drought strategy cost harlan hughes

Strategies To Build Back The Beef Herd After Drought

A conventional drought repopulation strategy [3] is to buy back as many bred heifers after the drought as cows were sold during the drought. The example rancher in my previous three columns [4] sold 50 bred cows from his original 250-head cowherd in 2012; therefore, he wanted to evaluate buying back 50 bred heifers in spring 2013.

The second half of this conventional drought strategy [5] is to not hold back any 2012 heifer replacements, and then double up on replacements held back in 2013. This rancher sold all heifers born in 2012 for an added $42,000 over his 2011 calf sales. He plans to hold back all heifers born in 2013.

The projected result of this repopulation strategy is that this rancher’s cow inventory declined in 2012 and 2013, but it will return to the traditional 250 cows in 2014 and beyond (Figure 1).

projected annual cattle herd income

projected calf sales drought

This drought restocking strategy is designed to minimize the drought’s impact on calf sales (Figure 2). First, calf sales increased about 40 head in 2012, but will decrease by the same number in both 2013 and 2014. From year 2015 on, calf sales will return to his previous average of 200 head sold/year.

Developing replacement heifers [6] comes at a significant cost, however. First, you lose the cash sales of selling them at weaning, and you incur the costs of growing and breeding the added replacement heifers. After buying 50 replacement females and holding back 40 additional replacement heifer calves, the study herd’s total cash costs of production will double from $154,000 in the pre-drought year of 2011 to $311,000 in 2013.

The biggest challenge of this conventional drought repopulation strategy is the net cash flow implications.

• First, net cash flow goes way up in 2012 when both bred females [7] and extra heifer calves were sold (Figure 3).

• Net cash flow goes negative in 2013 when bred heifers are purchased and additional heifer calves are held back as replacements.

The herd’s accumulated 10-year (2011-2020) net cash flow under this conventional depop/repop strategy is projected to be $87,000 less when compared to the control “no drought” run. Over the 10 years, this averages out to an annual decrease of $8,700 in net cash flow solely due to the 2012 drought. Of all the depop/repop strategies, this was the worst net cash flow projection generated.

net cash for drought restocking

comparing drought strategies cowherd

This current series of “Market Advisor” columns has focused on projecting the economic impact of the 2012 drought. Figure 4 presents the 10-year summary for the four depop/repop strategies studied:

• The annual net cash flow of the control “no drought” (red bars),

• The annual net cash flow for just depopulating the herd and holding back the normal number of replacement heifers (yellow bars),

• Depopulating and repopulating via raised replacements only (green bars) and

• Depop/repop via purchased females and raised replacements (blue bars).

Figure 4 depicts how net cash flow went up dramatically in the year of the drought, with bred cow sales and additional heifer calves sold. In 2013, net cash flow fell dramatically as more heifer calves were retained and developed, and bred heifers were purchased.

The largest negative net cash flow by far occurred in 2013 when bred heifers were purchased as replacements, along with raising replacements [8] (blue bars). The general downward trend from 2016-2020 was due to the projected calf price cycle.

The drought year 2012 generated record net cash flow, but the two most critical net cash flow years are 2013 and 2014. The control run’s net cash flow projection for years 2012, 2013 and 2014 was $60,790/year (Figure 5, left bar). The conventional drought strategy (buy & raise) averaged $29,697/year net cash flow over these same three years. Interestingly enough, the depopulation strategy, along with the normal 44 replacement heifers thereafter (second bar from left), generated the highest average net cash flow for the 2012-2014 time periods.

harlan three year cash flow

Record-high calf prices [9]are projected for the 2012-2014 time period, but the 2012 drought exerts a large negative impact on 2013 and 2014 calf crops, which is a time of projected record calf prices. Figure 4 (gray section) illustrates the annual net cash flow pattern of each strategy over the three most critical years. It further emphasizes the unfavorable projections for the buy and raise strategy (blue bars).

Figure 6 summarizes the 10-year annual average net cash flows for all depop/repop strategies, with each bar representing a single drought strategy. The control run is on the left, while the conventional depop/repop strategy is on the right.

harland hughes 10 year alternative drought

Depopulating [10] the cowherd by 20% is projected to reduce the 10-year average annual net cash flow from $45,300 (control) to $39,700/year (depopulation). Repopulating by raising additional replacements lowered the average net cash flow down to $37,700/year. Finally, buying replacement heifers and raising replacements again reduced the average net cash flow down to $36,600/year.

The worst strategy evaluated is the conventional depop/repop strategy on the right. It just isn’t good to have a drought at the peak of the calf price cycle, which leads to record female replacement costs.

This last strategy of buying and raising replacement females generated a 10-year accumulated $87,000 less total net cash flow than the control “no-drought” run. 

This 2012 drought exercise underscores the fact that where in the cattle cycle a drought occurs is all critical to the optimum drought strategy. The 2012 drought is predicted to occur at or near the top of the current calf price cycle, which makes for both high invisible costs [11] of the drought and high replacement female costs.

A second major conclusion is that there’s a dramatic change in annual net cash flows due to the drought. High-priced replacement females can impact a herd for the 7- to 10-year lifetimes of those replacement females in the breeding herd.

And one final point: The 2012 drought triggered my example rancher to sell 50 bred cows, as well as the 44 heifers he normally would hold back for the breeding herd. This study suggests that this conventional depop/repop approach to combating the 2012 drought, at or near the price cycle top, is projected to be costly. The $87,000 hit in net cash flow would have bought a lot of feed during 2012.

A common axiom is that you can’t feed your way out of a drought, but this may not be true when calf prices are record-high. 

Sidebar: Current econimc outlook

Though USDA January data indicates the U.S. cowherd [12] continues to shrink, retention of replacement heifers is beginning. Ranchers clearly are waiting to see what Mother Nature brings this spring and summer.

Meanwhile, feedlot profits [13]are currently very negative, while feeder calf prices are under pressure. In January, Cargill [14] closed its Plainview, TX, packing facility. Times are getting tougher in the beef business.

Meanwhile, there are indications that retail beef prices are reaching the point where consumers are beginning to move to pork and poultry. This all suggests that, though corn prices [15] are dropping slightly, feedlots will need to lower bids for feeder cattle.

My price analysis for March projects slaughter cattle prices below the 2009-2014 trend line for all of 2013 and 2014, and I project 2013 feeder calf prices to continue above the 2001-2013 trend line. This can only happen if feedlot cost of gain [16] goes down.

While I expect feeder cattle prices to come under pressure, my January 2013 feeder calf price projections for fall 2013 calves still show some growth over fall 2012 calf prices. My current projection for a 2014 peak in calf prices is still in place. 

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected]