Last month, I suggested that a fall 2004 preg-checked bred heifer that will produce seven consecutive calves has a calculated economic value of $1,560. A rancher paying $1,560 for that bred heifer this fall should expect to earn a 6% return on his investment.
The same economic analysis can be applied to bred cows of all ages. For example, a fall 2004 bred cow that produces six consecutive calves has an economic value of $1,489. Her economic value with five consecutive calves is $1,398; four consecutive calves it is $1,290; three consecutive calves is $1,159; and two consecutive calves is $1,049. Each economic value is calculated utilizing each female's lifetime annual net income values plus her cull cow income discounted back to today's dollars.
So what's a bred female worth today? I distinguish between the sale barn value of bred female and the economic value of a bred female in a rancher's herd.
The sale barn value is what a bred female would bring at the local sale barn where the driving factor is the gross value of today's feeder calves. As gross value goes up, the sale barn value of a bred female goes up. Now that feeder calf prices are quite high, the sale barn price of bred females is rising.
The economic value of a bred female, meanwhile, is the sum of future annual net incomes generated by all the calves she produces, plus her salvage value as a cull cow. These future incomes must be discounted back to today's dollars. Note this is net income, not gross income as I frequently hear ranchers use.
I suggest ranchers bring females into their herds when the economic value exceeds the sale barn price. The higher the economic value relative to the sale barn price, the more profit potential.
The beef cattle cycle, its resulting beef price cycle, and ranch resource costs are three key factors affecting the economic value of a bred female — regardless of her age. Finally, the economic value of bred females is ranch specific.
The cycle's "owning" phase
As is typical during the turn-around phase of the cattle cycle, I am currently receiving a lot of calls from folks who want to buy beef cows. Increasingly, more of these calls are from potential first-time cow owners. It seems everyone wants to own beef cows when calf prices get high in the cattle cycle.
I believe the last two years of high calf prices have now triggered the current cattle cycle's “everyone wants to own beef cows” phase. By 2005, that phase will change to “I have got to own some of these profitable beef cows!” Generally, this phase abruptly ends when calf prices break downward.
I project calf prices will stay strong for the next two, and perhaps three, calf crops. Calf prices will go south toward the end of the decade. Purchased females need to be paid for before calf prices turn south.
Now that calf prices have increased is not the best time in the cycle to buy beef cows. The best time to buy cows is when no one wants them — like a couple of years ago.
Anyone intending to buy cows over the next two years should buy them now, and the sooner, the better. Buy them now so newly purchased cows have more high-priced calf years to pay for themselves. I fully expect bred cow prices to get stronger until current calf prices turn sharply downward — like calf prices did in 1994. Bred cow prices peaked in the last cattle cycle in 1993.
Five calculation steps
Here are my five steps for calculating the economic value of bred females:
- Prepare a set of long-run planning prices. Beef cow producers find the development of a set of long-run planning prices one of the most difficult and complex tasks of the planning process. Start with planning prices and modify them to fit your economic projections.
- Prepare an economic budget for your herd. I used the five-year (1999-2003) average enterprise accounts for 769 Northern Plains beef cow herds as my base year. These enterprise accounts are posted by the University Of Minnesota.
- Utilizing your long-run planning prices, annual enterprise budget projections must be prepared for each of the 7-9 years a heifer might be in your cow herd. I utilized each year's long-run planning price and constant five-year average production costs for my projections.
- Project the salvage value of cull cows. Use the University of Missouri's FAPRI Baseline Briefing Book as your source of long-run cull cow planning prices.
- Determine the appropriate discount rate. This should be your after-tax interest rate for borrowed money. I use a 6% discount rate.
- Calculate the net present value (NPV) of a bred heifer. The bottom line presents the calculated NPV of bred females under different numbers of lifetime calves produced.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].
You might also like: