Ask five folks whether now is a good time to expand your cowherd, and you’ll likely get at least 10 different answers.
Cattle prices are record-high, after all. In fact, analysts at the Livestock Marketing Information Center (LMIC) project net cow-calf returns this year (basis Southern Plains) to be a record-high $445/head, and more than $400 next year.
In addition, despite record-high retail beef prices, the all-fresh Beef Industry Index jumped 6.2% from the first quarter to the second quarter, according to Glynn Tonsor, Kansas State University agricultural economist.
And, beef export value for the first half of the year set a new record at $3.27 billion, according to the U.S. Meat Export Federation. Beef export value per head of fed slaughter was record-high in June at $299.14.
Though drought still squeezes some areas of the country, pasture and range conditions are much improved this year over last. Moreover, with USDA predicting a record-large corn crop, the August World Agriculture Supply and Demand Estimates forecast the season-average farm price for corn at $3.55-$4.25/bu.
Still, though fuzzy indicators suggest producers are beginning to retain more heifers, the pace seems more reminiscent of a deliberate crawl than a tentative dash.
“As of Jan. 1 of this year, USDA reported that the number of heifers being retained for beef-herd replacements was above a year ago, and to-date data on heifer slaughter, etc., suggest that that planned heifer retention could have increased since then,” LMIC analysts say. “But, the latest USDA report said all heifer subcategories weighing over 500 lbs. [beef-cow replacements, dairy-cow replacements and other heifers] were down from two years ago and from estimates for 2013 …”
Derrell Peel, Oklahoma State University Extension livestock marketing specialist, explained in August that one deterrent to expansion is the high prices producers can receive for their replacement heifers.
“This is particularly true for producers still recovering financially from drought and other economic difficulties,” Peel said. “For some older producers considering retirement, current market prices may provide the incentive to sell out and exit the industry. While new producers will, in most cases, replace the older producers, there may be a lag in herd growth during the transition.”
Of course, there could be another subtly glaring reason.
“It takes a high-profit herd to make it through a major expansion, especially with today’s record-high expansion costs,” says Harlan Hughes, in his July BEEF column, “Thinking About Herd Expansion? Keep These Points in Mind.” His advice is to expand “only if you have a highly profitable beef cowherd.”
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High-profit herds, according to Hughes, tend to be those with the lowest unit cost of production (UCOP).
“Of all the production factors I’ve studied, UCOP has the highest correlation with profits — even more than pounds weaned per female exposed, average weaning weight or weight per day of age,” Hughes explained. “The most important point is that high-profit herds tend to be the lowest UCOP herds. And the best way to lower UCOP is to increase production, which generally means a high-percent calf crop and/or high weaning weights. I like to measure this high production by pounds of calf weaned per female exposed.”
Hughes provides an example in which retaining 40 more replacement heifers this year results in a cost of $1,948/pregnant heifer, adjusted for eight open heifers.
“Replacement heifer costs need to be paid from annual net income [not gross income], and it will take 3.9 more calf crops after 2016 to break even,” Hughes said. “If I net $400 annually from the sale of each calf, I need four additional calves to break even [until 2020], and to start making money from this expansion … The big increase in profit from this expansion is projected to occur when I sell my remaining replacement heifers as cull cows at 7-10 years down the road.”
The bottom line is that some operations have to get better before they get bigger.
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