Profits per cow grew in 2010 and preliminary data suggest profits per cow were up again in 2011. I project even higher profits for the next few years, all of which should trigger an expansion in the nation’s cow herd, right?
While drought in the Southern Plains is currently inhibiting a full-blown national herd expansion, indications are that expansion may be underway outside the drought region. In fact, my numbers suggest that 2011 profits in the Northern Plains were over $160/cow – up from $113/cow in 2010. And, I project profits per cow to continue to be high for the next four years (Figure 1).
So, let’s look at what this favorable outlook suggests for heifer development, and determine the economic value of a 2011 preg-checked heifer.
My primary source of long-run planning prices is the Food and Policy Research Institute (FAPRI) at the University of Missouri and Iowa State University. I utilized the latest FAPRI prices (yellow section, Figure 2) to generate my current expanded set of planning prices (white section). I project strong feeder-calf prices for the next several years (500-600-lb column). Meanwhile, Figure 3 presents FAPRI’s cull-cow prices and my projected cull-cow values.
The economic value of a preg-checked heifer is determined by the sum of her future annual net income from each calf she produces while in the herd – plus her eventual cull income. Given the time value of money (albeit, record low), these future net incomes need to be discounted back to today’s dollars. We can do all of this by using a net present value (NPV) model.
NPV is a mathematical model based on annual net cash flows. Net cash flow projections are very ranch-specific and, after taking production costs into account, annual net cash incomes must be adjusted for debt service and family living draw.
I used 2010 average North Dakota cost-of-production data as my base, and increased cash costs of production by $20/year (2.9% annual cost increase) for years 2012 through 2019. No debt service was considered, but a $100/head family living draw was taken into account. These long-run net cash flow projections are presented in Figure 4. In general, average net cash flow per cow is projected to trend up for the next four years, then down for four years.
One further biological adjustment should be made to these annual net cash flow projections. North Dakota’s herd performance data (Cow Herd Appraisal Performance System – CHAPS) shows that females grouped by age perform differently. Thus, I suggest that a typical female peaks in her profit generation at 5-7 years old. I’ve adopted the pattern in Figure 5 as being a typical annual profit pattern for a Northern Plains straight-bred heifer.
Figure 6 combines my long-term net cash flow projections and typical biological lifetime profit pattern into a current projected economic value of a preg-checked heifer that annually produces seven lifetime calves and then is culled. The column labeled “net income” is the annual adjusted income based on the projected annual profit per cow and her lifetime biological profit pattern. The sum of the annual net income column projects a $1,731 lifetime net cash income in nominal dollars for a 2011 heifer.
Given the time value of the dollar, we need to bring these future dollars back to today’s dollar. The annual discount factors are presented in the next-to-last column. The annual net incomes are then multiplied by the annual discount factors to calculate the annual discounted value.
The $1,566 figure in the lower right-corner of Figure 6 is the sum of these annual discounted values and represents the calculated economic value of today’s preg-checked heifer that will have seven consecutive calves in 2012 through 2018.
But, not all females produce a calf each year. Figure 7 calculates the economic values for heifers that produce one to seven consecutive lifetime calves. For example, a heifer that produces one calf and is then open for her next calf and culled, is projected to generate $805 worth of net cash valued at $789 in today’s dollars.
Another example is a female that produces four calves and then in culled for being open on her fifth calf; she is projected to generate $1,661 nominal value discounted to $1,551 in today’s dollars.
Another critical biological phenomenon is the fact that not all females produce seven consecutive calves in their lifetime. Research data suggest straight-bred cattle tend to rebreed at a lower rate than cross-bred cattle. For this simulation, I used the calving rates summarized in Figure 8.
An example may help explain the economic impact of calving rate by age of dam.
Let’s assume a rancher buys 100 preg-checked heifers (Figure 9). With an 82% rebreeding rate for these two-year-old heifers, 82 head will produce live calves at weaning. That means 18 heifers checked open or lost their calves and were sold.
The net economic value generated from these 18 culled females (first calf + cull value) would be $14,200, or $789/head. In year 3, 84% were checked pregnant and nine were culled open with an economic value of $14,391. By the end of the seventh calf crop, 62 head would have been culled and only 38 head would still be in the herd.
The sum of all the annual economic values is $127,305, or $1,273 per preg-checked heifer in the initial 100 heifers. Rounding this $1,273 figure up to $1,300, we conclude that the economic value of a fall 2011 preg-checked straight-bred heifer in the Northern Plains is $1,300/head.
This isn’t as high as I’d expected and suggests that the economic pressure for expanding the national beef cowherd is still somewhat muted. Perhaps the drought in the Southern Plains does indeed need to end before we will have a full-blown national beef herd expansion.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or [email protected]