Given the prospect of increasing beef prices, a key current question for ranchers is whether herd expansion is warranted? Back in the days of predictable cattle cycles, I would give an emphatic “yes,” but it’s a more difficult question to answer in today’s biofuels-driven “new normal.”
Northern Plains farm business records indicate that costs of production have been increasing at the ranch level annually. Still, I project good profits in the next few years for ranchers with existing beef cowherds.
Figure 1 presents my current planning prices (as of mid-January 2012) for 500-600-lb. steer calves. Calf prices are projected to peak in 2013 and 2014, then decrease slightly through year 2018. All in all, the next seven years should be record-high.
I believe calf prices could average $152 for the 2012-2016 period, compared to $125 for the past five years. Even with the projected increase in production costs, this suggests profitable times for the next 5-7 years. Thus, I suggest that seven years is a good planning horizon for straightbred heifers.
Let me share with you seven expansion strategies I encountered over the years as I studied management strategies designed to cope with cattle cycles. Designed for an existing herd with potentially ample feed supplies, some of these strategies are fairly common, while others aren’t, but I’ve seen all of them executed in various past cattle cycles.
1. Run a static herd. Many ranchers typically seek to run a consistent number of cows that is based on some limited grazing capacity or winter feed supply. Northern Plains records suggest a 12-14% annual culling rate is typical. Since not all replacement heifers come in pregnant, a few extra replacement heifers are held back each year to ensure a fairly stable 12-14% preg-checked replacement rate.
One strength of this marketing option is that when the demand for replacement heifers is high, the price discount for heifer calves is minimized. The net result is gross income can be increased due to high calf prices and a low heifer discount.
These ranchers do not try to outguess the beef price cycle – they just ride it out. The good times are really good and bad times are really tough.
2. Hold and develop added heifer calves when prices are high. Then, when prices are low, reduce the number of heifers developed. This was a common strategy during previous cattle cycles, with the aim to generate a fairly constant annual cash income. The biggest drawback is that when prices are high, this rancher is selling fewer calves. Then, when prices are low, he is selling more calves but at lower prices. The net result of this strategy is that gross cash income is reduced over the complete cattle cycle.
3. Sell 20-25 bred, four- and five-year-old females annually. This strategy should be triggered in the early years of strong replacement prices – like next year. Its strength is the fact that a rancher can generate a premium asking price for these 20-25 females being sold at the prime of their reproductive life. Typically, a female producing her third-through-fifth calves is at the peak of her productive life and bring top replacement prices. When the price of replacement mature cows drops off, you stop selling the 20-25 replacement females.
Additional replacement heifers will need to be held back to maintain the herd, but you should be able to develop a heifer calf that produces two high-valued calves for you before you sell the mature female. Another advantage is a faster rotation of genetic improvement in your herd.
4. Develop the top 50% of heifer calves raised. In this strategy, the top 50% of all heifer calves produced are retained and developed into preg-checked heifers. After selecting for the herd’s needed replacements, the remaining preg-checked heifers are sold as replacements. In times of strong beef prices, a profit is generally even made on the feeder heifers developed.
5. Hold back all heifer calves and expose them to a bull. After holding back all heifer calves and exposing them to bulls, those checked pregnant are sold as preg-checked heifers; the opens are sold as feeders. Since selling the opens as feeders should also be profitable, this strategy should make additional profit over selling all heifer calves at weaning.
6. Sell all calves produced when prices are high. When calf prices are high, sell all calves born and pocket the extra profit. When calf prices are low, hold back all the heifer calves you can rather than give them away. Herd numbers will change dramatically through the cattle cycle, but executed correctly, gross income over the cattle cycle should be greater.
7. Buy 100 bred females to calve in 2012 or 2013 and sell all calves produced. This strategy’s key component is related to the biology of beef production. It takes several years after the price signal for expansion is received before cattlemen can actually expand production. By the time that production is expanded, beef prices may well be trending down.
Thus, 100 preg-checked heifers purchased now should produce most of their lifetime calves during the next 5-7 years of projected favorable prices. Perhaps the next set of 100 heifers could be purchased in 2019. I once monitored a rancher that did this through at least three cycles over a 20-year period.
Which one of these expansion strategies would make you the most money?