February 5, 2015
Cattle producers have heeded the clarion call from a cattle market that made it perfectly clear in 2014 what was needed—and that is more cows. As USDA’s Jan. 1 Cattle Inventory report showed, herd restocking is well underway. If Mother Nature cooperates, the cow herd should continue to grow steadily over the coming years.
However, that’s a big if. As cow-calf producers know all too well, drought is the wild card in any expansion plans and can stop short any rebuilding that might be planned.
What’s a producer to do? Just ask Don Close, an analyst with Rabobank’s Food & Agribusiness Research and Advisory group. He thinks the numbers show a way to help the business increase cow numbers while providing a degree of drought risk management and allowing an aging set of cattle producers to find a way to let the kids come back to the farm.
Close’s recommendation? Consider a confinement or semi-confinement cow-calf production system. Close says the numbers show that the feasibility of such a system is real. “While the key method of U.S. calf production will remain the traditional cow-calf grazing model, a significant part of the expansion will need to incorporate systems for confined cow-calf production,” he says.
That’s because cattle producers are starting this expansion phase of the cattle cycle with 32 million fewer acres of pasture. That’s been the decline in available grazing acres in the last 10 years, he says, and it’s causing producers to look at options that don’t require the use of high-priced grass.
Close’s analysis looked at two different production systems:
Converting pen space in a traditional Southern Plains feedyard to accommodate cow-calf production,
Using hoop barns or other buildings in the Midwest in a semi-confinement system that allows the cattle to be in a covered, protected environment during the winter and graze waterways or pasture in the spring and corn stalks in the fall.
As anybody who’s tried to buy bred cows and heifers and then buy or lease grass to run them on knows, capital constraints are a major hurdle. “I looked at this as a way that a young producer could get started in the cow business. And I looked at it particularly in the classic Corn Belt model with the guy who has an established farm, likely to be at least to a degree landlocked, but has kids who want to return to the farm,” Close says. “It would be a means to generate enough additional income to an established operation without taking up a lot of land and be able to bring kids back home.”
While results will vary widely from one operation to another based on a number of factors, not the least of which is the volatile cattle market, Close looked at three different scenarios—a best-case market, a middle-of-the-road market, and a base or worse-case scenario. He compared returns from a traditional cow-calf operation, a semi-confinement operation and a total feedyard operation using both older cows and young stock.
“Under the high-price scenario, profits in all production models ranged from $660 per head in conventional Northern Plains production to an astonishing $803 per head with a confined older cow,” he says. “While it’s safe to say these returns aren’t expected to be sustained, they were realized in 2014.”
The mid-range price model showed a range of returns of $220 to $363 per head. “Based on the historical returns of less than $100 per head, this is probably a much more realistic expectation and still provides phenomenal returns, historically speaking,” Close says.
The base price scenario provides a range of a $55 per head loss to a $88 per head profit. “This range of return certainly fits with historical norms,” Close says.
However, he adds, there are two important considerations to take into account. “First, it gives a worst-case scenario that still provides economic logic to buying cows at current prices. It also shows that, under the worst-case scenario, returns are not so bad as to force producers out of the business.”
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