This month, I'll share a management strategy ranchers can use in making the cattle cycle work for them. This is a strategy high-profit ranchers taught me in a decade of kitchen-table sessions, during which I conducted individual cost-and-return analyses of beef cow herds. This and other strategies are discussed in detail in my CD (see end of story for more information).
Let's begin with a look at my current long-run planning prices for 500- to 600-lb. steer calves (Figure 1). Each year's annual price is a planning price for October of that year. This chart sets the priceing framework with which to evaluate management strategies. Always begin a strategy by looking at a set of long-run planning prices.
Holding back heifer calves
This strategy holds back replacement heifers as a counter-cyclical strategy. Let's review a fundamental economic concept of holding back replacement heifers:
The economic value of any bred heifer entering a herd is the sum of the future annual net incomes she'll generate from the calves she'll produce in your herd — plus her cull salvage value. Money has a time value, so these future annual incomes must be discounted back to today's dollars.
The economic value of a bred heifer is generally quite different than her sale-barn price. Generally, the higher the fall calf price for the years she will produce calves, the higher the generated net annual income and the economic value of that heifer. In contrast, sale-barn prices are tied heavily to that year's market calf price.
Heifers born during low-price years tend to produce calves during the high-price years (Figure 2). Heifers born during high-price years tend to produce calves during low-price years (Figure 3). Thus, the year a replacement heifer calf is born makes a huge difference in her lifetime profits. The cyclical beef price cycle ensures this.
If you study Figure 1, heifers born in one particular year in this current beef-price cycle will have a higher economic value than heifers born any other year. Which heifer birth year will generate the most economic value in the current cattle cycle?
The answer is 2001. That's because such heifers are bred in 2002 and have calves in 2003 and beyond — right over the top of the beef-price cycle.
Remember in 2001, when no one wanted heifers? As a result, most went to feedlots, and the heifer-calf discount was quite high.
What the typical rancher does
Let's begin by looking at what a typical non-drought-stressed rancher does.
During the low-price period (1996-2003 in this chart), the typical rancher held back few replacement heifers, opting to sell most of his annual heifer calf crop. Once prices reached the beef price cycle peak and the sale-barn price of bred females exploded, he held back more heifers to expand his herd. In other words, he sold more calves when prices were low, and fewer calves when prices were high.
Iowa State University (ISU) research suggests beef cow profits over a complete cattle cycle can be increased by producing and selling more calves in high-price times, and fewer calves in low-price times. In other words, a counter-cyclical heifer replacement strategy generates higher total profits over the total cattle cycle.
ISU researchers also suggest an easy way for ranchers to adopt this strategy is to use “dollar-averaging,” as is taught in business colleges for buying mutual fund shares. The strategy is to commit a fixed monthly dollar amount to buying mutual fund shares. Thus, you buy fewer shares in months of high prices, and more shares in months of low prices.
ISU researchers applied this dollar-averaging strategy to heifer calves. By holding back a fixed dollar amount of heifer calves (based on weaning market value), you hold back more heifers in times of low prices, and fewer heifers when prices are high.
This is exactly the counter-cyclical heifer retention strategy described previously, and it's easy to implement. Here's an example with a 200-head beef cow herd.
Assume a manager decided to hold back $10,000 of replacement heifers/year. In 2001, when heifer calves sold at $425, he held back 23 heifers. In 2005, with $635 heifer calves, he held back 16. In year 2008, with heifers projected at $485, his retention of heifers would increase to 21 head.
Such a counter-cyclical strategy would lead to a lower overall capital investment in the breeding herd, and higher dollar cattle sales over the total cattle cycle.
Next month, I'll summarize other strategies for making the cattle cycle work for you. To order my CD, “How To Make The Cattle Cycle Work for You,” send $25 to: Harlan Hughes, 30 Ramble A Road, Laramie, WY 82070.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY.
Reach him at 701/238-9607 or [email protected].
Advice for drought-stress
It is unlikely drought-stressed ranchers can implement a counter-cyclical strategy in this beef price cycle. In fact, the drought-forced depopulation of their herds in 2002 will likely pressure their ranch businesses all the way through the end of this decade.
After selling cows at fire-sale prices in 2002, the visible cost of that drought was significant. But the hidden costs were even more significant, as these ranchers had fewer calves to sell in the record-price years of 2003-2005.
With more moisture recently, many of these drought-stressed operations are now beginning to retain more heifers. Unfortunately, bred-replacement heifers are now at decade-high prices, regardless of whether they're raised or purchased.
These ranchers are actually implementing the Figure 3 economic model. In the 2005 and 2006 high-priced years, drought-stressed ranchers will likely retain expensive replacement heifers. Thus, they will sell fewer calves rather than more calves as recommended.
Additional hidden costs of the 2002 drought will show up in the last half of this decade. These ranchers will have a higher overall capital investment in their herds, and a higher cost structure due to repopulation. While these factors will generate more calves to sell, sale time for those calves will occur just as the price cycle turns down.
The result: We stand to lose some ranchers in the last half of this decade due to higher costs and lower prices, all relating to the 2002 drought.
I'll discuss the economics of depopulating a beef cow herd due to drought in a future column. You'll be surprised at what my simulations suggest.