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Consider The Invisible Costs Of Your Drought Strategy

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In a continuation of our drought strategies analysis, we project the invisible costs of having fewer calves to sell in the years following the 2012 drought.

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This month, I will discuss the invisible costs to a beef cowherd that are associated with depopulation due to drought. I’ll use an example 250-head cowherd and project the invisible costs of having fewer calves to sell in the years following the 2012 drought.

Step I – Project “the no-drought” control run. Last month, I presented the economic projections for a 250-cow demonstration herd for the 10-year period of 2011-2020, which assumes there was no drought in 2012. This analysis is the “control run” for this study. By comparing the projected economic outcomes of alternative drought strategies back to the control run, it is apparent that the actual difference in economic performance is due to the reduced animal numbers and not different economic values, such as calf price, feed costs or cash production costs.

As reported in detail last month, our demonstration herd was projected to generate an accumulated $453,132 of net cash income over this 10-year period. This computes to an average annual net cash income of $45,313.

First, please note that the pattern of projected net cash flow (Figure 1) follows the projected current calf price cycle that I presented last month. Secondly, note that the 2012 drought is projected to have its greatest economic impact at the peak of the current price cycle. Thus, the point of my December column was that the potential dollar impact of the 2012 drought could be very high.

Step II – Project the economic impact of depopulating the herd. Let’s begin by imposing the 2012 drought on my demonstration herd. Let’s assume this rancher’s region was hit hard by the 2012 drought, leaving him with insufficient home-raised feed to carry his 250-head cowherd, plus his young replacement heifers, through 2012 and into 2013 grass.

Calculating that he would have enough feed to get 200 cows through the winter and onto grass in 2013, he decided to sell the bottom 20% of the herd – 50 mature cows. Like many of his neighbors, he also decided not to hold back any replacement heifer calves from his 2012 calf crop.

Figure 2 shows the projected impact on mature cow numbers after his 50-cow depopulation and the 2013 return to the 44-46 replacement heifer calves he would normally hold back in a non-drought year. While the projections show the herd numbers growing, it was projected to grow to only 225 mature cows by year 2020. Under this depopulation strategy, the 10-year average number of mature cows in the herd is projected to be 210 mature cows/year, which is 40 cows less than his original 250-cow business plan.

projected january 1 cow numbers

impact of depopulation in cattle herd

Naturally, fewer mature cows imply fewer calves to sell. Figure 3 shows the projected annual numbers of calves sold for each of the 10 years under study. Since no replacement heifers were held back in 2012, the number of heifer calves sold spikes in 2012. And, with 50 mature cows culled in 2012, the calf numbers produced fell in 2013 and again in 2014. In fact, the number of calves sold was down each year all the way through 2020.

Thus, under this depopulation strategy, this rancher is projected to sell an average of 166 calves/year – down from his average of 197 calves sold annually in the control run. This is a reduction of 310 calves to be sold over the course of the decade.

This 310-head reduction in calves sold projects a $299,295 drop in calf sales over the 10-year study period, or an annual reduction in calf sales of $29,929. This accumulated $299,295 is the projected invisible cost of selling fewer calves triggered by the 2012 drought.

Step III – Project the net cash flow impact of depopulating. What really changes in a depopulation decision is the pattern of annual net cash flow for the herd. In the drought year, when both extra cows are culled and replacement heifer calves are sold, net cash flow goes up to $162,600 (Figure 4).

projected net cash after drought years

But, in 2013, with fewer cows and 45 replacement heifer calves again held back, it drops to $9,311! This dramatic change is typical when a drought-induced herd depopulation is executed. My conclusion is that the largest negative cash flow impact of drought depopulation is in the year following the drought.

An examination of this herd’s projected three-year average for 2012-2014 indicates the annual average net cash flow for the “no-drought” situation is $67,921, while the three-year average net cash flow under depopulation is $48,157. This is a projected annual net cash flow drop of $19,814/year in the first three years following the drought due the decision to depopulate.

Not all news is bad news, however. Cash production costs with the drought depopulation dropped $184,000 in this demo herd, due to lower cow numbers and lower replacement heifer development costs. After adjusting for the drop in calf sales and the drop in cash production costs, the accumulated net cash flow is projected to be $59,400 less over the 10-year period due to the depopulation decision.

I wonder how much feed could have been bought in 2012 with that $59,400? It figures out to $238/mature cow in the Jan. 1, 2012 inventory.

Next month, I’ll bring in the repopulation decision and try to get this herd back up to the business plan’s goal of 250 mature cows as quickly as possible. What’s your guess on what this will do to the net cash flow projections for this herd? Does where we are in the cattle cycle impact this? Stay tuned for answers. 

Harlan Hughes is a North Dakota State University professor emeritus. He winters in Yuma, AZ. Reach him at 701-238-9607 or harlan.hughes@gte.net.

Discuss this Blog Entry 3

on Jan 18, 2013

In many areas of the country, the $238/mature cow would have bought 1 to 1.5 tons of hay in 2012. That would not have been nearly enough to bring the herd intact through the 5-10 months of severe drought. It would have bought less than one ton of corn gluten or ddg as a supplement to residual grass. The same $59,400 spent in the spring of 2013 would buy back almost 40 cows at $1500/cow. Could you discuss the aspect of liquidating midway through the drought, saving the feed costs, and buying back replacement cows. Thanks. Jim Gerrish

Anonymous (not verified)
on Jan 25, 2013

Jim, my current draft market advisor does address your question on your question.

Harlan Hughes

Wayne Parrish (not verified)
on Jan 19, 2013

Throw a little income tax with this picture and things change quite a bit.
I think Jim Gerrish's $1500. replacements are a pipe dream if it when it starts raining.
Another aspect is that we used some of our pastures so hard last year that they really need a rest this year.

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Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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