Market Advisor

Expect Record Revenue & Costs In 2012-2014

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Looking back, one should have developed 2009 heifer calves to start calving in 2011. Of course, this is a common problem with beef price cycles – it’s so easy to be out of sync with the cycle.

My current price projections are for record-high average calf prices for the next five years. What’s more, I expect those increases will exceed a projected 3% annual increase in production costs (Figure 1).

Given this favorable economic climate, let’s discuss some general questions about the economics of maintaining and expanding a typical Northern Plains beef cowherd.

Expanding a beef cowherd has two dramatic impacts on the economics of the cowherd.

• First, there’s an immediate reduction in the gross cash income the year that heifer calves are held back.

• Second, there’s a significant increase in the amount of feed needed to develop these added replacement heifers from weaning through preg-check the following fall. In addition, these preg-checked heifers must be fed for another year before their calves can be marketed at weaning.

In addition, data shows heifers’ calves tend to be lighter at weaning. Some of my past work suggests the net income from a first-calf heifer is only 81% of the total herd’s average net income per cow, even after adjusting the sale price of her calf for the typical price slide.

A 2012 heifercalf held back for replacement won’t produce a weaned calf for marketing until fall 2014. Based on Figure 1, this is projected to be beyond the peak income years of this price cycle. Looking back, one should have developed 2009 heifer calves to start calving in 2011. Of course, this is a common problem with beef price cycles – it’s so easy to be out of sync with the cycle.

I estimate the cost of holding back a 2012 heifer calf and developing her into a preg-checked replacement heifer to be about $1,500. This includes the opportunity cost of not selling a weaned heifer calf in fall 2012, and the cost of the 2013 resources consumed in developing this heifer calf into a preg-checked heifer by fall 2013.

• First, I project fall 2012 prices for weaned 554-lb. heifer calves to be $165/cwt. for a total value of $916. This is the opportunity cost of not selling this heifer at weaning.

• Second, I estimate it will take $554 in resources valued at fair market value to develop a weaned heifer into a preg-checked heifer a year after weaning.

I rounded the sum of these two numbers ($914 + $554 = $1,468) up to $1,500 to get the cost of developing a preg-checked heifer; 62% of this cost is the opportunity cost of income forgone, and 38% is the market value of resources consumed in developing her from weaning to preg-check time.

Let’s now apply these numbers to an example herd. Let’s assume I have 250 beef cows in my herd. My production parameters are an 85% calf crop based on the number of females exposed, a 565-lb. average weaning weight, 14% average culling rate, and a 1% cow death loss.

Each year, I replace any cows lost or culled to run a perpetual herd of 250 cows. Rather than calculate a depreciation cost for this cowherd, I include the annual cost of rebuilding my perpetual herd to a constant 250-head cowherd each year.

I’m projecting my herd will gross $980/cow for 2012 – an all-time high. Of this gross income, 83% will come from calf sales and 17% from cull animal sales. Cull sales include cull cows, cull bulls, and cull open heifers. No females are sold as bred cows and there is no inventory change from one year to the next.

My total gross cash income for this herd in 2012 is projected to be $244,923. My net is projected at $46,500, or $189/cow – a decade-high net income.

I need 35 preg-checked replacement heifers annually to maintain my 250-head cowherd. This covers the three cows that typically die and the 32 cows typically culled. If 80% of heifers exposed become pregnant, I need to hold back and develop 44 heifer calves annually to ensure the 35 pregnant replacement heifers needed to maintain my 250-head cowherd.

Holding back 44 heifer calves cuts my projected 2012 cash income by $40,220, based on the projected 2012 prices. It also will cost me an additional $25,080 in 2013 to develop these heifers, for a total of $65,300 annually to maintain my inventory of 250 cows. Here is the number that surprises me – this comes to $261/cow ($65,300/250) as my herd replacement/maintenance cost. This $261/cow replacement cost is averaged over the total 250 cows. This is also record-high.

Clearly, developing 2012 heifer calves into preg-checked heifers will be costly. And, before this preg-checked replacement heifer can produce a calf to be sold, I must support that heifer in 2014. Assuming an average annual cost of $794 in 2014, I have about $2,300 in that heifer the day I sell her first calf.

This replacement heifer needs to be paid for from the annual net incomes from her lifetime calves produced. The truth is that she won’t pay for herself until I sell her as a cull cow; however, this is the normal situation.

Ranchers typically utilize the value of cull cows sold (32 cull cows projected sold for $26,864 in my example herd) to reduce the cost of replacement heifers. Since I’ve already included all cull animal income in the gross income calculations, I don’t reduce the cost of replacement heifers by the value of the cull cows. The key is to be sure you don’t double count the cull cow income.

Yes, by including the opportunity cost of not selling heifer calves at weaning as part of the economic costs of replacement heifers, the cost of replacement heifers varies annually based on the market value of heifer calves when weaned. Each year’s set of replacement heifers has a different average cost. Based on my suggested planning prices, 2012 through 2014 will be record-cost years for developing replacement heifers.  ❚❚

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

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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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