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If Nature Cooperates, Good Times Are Ahead For Beef Producers

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The national beef cow inventory is at a 50-year low, and long-run corn prices are projected to trend lower. These are two positive indicators for today’s beef industry.

By the time that you read this, you should have a good idea of the summer rainfall in your area. Assuming that rainfall is sufficient to consider adding bred heifers to your herd, I’ll share my projections for the economic value of a bred heifer entering a beef cowherd in fall 2013.

The national beef cow inventory is at a 50-year low, and long-run corn prices are projected to trend lower. These are two positive indicators for today’s beef industry.

Today’s economic value of a bred heifer will be influenced by calf prices over the rest of this decade. Figure 1 presents last month’s suggested planning prices summarized in five-year segments. There are two key points about these long-run planning prices.

  1. We’re in a period of projected increases in beef prices due largely to the reduced national cattle inventory. I expect these favorable prices to stimulate expansion in the national beef cowherd.
     
  2. This expansion over the next three to four years is projected to weaken feeder cattle prices in the last part of the decade.

suggested five year planning beef cow prices

Value of a bred heifer

Let’s calculate the economic value of a pregnancy-checked heifer. The economic value of a bred heifer in your herd is the sum of the annual net cash incomes produced from all of the calves she weans while in your herd. In order to express this value in 2013 dollars, these future net cash incomes need to be discounted back to today’s dollars. Conceptually, this is a straightforward process; however, in actual practice, it requires a large number of calculations. Thank goodness for computers.

Figure 2 summarizes my calculations for the economic value of a bred heifer preg-checked in fall 2013. My basic assumptions are that these calculations are for a straight-bred heifer that has seven consecutive calves while in my example herd. The discount factor used was 3% — the lowest discount factor I’ve ever used in calculating the economic value of a bred heifer. The female is assumed culled and sold in year 2020 after producing seven consecutive calves.

projected economic value of bred heifer

Let’s discuss each column in Figure 2:

  • The “Herd average income/cow” is the projected net cash flow per cow and not the economic profit per cow. This number is adjusted for the annual projected calf prices and the projected annual net cash cost per cow. This is after a family living draw of $100/cow. No debt service is considered in these calculations.
     
  • An “Age adjustment” is used, suggesting that the “Adjusted net income” per female depends on the herd’s average net cash income per cow, and the age of the female for each year. This suggests that 4-, 5- and 6-year-old females have the highest annual net cash incomes. This age adjustment is based on my Integrated Resource Management work in the 1990s. For example, a first-calf heifer is assumed to generate a net cash income equal to 81% of the herd’s average net cash income. A 6-year-old female, meanwhile, is projected to generate a net cash income of 133% of the herd’s annual average.
     
  • A dollar today is worth more than a dollar next year — albeit, currently not much more, given today’s low interest rate. The discount factor used in this example calculation was 3% and each year’s “Discount factor” is based on published financial discount tables and varies with the years into the future.
     
  • The furthest-right column is the calculated annual “Discounted value,” which is calculated by multiplying annual net cash income by that year’s appropriate discount factor.
     
  • The bottom-line, left-hand number ($3,080) is the sum of the projected annual “undiscounted” or nominal total net cash income generated over the lifetime that the heifer is in that herd — including the cull value of the female.
     
  • The number to the right ($2,691) is the sum of the annual “discounted” values of the heifer’s lifetime calves produced while in that herd, plus the discounted cull value. 
     
  • A preliminary answer to the question “What is the economic value of preg-checked heifer in the fall of 2013?” is the $2,691 number. This is the highest economic value I’ve calculated in the last decade — even after adjusting for increasing annual long-run cash production costs summarized in last month’s “Market Advisor” column. In summary, this favorable $2,691 number is heavily influenced by favorable calf prices AND the low discount factor.

But there’s more to this story. If one were to purchase a package of 100 heifers, not all will produce seven consecutive calves; some heifers will be culled each year. The annual culling rate typically starts out high for the 3-year olds, and goes lower as the females mature, reaching the low around the fourth or fifth calf. The annual culling rate typically goes up slightly as females approach the end of their productive years.

My research suggests that by the end of the seventh calf crop, 62 of the original 100 heifers will have been culled. These 62 culled females can’t be valued at the above $2,691 — they will be worth less, depending on how many lifetime calves they raised. The fewer lifetime calves a culled female produces, the lower the value of that culled female

While I actually calculate the economic value of alternative lifetime calves from one through six calves, space doesn’t allow me to present these alternative tables. In summary, a heifer having one lifetime calf is valued at only $1,209; two calves,at $1,502; three calves, at $1,849; four calves, at $2,110; five calves, at $2,352; six calves, at $2,540; and seven calves, at $2,691. A heifer that is open for her second calf, but kept in the herd anyway, and then has five more consecutive calves, is valued at $1,854.

Now back to the purchase of 100 heifers. With the 62 head culled over the seven-year period, my calculated economic value of the 100 head purchased is reduced to $1,992/head. 

My final answer to the question “What is the current economic value of a preg-checked heifer in the fall of 2013?” is $1,992/head.

In February 2013, I calculated it would cost $1,418 to raise a 2013 preg-checked replacement heifer. Is this calculated difference between the $1,418 calculated development cost and the $1,992 calculated economic value enough to stimulate a national herd expansion? For those with ample rainfall this summer, I believe it is.

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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Discuss this Blog Entry 1

A Vega (not verified)
on Jun 4, 2013

100% in agreement with Mr. Hughes. Precipitation forecast is that most of the country will have normal precipitation from June to August, except for West & North TX, Eastern NM & CO, Western OK, KA & NE; and WA, OR & ID.
Cow slaughter is currently decreasing significantly, and if the new Cattle on Feed Report shows low cattle numbers in feedlots and low new placements, the price for all classes of cattle is going to climb in a hurry. If all of these happen and prices do not go up, I would have to think that something wear is happening in the marketplace.

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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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