Should your herd get bigger or get better before it gets bigger? BEEF Columnist Harlan Hughes looks at expansion possibilities in the first of his three-part Market Advisor series.
The industry is abuzz with talk of herd expansion. The Northern Plains already appears to be expanding, while the drought-mired Southern Plains is just trying to maintain numbers. Meanwhile, California herds are downsizing due to severe drought, but other U.S. regions are contemplating expansion.
Nothing fuels expansion talk like rising cattle prices, which we’re indeed seeing. And the general consensus is that the national beef cowherd is moving into an expansion phase as forage production allows.
Figure 1 presents my mid-April 2014 price tables for 2012 and 2013 steer prices, and price projections for 2014 steers. Feeder-cattle weights are along the left-hand side, and selected critical marketing months are listed along the top. Slaughter-cattle price projections are listed along Figure 1’s bottom line.
Strong cattle prices are projected to continue through 2014. I project fall 2014 weaned-calf prices (550 lbs.) to be $221/cwt. — up from $198 in fall 2013 and $168 in fall 2012. Heavier-weight feeder cattle are showing the same favorable price relationships.
I also project a $200-plus/head profit for finished steers harvested in April 2014. This is important, because when cattle feeders are making money, they bid aggressively for replacement feeders.
Let’s look at a beef-cow budget for 2014 fall-weaned calves. Ranchers are quick to remind me that despite the great calf prices, cowherd operating costs have also risen substantially. So, let’s look at the cost side of my Wyoming-Nebraska 2014 study herd.
The hay costs for 2014 fall-weaned calves occurred from weaning in 2013 until spring 2014, and these hay costs are presented in Figure 2. I’m using the $108/ton average grass hay costs (labeled as “other hay”) for this 2014 beef cowherd. This compares to $148/ton grass hay price for the 2013 calves, and $137/ton grass hay price for 2012 calves. Hay costs are down for the 2014 calf crop.
A beef cowherd generates income from the sale of calves, cull cows and bulls, cull open heifers and breeding livestock. Figure 3 illustrates how I calculate “gross income” per cow. This is based on a static cowherd of 250 head weaning an 87% calf crop, with an average weaning weight of 569 lbs. This generates 584-lb. steer calves and 554-lb. heifer calves at weaning.
We’ll assume that 44 heifer calves are kept for replacements, covering the 32 cows culled and three cows that died. We’ll also assume that 80% of the replacement heifers check pregnant in the fall, producing 35 preg-checked replacement heifers.
Calculating the unit cost of producing (UCOP) 100 lbs. (cwt.) of calf is a little more difficult, as we have an enterprise that produces several different products. Instead of allocating costs out to the various products, I converted the total “gross income/cow” to a composite “cwt. of steer-calf equivalents.”
Let’s study Figure 3 to gain a better understanding of my calculations. There are 256 live calves projected to be weaned in fall 2014 (87% of the 294 females exposed). Of the 2014 heifer calves, 44 were retained as replacements for next year, which are required to maintain a perpetual cowherd of 250 head.
The total gross income calculates to $304,320 for the herd, or $1,217/cow in the Jan. 1 cow inventory. If this $1,217/cow gross income is divided by the projected price of steer calves ($216/cwt.), this $1,217 is equivalent to 5.63 cwt. of steer-calf sales. All UCOP is based on this 5.63 cwt. of composite steer equivalents generated by this beef cowherd.
Figure 4 presents an aggregated summary of herd performance factors and illustrates how UCOP is calculated. Annual feed costs include both winter-stored feed and summer and fall grazing costs. Non-feed costs include livestock supplies, fuel and oil, repairs, marketing costs, hired labor, operating interest and the beef cowherd’s share of overhead costs. The biggest surprise to me is the annual replacement cost/cow, which calculates to $329/cow. No operator or family labor costs are included.
All these production costs total $876/cow. If divided by the 5.63 cwt. steer equivalents, it gives us a breakeven selling price of $1.56/lb. of steer calf, or a calculated breakeven calf price of $156/cwt. This compares to $163/cwt. in 2013 and $146/cwt. in 2012.
Figure 5 summarizes my economic projections for the eastern Wyoming-western Nebraska example herd to sell weaned calves in fall 2014. Gross income is projected at $1,217/cow and production expenses at $876/cow, leaving an earned return to operator and family labor, management and equity capital at $341/cow.
Figure 6 illustrates profit-per-cow projections for alternative weights/average daily gain (ADG) and/or alternative costs of gain/lb. calf produced.
As you study this table, keep this general statement in mind: “As weaning weight goes up, the cost of calf gain/lb. tends to go down.” I’m not sure how well this economic concept is understood by cow-calf producers, but I will expand on it next month.
If you locate the row and column in Figure 6 that most matches your herd’s production parameters and cost of calf gain, the table’s right-hand section will project the profit/cow for your herd.
Operations in the upper left-hand part of the table may well want to expand their herds, while those in the lower right-hand corner probably should “get better before you get bigger.”
If my study herd’s projected profit of $341/cow comes anywhere close to reality, a national herd expansion surely will be triggered. The problem, however, is that one year doesn’t make a cattle cycle and its related price cycle. Stay tuned for further “expansion economic discussions” in Parts II and III of this series.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Kuna, ID. Reach him at 701-238-9607 or firstname.lastname@example.org.
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