Market Advisor

Thinking About Herd Expansion? Keep These Points In Mind

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We all know it costs money to expand a beef cowherd, and net cash flow will decrease in the early years of expansion. Here's how that could impact your cowherd.

Expanding a beef herd in 2014 means doing so at a time of record expansion costs. In addition to the record opportunity cost of not selling 2014 heifer calves at weaning, the economic challenge is further compounded by the fact that the early years of herd expansion reduce the net cash flow of the existing beef cowherd.

For example, in my study herd of 250 cows, expanding by 40 more heifers will reduce my net cash flow in 2014 by $49,800 or $1,240/head. That’s because 40 fewer heifers will be sold at weaning in fall 2014.

In 2015, it will take about $550/head (or another $22,000) to develop these 40 weaned heifer calves into 32 pregnant females (a conservative 80% pregnancy rate). The projected cost of 32 preg-checked heifers is $71,600. When I adjust for the market value of open heifers ($9,250), these 32 preg-checked heifers are projected to cost $1,948/head.

I then must run these heifers for a year before they have their first calves in spring 2016. The projected full economic cost for my study herd in 2014 averages $880/cow. Assuming that 32 pregnant heifers cost at least as much to run for a year as the mature cows, the cost to carry these added pregnant heifers until their first calves are weaned in 2016 calculates to $28,160 (32 times $880).

Thus, my total expansion bill is projected to be $90,510 to produce 32 extra calves in 2016. These 32 calves could be worth $1,250/head, for an additional income of $40,000 in fall 2016. This reduces my projected expansion cost by the end of 2016 to $50,510, or $1,578/added heifer pregnant with her second calf.

How long will it take to pay for these replacement heifers? Replacement heifer costs need to be paid from annual net income (not gross income), and it will take 3.9 more calf crops after 2016 to break even. If I net $400 annually from the sale of each calf, I need four additional calves to break even (until 2020), and to start making money from this expansion.

herd expansion

Part 1: Should You Expand Your Cowherd? Take This Test

Should your herd get bigger or get better before it gets bigger? Harlan Hughes explores this in part one of his expansion series. Read here.

It will take five annual calf crops to cover the added costs of these 2014 added replacement heifers. By then, I fully expect calf prices to have weakened.

I have built in the replacement cost of any of these 32 replacement heifers that turn up open during their mature lifetime. The big increase in profit from this expansion is projected to occur when I sell my remaining replacement heifers as cull cows at 7-10 years down the road.

The bottom line is that it takes a high-profit herd to make it through a major expansion, especially with today’s record-high expansion costs. So, be sure you enter into expansion only if you have a highly profitable beef cowherd.

Now, let’s look at the economics of getting better. Ranchers commonly believe that increased production is preferable to cutting costs per cow, and I agree that the focus should not be on cutting costs per cow. My integrated resource management (IRM) work with producers in the 1990s indicated that it’s not the cost per cow that ranchers should focus on, but the unit cost of producing 100 lbs. (cwt.) of calf (UCOP). Generally, the lower the UCOP is, the higher the herd’s total profits. The only way a herd can have a low UCOP is to have high production per cow.

Of all the production factors I’ve studied, UCOP has the highest correlation with profits — even more than pounds weaned/female exposed, average weaning weight, or weight per day of age. The most important point is that high-profit herds tend to be the lowest UCOP herds, and that the best way to lower UCOP is to increase production, which generally means a high percent calf crop and/or high weaning weights. I like to measure this high production by “pounds of calf weaned per female exposed.”

Last month, I ended my article with a table relating “profit per cow” with “cost of calf gain” and “pounds weaned/female exposed.” I have simplified that table this month.

The revised table represents my April 2014 projections for my eastern Wyoming/western Nebraska study herd of 250 cows. My projections for spring 2014-born calves marketed in fall 2014 are based on:

  • An 87% calf crop (live calves weaned/females exposed in the previous breeding season)
  • 569-lb. average weaning weight
  • 203-day average calf age at weaning
  • 495 lbs. of calf weaned per female exposed
  • 2.8-lb. average gain per day of age
  • UCOP of $1.56/lb. of calf produced
  • A $341/cow profit is projected for my study herd producing 2014 calves.

These data were presented in detail in my last Market Advisor column in the June issue, and are incorporated into Figure 1.

The yellow cells in Figure 1 illustrate the production parameters and the UCOP for this study herd; the center highlighted number is the projected $341/cow profit from producing 2014 spring calves weaned in the fall.

profit projections for beef cowherd

The best way to increase profits is to lower the UCOP for the herd, and if this herd weaned 513 lbs. of calf per female exposed, it would be equivalent to an average weaning weight of 589 lbs./calf weaned, which would drop UCOP to $1.50/lb. This would increase the projected profit to $369/cow. The market price for the heavier calves was adjusted down by current sale-barn market price slides.

On the other hand, if this herd weaned only 460 lbs./female exposed, the UCOP would increase to $1.61/lb., and the projected profit would drop to $316/cow. In this case, the market price was adjusted upward based on current sale-barn market price slides.

Herds in the upper left-hand corner of the table are prime candidates for “getting bigger.” My recommendation for herds in the lower right-hand corner is to “get better” before getting bigger. I say this because it costs money to expand a beef cowherd, and net cash flow will decrease in the early years of expansion. What’s your situation: Should you get bigger or get better?

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Kuna, ID. 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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