Market Advisor

What If The Drought Continues In 2013?

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The projections include some good news and some not-so-good news. First, the good news – my latest price projection is $181 for October 2013 weaned steer calves. The not-so-good news? The cost of producing a weaned calf in 2013 – is projected to go up $26/cwt.

By the time you read this, you’ll have some indication of spring moisture conditions on your ranch. Those with normal rainfall are blessed. I advise the others to develop a contingency plan for continued drought in 2013.

This month, I’ll share the economic contingency plan prepared for my example eastern Wyoming/western Nebraska rancher discussed in previous articles. This rancher had sufficient winter moisture to green up spring pastures but he’s worried about sufficient grass for the entire 2013 growing season. So, we’ve prepared an economic analysis of this 250-cow herd should he be forced to sell another 50 cows this summer. Remember, he was forced to sell 50 cows in 2012.

Each month, I prepare a set of price projections for next fall’s weaning prices. As we sat down to develop this contingency plan, I shared with him my latest economic projections for the production of 2013 calves. Figure 1 depicts my projections for alternative feeder weights for key marketing months in 2013.

2013 planning projections for feeder steers

Slaughter cattle prices (bottom line) are projected to be up slightly over 2012. Feeder steers (750-800 lbs.) are a mixed bag, and calf prices are a little lower in early 2013, but should strengthen by late 2013. Lower corn prices should be the driving force on feeder calf prices. Corn prices are projected to be lower in 2013 as total corn demand has dropped off this last year.

My projections include some good news and some not-so-good news. First, the good news – my latest price projection is $181 for October 2013 weaned steer calves. This is up $15 from fall 2012 actual prices. Meanwhile, the discount for heifers is projected to narrow to $10/cwt. Much of this price strength is a virtue of the lower beef cow numbers in the national herd.

My last four monthly projections are summarized in Figure 2, with each bar representing a particular month’s October 2013 projected weaned steer calf price. While the absolute price projection from each month is important, also note the trend-line projection across the top of the bars for October 2013’s price projection. The trend line is horizontal, which projects strong fall 2013 calf prices.

monthly price projections for 2013 beef calvesMeanwhile, the not-so-good news – the cost of producing a weaned calf in 2013 – is projected to go up $26/cwt. This increase is due to the high-priced hay used to winter the cowherd last winter.

Higher calf prices, coupled with even higher winter feed costs, suggest 2013’s profit will fall to $68/cow. That’s down from $138/cow in 2012. The lower projected profit per cow suggests considerably less leeway to purchase supplemental feed should the drought continue in 2013.

What if drought forces this rancher to cull another 50 cows in 2013? Combined with the 50 cows he culled in 2012, that’s 100 cows depopulated in two years – or 40% of his customary 250-head cowherd. In addition, he would again sell all heifer calves born in 2013, as he did in 2012, which will greatly lower his grazing needs.

The repopulation plan would be to buy 50 bred cows to calve in spring 2014, while increasing the number of heifers held back for replacements in fall 2014 to 60 head; he would also hold back another 60 head in fall 2015. After 2015, he’d revert to his normal 45 replacement heifers. This expanded drought strategy substantially reduces the projected winter cattle feed required for winter 2013/2014.

Figure 3 summarizes projected mature cow numbers under this expanded drought plan. The three years of low cow numbers are 2013, 2014 and 2015, with cow numbers projected to grow back to 224 head by 2020. That’s a 10-year average of 204 head, down from the original business plan of 250 cows/year.

projected mature beef cow numbers

projected total annual calf sales

After some discussion, we concluded that herd rebuilding will have to be delayed toward decade’s end. For now, the emphasis has to be on the financial impact of getting through the current extended drought.

Our attention quickly turned to the projections of total calves sold as a result of this expanded drought plan. Figure 4 presents the total steer and heifer calf sales projected after implementing the extended drought plan. Under this extended drought plan, the big impact on total number of calves sold would be in 2013, 2014, and 2015 – the years of projected high calf prices.

This makes for high “invisible” drought costs from not having as many calves to sell. Under this extended drought plan, calf sales don’t attain the original 200 head/year as was indicated in the original pre-drought business plan.

The extended drought plan also takes its toll on net cash flow (Figure 5). Selling bred cows in both 2012 and 2013, and not holding back replacement heifers, generates very high net cash flows in both 2012 and 2013. But buying back bred cows in 2014 and holding back 60 replacement heifers generates a large negative net cash flow in 2014. The lower calf sales also impact 2015 due to the 60 additional heifers being held back to be developed.

net cash flow projections for beef herd during drought

The average net cash flow for the four-year period of 2012-2015 is projected at an annual average of $47,375, which is quite good. However, net cash flow gets considerably tighter for the rest of the decade. The 10-year average net cash flow is projected at $34,152 – the lowest of any drought strategy evaluated, but only $24,264 less over the 10 years ($2,400/year less due to the extended drought plan).

This $24,000 would purchase $480 worth of feed/cow proposed sold under the extended drought plan. Could he feed his way through the extended drought? My calculations are that he could keep the 50 cows in 2013, spend up to $28,000 for supplemental feed, and break even due to the extra calves to be sold in future years.

One final comment: if this rancher was thinking about retiring on or before 2020, my analysis suggests he sell all calves born each year after implementing the extended drought plan, and hold back no replacement heifers. By 2020, the herd would decrease to 34 cows. The annual net cash flow is projected to average $61,000, and taxes at sell-out-date would be minimized. Food for thought for those thinking about retirement!

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.

 

You might also like:

Strategies To Build Back The Beef Herd After Drought

Drought Is Causing A New Focus On Milk EPDs

2013 Setting Up For Higher Cattle Prices

14 New Ranch ATVs For 2013

Discuss this Blog Entry 2

RIOPEL (not verified)
on Apr 4, 2013

Hope God & friends gives us a little help!

Anonymous (not verified)
on Apr 9, 2013

I really hope that the drought does stop this year and that we get more rainfall! It will be a lot easier on everyone if we can just get some help from up above. If we have another drought this year then people are going to have to sell off and they are probably going to have a hard time trying to do that. All we can do is hope and pray.

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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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