Market Advisor

Your Herd’s Economic Base Will Determine Your Drought Strategy

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Each ranch operator must figure his herd’s economic base when launching a drought management plan. And in many parts of the country, a drought management plan is a necessity today.

As of late July, drought was creating a serious situation over much of cow country, as well as the eastern Corn Belt. In addition, the September 2012 corn futures price had grown beyond $8/bu., with new crop corn prices having risen 50% since early June.

Of course, corn prices are projected to drop some with the 2013 corn crop, but 2012 calves will be finished with 2012 corn. Figure 1 depicts the volatility of corn futures prices.

The market impact of rising feedlot cost of gain (COG) is negatively impacting 2012 feeder cattle prices. Ranchers should note, however, that while feeder cattle prices are substantially down currently, fall 2012 feeder calf prices are still projected to equal last year’s prices. Last year’s beef cow profits, while not record high, were quite favorable. Figure 2 presents my projected fall 2012 planning prices (as of mid-July).

Figure 3 summarizes my traditional marketing alternatives for 2011 and presents my current projections for 2012 calves. Current feed cost projections have increased the cost of production for all marketing alternatives (see the two COG columns).

The positive thing for finishing is the projected smaller 2012 buy/sell margins for feedlots. Beef exports are projected to keep slaughter prices strong, while feeder cattle prices appear to be adjusting to the projected increase in COG.

As ranchers progress into this year’s drought, each rancher needs to know his herd’s economic base at the start of the drought. The herd’s economic base will determine which drought strategy alternatives are feasible. Low-cost producers have considerably more feasible drought strategies available to them than higher-cost producers.

The numbers provided in this column are mine, and I encourage ranchers to formulate their own herd’s cost-of-production analysis. The example data I will use is the 2011 average economic summary of 128 herds located in the Northern Plains. Here is my suggested outline for establishing your herd’s economic base.

The foundation ofany beef herd’s economic analysis has to be that herd’s performance data. Figure 4 presents my suggested critical herd performance measures.

Production efficiency is best summarized by the “weaned percentage” based on percent of females exposed to the bulls and “lbs. weaned/female exposed.” Meanwhile, culling percentage is critical in determining the number of replacement females needed to maintain the herd. 

Let’s now look at the costs of production for these 2011 herds:

• Winter feed consumption. I charged winter feeds fed to the cows while gestating to the following calf crop. That is, the winter feed fed during 2010/2011 is charged to the 2011 calf crop. The winter feed fed 2011/2012 is charged to the 2012 calf crop.

The best way to get a handle on the winter feeding program is to convert all forage consumed to “tons of hay equivalent” (Figure 5). The actual pounds of forage fed are adjusted to “dry matter pounds”; then, the total dry matter (lbs.) of all forages is converted back to tons of hay equivalent. For my example herds, this converts back to 3.44 tons of hay equivalent consumed for the 2010/2011 winter. Now the only forage price I need is hay price.

• Annual feed costs. All feed costs should be based on local market prices, not cost of production. I don’t recommend using cash costs of production for ranch-raised feeds.

Figure 6 summarizes all feed costs associated with the 2011 study herds. Winter forage costs totaled $149/cow. When summer pasture costs and all other feed costs are accounted for, the total market value of all feeds fed was $303/cow for the 2011 calves.

This is the cost table that will change the most in your 2012 drought plan. For example, my current drought plan brought this table’s total feed costs to $358/cow – an 18% increase as of mid-July 2012.

• Livestock costs. Figure 7 lists my suggested categories making up the livestock costs. In 2011, these livestock costs totaled to $89/cow. (Breeding costs here are for artificial insemination only, as bull costs are imbedded into the herd’s overall cost structure.) I don’t project livestock costs to change much in this 2012 drought year.

• Overhead costs. Figure 8 presents my suggested overhead cost categories, which average $84/cow for the study herds. Again, this is only the share of these costs allocated to the beef cowherd. I don’t expect these costs to change from the 2011 to the 2012 calf crops.

• Herd replacement costs. Replacement costs include two categories of costs – a $151 value of purchased animals (females and bulls), and a $119 market value of bred replacement heifers transferred into the cowherd for a total economic replacement cost of $270/cow in the inventory.

In summary, Figure 9 presents my economic summary for these 2011 Northern Plains herds. Gross income averaged $941/cow, and total costs of production averaged $767. The economic net returns – return to unpaid labor, management, and equity capital – averaged $175/cow.

With respect to the 2012 calf crop, I project beef cow feed costs of production to rise $33/cow from 2011 to 2012. While I have 2012 projected steer calf prices near last fall’s average, I currently have heifer prices and cull cow prices projected lower. Thus, I project 2012 gross income to be down $103/cow.

My bottom line is that the projected return to unpaid labor, management, and equity capital per cow is down from $175/cow in 2011 to a projected $72/cow in 2012.

Figure 10 puts my 2011 actual returns and my projected 2012 returns per cow in perspective to historical returns. Note the impact of the 2002 drought and also the 2006 drought. The current drought will also have its economic impact. Stay tuned. 

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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