Market Advisor

The next decade: Part II

RSS

Replacement female decisions are among ranch managers' most critical decisions. While complete genetic control is often desired, ranch-raised heifer replacements tend to have a lot of hidden costs that frequently get ignored.

If high-cost replacement females are brought into a herd, those high costs stay with that herd for all the years those females are in the herd. If low-cost replacement females are brought into the herd, that herd will probably become a low-cost herd.

The annual depreciation cost associated with a beef cow breeding herd is substantial. Most ranchers get around breeding herd depreciation by annually adding back in replacement females and selling cull cows. In either case, the annual cost associated with maintaining a beef cowherd (replacement costs or depreciation) is substantial.

I'm currently utilizing replacement costs of $147/cow in my beef cow budgets. With a 13% replacement rate, this calculates to a $1,130/head replacement cost ($147/.13 = $1,130). Remember, 2009 replacements were born in 2007 when heifer calf prices were higher.

Current low profit margins are making female replacement decisions even more critical. In addition, long-term projections are for profit margins to remain low as we progress further into the biofuels era. The accumulated costs of making wrong female replacement decisions in the biofuels era could easily become very serious.

Today's ranchers must think outside the box and expand their female replacement considerations by simultaneously evaluating the economics of raising them, purchasing preg-checked heifers or purchasing bred mature cows. In low-price years, you hold back extra heifer calves; in high-priced years, you sell every female born. Astute ranchers do whatever it takes to lower replacement female costs.

The first step in lowering replacement female costs is to ensure that the proper economic analysis is employed in making your female replacement decisions. My recommended heifer replacement analysis focuses on answering two questions:

  • Is the proposed female replacement investment decision predicted to be profitable?

  • Is the proposed female investment decision predicted to be feasible?

The profitability answer must be based on the projected return on investment (ROI) where all resources consumed by the replacement females are valued at fair market price (opportunity cost). This, in turn, suggests that ranch-raised grass, hay and grains must be valued at the going market price — not at cost of production.

Meanwhile, the feasibility question focuses on how the replacement females will be financed; that is, the focus is on the business's annual cash flow (out-of-pocket costs and cash sales) for the years that the replacement females will be in the breeding herd. There can be a huge difference in the cash flow demands when the replacement females are financed with equity capital or borrowed capital.

The profitability question must be answered first; if the answer is affirmative, then move on to the feasibility question. If the profitability question is no, the analysis ends there.

The fact that a female replacement decision will cash flow is irrelevant if the investment is not a profitable use of your resources. The answers to both questions must be affirmative for a ranch manager to go ahead with his female replacement decision.

The most difficult part of this process is deciding which long-run planning prices to use. Most ranchers tend to use today's short-run prices, but long-run prices are preferable since the replacement females will be in the herd for several years.

I believe the best planning prices available are those calculated by the Food and Policy Research Institute (FAPRI) at Iowa State University and the University of Missouri. FAPRI annually publishes a set of 10-year baseline prices based on extensive computer models of the U.S. and world agricultural economies.

Figure 1 presents FAPRI's long-run projections for Nebraska direct slaughter steer prices, Oklahoma feeder (600- to 650-lb.) steers, and utility cull cows. Figure 2 is a chart of FAPRI's Omaha direct slaughter steer prices.

These FAPRI planning prices are the foundation for my expanded set of planning prices targeted for Eastern Wyoming/Western Nebraska (Figure 3). The yellow columns in Figure 2 are FAPRI's published prices.

My feeder prices for alternative calf weights focus on fall prices targeted for spring-calving cowherds. I also emphasize five- and 10-year average prices.

Figure 4 presents the weaned calf prices I use to evaluate female replacement decisions. In fact, these planning prices were used in last month's “Market Advisor” column to calculate today's economic value of a preg-check heifer.

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.

Figure 1. Food and Policy Research Institute's baseline planning prices
Years
Type of cattle 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Nebraska direct slaughter steers $92 $90 $96 $98 $101 $102 $102 $100 $103 $103 $103
Oklahoma 800- to 850-lb. steers $108 $104 $114 $122 $128 $131 $133 $133 $133 $133 $133
Utility cull cows $56 $53 $57 $56 $50 $50 $61 $61 $61 $61 $61
Figure 3. Suggested planning prices for alternative weights of feeder steers (Oct. 24, 2009)
Year 400-500 lbs. 500-600 lbs. (fall) 600-650 lbs. OK steer 600-700 lbs. 700-800 lbs. 800-900 lbs. 1,100-1,200 lbs. Nebraska direct slaughter steers
Fall prices Annual
2007 annual $133 $125 $120 $118 $113 $109 $92
2008 $119 $111 $108 $105 $102 $99 $89
2009 $114 $107 $104 $101 $98 $95 $90
2010 $127 $118 $114 $111 $107 $104 $95
2011 $136 $127 $122 $119 $115 $112 $98
5-yr ave (2007-11) $126 $118 $114 $111 $107 $104 $93
10-yr ave (2002-11) $132 $121 $114 $112 $106 $101 $86
2012 $146 $135 $128 $125 $121 $118 $101
2013 $149 $138 $131 $128 $124 $121 $102
2014 $152 $141 $133 $130 $126 $123 $102
2015 $152 $141 $133 $130 $126 $123 $102
2016 $152 $141 $133 $130 $126 $123 $103
5-yr ave (2012-16) $150 $139 $132 $129 $125 $121 $102
10-yr ave (2007-16) $138 $128 $123 $120 $116 $113 $97
2017 $155 $144 $133 $130 $126 $123 $103
2018 $155 $144 $133 $130 $126 $123 $103
What's Market Advisor?

Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

Contributors

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,...

Sponsored Introduction Continue on to (or wait seconds) ×