Market Advisor

The next decade: Part I

RSS

I truly believe ranching in the next decade will not be “business as usual.” Thus, my next few columns will look to stimulate ranchers' thinking about where their businesses might be headed over the coming decade.

The Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University and the University of Missouri recently summarized its 10-year baseline projection this way: “The cattle industry is experiencing difficult financial times, as rapidly rising input costs are not compensated by higher receipt levels. Feed and non-feed costs are expected to moderate this year (2009), but stay above levels seen earlier this decade. Despite decreases in per-capita beef supplies, short-term economic weakness will constrain cattle prices below profitable levels until 2010.”

Depending on when a ranch herd was established and how replacements are brought back into the herd, the capital investment in a beef cowherd varies substantially between ranches. When overvalued females are brought into a herd, those high costs stay with that herd over the total life of those females. When undervalued females are brought into a herd, that herd becomes a low-cost herd.

To examine long-run economic projections, let's focus on the economic value of a 2009 bred heifer. The economic value of a bred heifer today is the sum of her annual net cash incomes generated while that female is in the herd. These future incomes need to be discounted back to today's dollars. Note that I am talking about annual “net” cash income and not “gross” cash income.

Let's first focus on two key economic variables that will determine the economic future of ranching — net cash income (NCI) and family living draw (FLD). Both these variables are imbedded in the net present value (NPV) concept utilized here to illustrate today's economic value of a bred heifer.

The key components of NPV methodology are annual NCI and the time value of money. Annual NCI centers on a set of annual planning prices and a set of annual projected production costs. FLD must also be added in as a cash cost. I encourage ranchers to construct both sets of these numbers for their own ranch.

The time value of money centers on the concept that a dollar today is worth more than a dollar a year from now. The discount rate used in this analysis is 5%.

The economic value of a bred heifer today depends on the predicted annual NCI while that heifer is in a rancher's herd. The cost structure used in this analysis was based on North Dakota's Farm Business Management 2009 database of 130 beef cowherds.

NCI per female varies considerably among ranchers. FLD also varies among ranchers, as some generate their total FLD from the beef cowherd, while others rely on off-farm income for family living.

Let's assume a rancher buys 100 preg-checked heifers in November 2009, which are predicted to have seven consecutive spring calves. However, with typical culling rates for open females, etc., only 72 of these heifers will likely remain in the herd by the end of the seventh calf crop, and later will be sold as cull cows. Those ranchers who generate FLD from farming or off-farm employment have a higher economic value of a preg-check heifer.

Figure 1 presents my current calculated economic values of bred heifers for alternative NCI and FLD. For example, a rancher with an annual NCI from his current cowherd of $50/cow and no FLD could pay up to $768 for a bred heifer in 2009 and earn a 5% return on his investment. A neighboring rancher generating a $100 NCI/cow could pay $1,014 for that same bred female and also earn a 5% return on his investment.

For any given annual NCI, the higher the annual FLD, the lower the economic value of the bred heifer in that herd. How a ranch family generates its FLD is all critical with respect to what is the economic value of bred heifer.

FAPRI further summarizes its 10-year projection this way: “Cow-calf producers have responded to economic losses by reducing inventory. Feedlots are also struggling financially. Fewer available calves will cause feeder animal prices to rise, but until the economic situation of feedlots improves, price bids for calves will be tempered. Beef cow numbers drop to 13% below the 1996 peak and should return the industry to historical profitability levels in a few years.”

FAPRI makes annual beef sector price projections for the next 10 years. These annual projections are based on general economy projections, world trade and the total agricultural industry projections. I used FAPRI's beef sector price projections to generate a detailed set of price projections that I apply to a North Dakota database of farm business accounting records.

This North Dakota database is used to project the economic performance of these beef cowherds annually from year 2010 to 2017. Figure 2 presents the projected annual net cash flows. With respect to Figure 1, this calculates out to an average annual NCI of $66/cow over the next seven years.

After taking into account the calf sales and cull female sales from the purchase of 100 purchased heifers, a total of $84,345 or $843/bred heifer was generated. That is, the calculated economic value of a bred heifer in fall 2009 is $843, the lowest NPV I've calculated in years. I even included no annual FLD in this example.

This analysis suggests we're in for a decade of relatively low annual NCI, which will put considerable pressure on holding down the capital investment in replacement heifers. Ranchers who continuously bring in overvalued replacement heifers will eventually exit the beef cow business.

My major conclusions are:

  • The capital investment strategies of profitable ranches in the next decade will be considerably different from those of the past decade.

  • Economic pressures over the next decade will force ranchers to generate FLD from something other than the beef cowherd.

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.

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) ×