Market Advisor

Heifer economics part 3

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Replacement-heifer decisions may prove to be one of the more critical management decisions of the emerging biofuels era. That's because such decisions will impact a beef cowherd's long-run financial performance over the total lifetime those heifers are in the herd.

My economic analyses suggest that developing 2005 and 2006 heifers into replacement females will be quite costly based on three factors.

  1. The opportunity costs of not selling 2005 and 2006 heifer calves at weaning were record high.

  2. Given the drought and high corn prices, the opportunity cost of feeds used in developing heifers may also be record high.

  3. The opportunity costs of pasture grazing are also at a record high.

Development costs

In each case, heifer development costs need to be based on opportunity costs. But remember that, in general, heifer-development costs are ranch-dependent.

For instance, the opportunity costs of feeds used for heifer development in Wyoming are very high. Conversely, a Montana rancher shared with me his heifer-development costs and the opportunity cost of his feeds were quite reasonable.

After the drought

The economic cost of developing replacement heifers impacts a beef cowherd's financial performance for the total lifetime of those heifers. Ranchers must ensure that their ranch doesn't suffer long-run financial losses from their current heifer-development programs, especially during the emerging biofuels era.

Herein lays the challenge: In the emerging biofuels era, 2005 and 2006 replacement heifers are unlikely to generate a record lifetime income. Thus, record-high heifer-development costs coupled with moderate heifer lifetime income projections suggests caution is needed in developing heifers. If a replacement heifer isn't going to pay her own way in the biofuels era, you don't want her in your herd.

The critical question for ranchers forced to reduce stocking rate due to the drought is: Do I restock back to a “previous norm” or run with a lower overall female stocking rate and use my surplus grass to produce “forage-based” heavier feeder cattle?

A client forced to reduce stocking rate due to the 2002 drought is now a high-cost producer — his last five-year economic costs averaged $133/cwt. of calf produced. Using the USDA Planning Prices presented in the July “Market Advisor” column, I project this operator's 2005 or 2006 replacement heifer calves will lose money over the years they are in his herd. Over their lifetime, these replacements have a calculated economic value of $729/head. To see these calculations go to www.beef-mag.com.

Percent calf crop's impact

This same high-cost rancher's breakeven economic value of a bred heifer is $1,038. At this $1,038 development cost (or purchase price), he's projected to not make any profit with his replacement heifers. Multi-year simulations (2006-2015) suggest this rancher would be better off not developing his 2005 and 2006 replacement heifers. Instead, he should explore using his extra grass to run yearlings.

An average-cost, or low-cost, rancher might end up with a totally different management decision with respect to developing replacement heifers for his herd during the emerging biofuels era. Each operator must calculate his heifer-development costs and economic values of bringing heifers into his own herd to find their optimum heifer-development strategy.

Straightbred vs. crossbreds

A second critical economic factor in this emerging biofuels era is the percent calf crop on a ranch. In my July column, I calculated that a preg-checked heifer in fall 2006 had a projected economic value of $1,031 (utilizing USDA's Long-Run Planning Prices and with a 7% return on the initial investment). Those calculations were based on a 90% calf crop.

I've analyzed several herds with a percent calf crop in the low 80% range. If I reduce the above analysis to an 82% calf crop, the breakeven economic value of a replacement heifer goes down to $868 — a drop of 16%. An 8% drop in calving percentage generated a 16% drop in the economic value of heifers going into that herd.

  • Increased percent calf crop from crossbreeding.

    It appears that “black-on-black” breeding programs are moving ranchers further away from crossbreeding. This general trend concerns me because it imposes a huge hidden economic cost on the ranching sector.

    Research suggests three production performance advantages from the heterosis provided by crossbred cows over purebred cows:

    1. 12% more pounds weaned per cow exposed,

    2. 10% more weaned calves per females exposed, and

    3. a two-year added lifetime production from crossbred cows (see Table 1).

    When I add a 10% gain in percent calf crop to my heifer-development models, I generate a 17.5% increase in the economic value of replacement heifers. That gets my attention!

  • Increased lifetime longevity from crossbred heifers.

    Research suggests crossbred cows have two years longer lifetime productivity. Research also shows the lifetime annual percentage of cows remaining in the herd remains higher for crossbred females, something also borne out in the North Dakota's CHAPS Data. When I plug these two longevity factors into my economic models, I gain a 6% increase in the economic value of replacement heifers during the emerging biofuels era.

  • Increased weaning weights from crossbred heifers.

    Research data suggests a 12% increase in weaning weight from crossbred cows. I calculated that a 10% increase in weaning weights would generate a 6% increase in net cash income per cow. (Part of the increased weaning weight was offset by reduced calf prices.) When I plugged this into my economic models, I generated another 5% increase in the economic value of developed heifers.

  • Economic summary of crossbreeding.

    Each of three crossbreeding production improvements was evaluated using USDA's Planning Prices for the emerging biofuels era. Though not shown on the table, a straightbred-developed replacement heifer has a lifetime economic value of $868 (earning a 7% rate of return on the initial development costs). When I added in a two-year increase in longevity, a 10% increase in percent calf crop, and 10% increase in weaning weights, I generated a $1,157 lifetime economic value for a developed crossbred replacement heifer (Table 2). This is a 33% increase in the lifetime economic value of crossbred developed heifers over straightbred-developed heifers.

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.

Table 1. Suggested production advantages from heterosis
Purebred Crossbred Difference
Pregnancy (%) 91 96 5% Advantage
Pregnancy to weaning Live calf (%) 92.5 96.5 4% Advantage
Calves/cow exposed (%) 84.2 92.6 10.1% (92.6/84.2)
Weaning weight (lbs.) 525 525 0
Plus (lbs.) 0 18 3.5% maternal boost
Plus (lbs.) 0 45 8.5% direct boost
Total weaning weight advantage 525 lbs. 588 lbs. 63 lbs.
Source: Leachman of Colorado “No Better Bull Seminar,” Feb. 8, 2007 Internet seminar
Table 2. Projected economic value of a crossbred heifer in the emerging biofuels era
1 calf 2 calves 3 calves 4 calves 5 calves 6 calves 7 calves 8 calves 9 calves Open 3rd year
Value of cull cows Year Net income Net income Net income Net income Net income Net income Net income Net income Net income Net income
$55 2006
$51 2007 $121 $121 $121 $121 $121 $121 $121 $121 $121 $121
$48 2008 $0 $110 $110 $110 $110 $110 $110 $110 $110 -$275
$46 2009 $0 $0 $162 $162 $162 $162 $162 $162 $162 $162
$44 2010 $0 $0 $0 $186 $186 $186 $186 $186 $186 $186
$42 2011 $0 $0 $0 $0 $254 $254 $254 $254 $254 $254
$41 2012 $0 $0 $0 $0 $0 $206 $206 $206 $206 $206
$41 2013 $0 $0 $0 $0 $0 $0 $171 $171 $171 $171
$42 2014 xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx $177 $177 xxxxx
$44 2015 xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx $0 $95 xxxxx
Value of cull cow $612 $576 $552 $528 $504 $492 $492 $504 $528 $492
Interest discount rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Total undiscounted net income $733 $807 $945 $1,107 $1,337 $1,531 $1,702 $1,891 $2,010 $1,316
Beef cow worth $685 $713 $792 $886 $1,024 $1,130 $1,343 $1,304 $1,350 $878
Cow age 2 3 4 5 6 7 8 9 10 8
Purchase (100 head/year) 2007 2008 2009 2010 2011 2012 2013 2014 2013
Save rate 90% 92% 95% 97% 97% 99% 97% 96% 96%
Remaining number 90 83 79 77 75 74 72 69 66 66
Head cuIIed 10 7 4 2 2 1 2 3 3 34
Market value $6,851 $4,989 $3,168 $1,773 $2,048 $1,130 $2,687 $3,913 $89,096 $115,654
Calculated LEV for a preg-checked crossbred heifer $1,157
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.

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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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