Cattle Economics

Even With High Prices, Be Sure To Weigh The Return

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Depending on which side of the biscuit you butter, these are fixing to be halcyon days in the cow-calf business. At least they are judging by the chatter you hear about how much bred heifers and cows are going to be worth heading into next year.

“What you can afford to pay is a lot higher than it’s ever been,” says Stan Bevers, Texas AgriLife Extension agricultural economist. “Right now, the numbers say you can pay as much as $2,000 for a bred heifer and break even. The issue that has to be discussed, though, is the total amount of money that has to be invested relative to the rate of return.”

The $2,000 figure Bevers refers to represents specific projections for his part of the world. The figure also represents pushing the Net Present Value (NPV) to as close to zero as possible; telling him how much he could pay for a bred heifer today and still be profitable.

If you’re unfamiliar with it, Bevers explains, “NPV is a tool that allows you to analyze potential profitability of an investment, given anticipated net income as well as purchase price (the investment value).” It also accounts for the time value of money, the fact that $2,000 in your pocket today is worth more than having $2,000 in your pocket a year from now.

In this case, Bevers is accounting for a bred heifer kept through eight calf crops, then salvaged. He’s using annual costs from the Southwest Standardized Performance Analysis (SPA) and adjusted projected prices from the Food and Agricultural Policy Research Institute.

You can find various spreadsheets that calculate NPV allowing you to input your own projected production (including annual weaning rate per cow exposed and weaning weight), costs and prices. You also input your own discount rate. That’s the rate used to discount future dollars to current values. Bevers says he’s happy to share his own spreadsheet, by writing him at s-bevers@tamu.edu.

This is the same mental math producers perform, whether or not they think of calculating annual projected net income for a heifer’s lifetime production in terms of NPV.

At minimum, producers in business over the long haul with intentions of making money do that sort of penciling. “The ones who aren’t are the ones who will be paying $2,500 when the numbers say $2,000 is the maximum,” Bevers says.

Such projections necessarily require all kinds of rational assumptions. The worth of this kind of deliberate reckoning is at an all-time high, though, along with today’s hefty equity requirements, market volatility and accompanying risk.

“When you run the numbers, even if paying $2,000 for a bred heifer is doable, are you willing to accept 1%-2% return on the money invested?” Bevers asks. “With the prices we have today, it can go bad faster than it ever has, too.”

Plus, there’s less opportunity to dilute cost with increased production.
“We’ve maxed out annual cow-calf production relative to the constraints of the weather each year.” That’s what Bevers told folks at the Southern Plains Beef Symposium at Ardmore, OK, in August.

In fact, rising input costs relative to maximized production is one of what Bevers believes are the three key barriers to cowherd expansion. The other two are competition for resources, including land and labor, and overall profitability relative to the necessary investment.

“Most people don’t want to hear that, but I can find no credible data suggesting that the average weaning weight per cow exposed in this country has increased in the past 10 years,” Bevers explains.

Besides stabilizing over the past decade, Bevers says the industry’s focus on moderating cow size could decrease weaning weights.

“Nationally, the average corn yield increases an average of 2.6 bu. every year. There’s more cash flow for corn producers to cover increasing input costs,” Bevers says. “Average production per cow isn’t increasing.”

What's Cattle Economics?

Wes Ishmael provides tightly focused analysis and commentary on specific beef quality and marketing issues of practical importance to beef producers.

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Wes Ishmael

Among the industry’s most insightful thinkers, Wes Ishmael concentrates on industry price and market perspectives for BEEF magazine. Along with his monthly “Cattle Economics” column...

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