We all know the cattle market runs in cycles. One year, calves may be cheap, so you have to sell more calves to make more money. In a year of high prices, fewer head return more money, giving you the chance to retain some heifers to rebuild or expand your herd.
Riding those waves of the market is a lot like living paycheck to paycheck. It's also not the most profitable strategy for retaining heifers, according to an Iowa State University (ISU) study. Instead, using an average dollar value to determine how many heifers to keep each year could be a better deal, the ISU study found.
It's a tactic patterned after the investment strategy of dollar-cost averaging. A term you've likely heard your investment banker use. Simply put, dollar-cost averaging means you invest a certain amount of money regularly, regardless of high or low prices.
When dollar-cost averaging with heifers, you'll be buying more heifers when the price is low and fewer head when the price is high. Over time, you rebuild your herd at a lower cost/head and generate more profits.
“It follows the principle of ‘buy low, sell high,’” says John Lawrence, an ISU Extension ag economist. “You are trying to be counter-cyclical. You'll be doing the opposite of everyone else.”
Lawrence led the ISU study that compared the profitability of four heifer retention strategies over a 30-year period (1970 to 1999). Researchers used a starting inventory of 82 bred cows, 18 bred first calf heifers, 21 virgin heifers being developed and five bulls. They then retained heifers based on:
Steady size (SS): Producer retains the same number of heifers each fall to maintain the same size cowherd.
Cash flow (CF): This producer's objective is to maintain the same cash flow each year. All steer calves, cull cows and bulls are sold. Next, enough heifers are sold to reach the cash flow objective. Any remaining heifers are retained for the breeding herd. If there aren't enough heifers to achieve the cash flow objective, additional cows are sold.
Dollar-cost averaging (DCA): The producer retains the same dollar value of heifers each fall. As mentioned above, when calf prices are low, the producer retains a higher number of heifers. For this study, the annual amount invested in heifers was equal to the average SS investment in heifers, but the timing of the investment was different.
Rolling average value (RAV): Producer retains the 10-year average value of heifers each fall. For this study, the 10-year average value was equal to 21 head of heifers — the same number of head retained yearly in the SS strategy.
At the end of the study, producers using the DCA and RAV heifer retention strategies had more money in their pocket than producers trying to maintain a constant herd size or a constant cash flow. (see Table 1.)
Heifer retention strategies aimed to meet a constant yearly cash flow had the lowest average revenue.
Producers retaining the same number of heifers annually did see increased revenue, but it didn't grow as fast as the DCA and RAV strategies, Lawrence says.
“Looking at annual profitability over the long haul, DCA and RAV came out on top,” Lawrence says.
He credits this to two factors. First, when heifers are higher priced you are selling more of them and thus getting higher returns. Second, the higher number of low-cost heifers comes into production during the higher price time of the cycle; thus, you sell more calves at the higher prices.
Lawrence says producers purchasing bred or open females should follow the DCA or RVA concept, too. “Prices for bred cows and heifers also follow the market's ups and downs, so buy more when they are cheap,” he says.
“I agree that the ‘averaging’ concept will work,” says Harlan Hughes, a professor emeritus of agricultural economics at North Dakota State University.
He adds, “I even suggest producers should cull deep on the downward side of the cycle so they can greatly reduce culling on the upside of the beef price cycle and also sell every calf born.”
By selling more calves when prices are high, Hughes says producers will build a financial reserve to get through the next down time.
It's a strategy Lawrence and Hughes say producers should act on right now.
“With heifers as high as they are now, producers should be selling now,” Lawrence says.
Hughes predicts prices will dip later this decade. “My current projections are for a down time to hit in 2007,” he says.
One major point to consider if you plan to increase production in the profitable years and reduce production in the unprofitable years is your land base.
The DCA and RAV method will vary your herd size considerably over the cycle, Lawrence points out. That means it's best suited to a flexible land base that can be increased or decreased at the going rental rate. Or, for producers with a fixed land base, a stocker enterprise — or some other option to utilize the forage — may be necessary.
“A stocker enterprise serves as a shock absorber for excess forages as the size of the cowherd fluctuates based on investment decisions,” Lawrence says.
If changing your land base isn't an option, Lawrence suggests staying with the steady size strategy. It's also the simplest to implement, he adds.
A final point to ponder: Lawrence says producers who implement the DCA or RAV strategies must be prepared financially to weather wider swings in cash flow.
“This is for people who can manage resources (land, forages) and capital to do what others aren't or can't,” Lawrence concludes.
How Many To Keep?
If you plan to implement a dollar-cost average approach to your heifer retention program, you'll need to determine how many head to keep each year.
To decide the dollar value to invest annually, determine the number and weight of heifers you would retain under the steady size system then multiply by long-run average heifer price.
For example, if I plan to retain 20 head of 500-lb. heifers each year and the 20-year average October heifer price is 73¢/lb., I would invest 500 × 73¢ × 20 = $7,300/year. If 500-lb. heifers are selling at 95¢/lb. in the fall ($475/head), I would keep $7,3004475 = 15 head. The year that heifers are 60¢/lb. ($300/head), I would keep $7,3004300 = 24 head.
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