The bottom line is that it’s not good to have a drought at the peak of the calf price cycle. A key lesson is to not spend the extra cash generated in the drought year as the money will be needed to weather the herd’s repopulation phase.
In times of drought, ranchers should focus most of their management energy on cash flowing the herd through the drought and beyond. Remember, a drought’s cash-flow impact on a herd is 7-10 years.
The manager of my 250-cow demonstration herd estimated that he had sufficient feed to take 80% of his cowherd through the winter to grass in 2013. To maintain his 2012 herd into 2013, without depopulating, he estimated he’d need to purchase the feed for that remaining 20%, as well as his associated young stock.
He considered depopulating his herd by 20%, in addition to not developing any replacement heifers from his 2012 calf crop. He would then repopulate through raised replacements following the drought. He asked me to project the net cash flow of his depopulation/repopulation drought strategy.
Last month’s column projected the 10-year, cash-flow impact of depopulating this demo herd. This month, I’ll focus on the cash-flow impact of repopulating the herd after the drought by holding back added replacement heifers from the 2013 and 2014 calf crops.
Let’s first project the production impact of repopulating this herd by holding back 80 replacement heifers from the 2013 calf crop (rather than the normal 45 head), and another 80 replacement heifers from the 2014 calf crop. These additional replacements would bring this beef cowherd back to 250 cows in 2015 (Figure 1). This drought strategy is projected to reduce the 10-year average number of cows to 233 cows/year – down from the 10-year average of 250 cows before the drought.
The dynamics of a drought’s impact on calf sales is amazing. While this rancher normally sold around 198 calves/year, the number of calves marketed annually under this drought strategy would not recover to the normal number until 2016 (Figure 2).
After repopulation, a total of 1,786 calves were projected to be sold over the 10-year period of 2011-2020. This compares to 1,965 calves projected to be sold in the control run over this same 10-year period. This is a reduction of 179 calves sold over the 10-year period – a 9% drop in accumulated calf sales.
Any shock to the herd, such as depopulation and then repopulation, results in an oscillation of calf sales until the numbers finally stabilize. In our demo herd, calf sales would go up to 241 in the 2012 drought year, down to 112 in 2013, and down to 77 in 2014 (2013 and 2014 are projected to be years of high calf prices).
Calf sales then would grow to 164 head in 2015, and 202 head in 2016. Calf sales finally would level off at 198 head for the years 2017-2020, which are years of projected lower calf prices.
Thus, this herd’s accumulated 10-year gross sales is projected to be $111,087 less for this herd as a result of the 2012 drought. This amounts to a decrease of $11,100/year in gross sales, or an annual reduction in sales value of $44/cow over the 10 years due to the drought.
Further study of net cash flow carries both good and bad news.
Figure 3 illustrates the extreme volatility in net cash flow that is generated by this depopulate/repopulate drought strategy. In the year of the drought, net cash flow rises to $162,000 due to increased cattle sales, but goes negative when more heifers are held back in 2013 and 2014. The three-year average net cash income for 2012, 2013 and 2014 is projected to be $38,300. Compare this to a projected three-year average of $60,700 in the “no drought” control run.
The bottom line is that it’s not good to have a drought at the peak of the calf price cycle. And a key lesson is to not spend the extra cash generated in the drought year as the money will be needed to weather the herd’s repopulation phase.
This depopulate/repopulate strategy is projected to generate a 10-year annual average net cash flow of $37,390. The 10-year average for the control run was $41,500/year. (In both cases, the projected cattle cycle is responsible for the drop in net cash flow for years 2016 through 2020.) The 10-year accumulated net cash flow is projected to be $75,742 less due to the depopulation and repopulation actions. In summary, net cash flow, both annually and over the 10-year study period, is significantly impacted by the drought.
Repopulation via raised replacement heifers is projected to generate even less net cash flow than just depopulation. Depopulation alone reduced the 10-year net cash flow by $59,400, while repopulation via raised replacement heifers reduced net cash flow by another $16,332.
I expected repopulation to increase net cash flow, not decrease it. Should this rancher repopulate by buying bred replacement heifers? Stay tuned.
Final food for thought – the projected $75,000 decline in net cash flow from this depopulation/repopulation drought strategy would buy a lot of feed. The take-home message is that where a drought occurs in the cattle cycle makes a huge difference on the optimum drought strategy.
In my calculations, I consider a beef cow year as being the period from weaning period to weaning period. Thus, I charge the 2012/2013 winter feed bill to the production costs of the 2013 calf crop. The 2012 drought will heavily impact the winter 2012/2013 feed bill, which will significantly impact the profit potential of producing 2013 calves.
First, hay prices are currently record-high. USDA’s mid-December market summary figures for Nebraska cited $275-$300/ton for large baled alfalfa, while grass hay was priced at $200-$230/ton.
Fortunately, not all the hay needs of my demonstration rancher will have to be purchased at such high prices. Thus, the projected feed cost of feeding his beef cows will be a weighted average of cash cost of the raised hay, plus the cost of purchased hay and transportation.
My demonstration rancher, with his 250-cow herd, estimated the economic cost of his raised grass hay raised in 2012 as $100/ton, and purchased grass hay at $200/ton. The weighted average of the raised grass hay and the purchased hay needed to winter his total 2012 cowherd without drought depopulation is projected to be $120/ton (80% at $100, and 20% at $200). Given his estimated hay needs of 2.7 tons/cow and the associated young stock and bulls, the projected market value of his annual feed bill is record-high at $528/cow. Grass is priced in at rental rates.
Eliminating the development of 2012 heifer replacements should reduce the market value (economic cost) of feed to $467/cow. Compare these projected 2013 feed costs to the total herd’s $321 feed cost in producing his 2012 calves.
My prediction is that the average profit of producing 2013 calves will be lower than for 2011 and 2012 calves.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 or firstname.lastname@example.org.