Though 2010 weaned-calf prices are improved from 2009, higher calf prices alone aren’t sufficient to trigger expansion; higher profits per cow are needed. And that may come if the effects of recent stronger export demand trickle down to weaned-calf prices over the next few years.
With that in mind, let’s discuss the projected economic value of a preg-checked heifer. This economic value is the sum of her future annual “net incomes” generated from all the calves a heifer produces while in your herd, plus her eventual cull value.
Given the time value of money, those future annual incomes need to be discounted back to today’s dollars. Using a net present value (NPV) model, I’ve calculated today’s economic value of a preg-checked heifer.
In order to look at the annual net incomes generated by a heifer’s lifetime calves produced, we need a set of long-run planning prices. Two public agencies routinely publish such data – USDA’s Agricultural Research Service and the Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University and University of Missouri.
Using this data as my foundation numbers, Figure 1 presents my latest set of long-run planning prices for eastern Wyoming and Western Nebraska (ranchers from other regions should adjust these prices based on their region’s price differentials). I will use the “500- to 600-lb. steer” price column in Figure 1 in my bred-heifer calculations in this economic analysis. Figure 2 presents the cull-cow prices also used in this economic analysis.
These planning prices were used to simulate the annual net cash flow of a typical Northern Plains beef cowherd over the 2011-2017 period. The bars in Figure 3 provide the calculated annual net cash flows per cow for this typical herd. Earned net cash flow per cow is projected to increase through year 2015 and remain relatively high with a gradual decrease into year 2018.
Net cash flow calculations can vary substantially between ranches based on the existing debt allocated to the beef cowherd, as well as the family living draw allocated to the beef cowherd. My current assumptions with respect to the net cash flow projections are presented in Figure 3.
Figure 4 presents the NPV model used to calculate the economic value of a preg-checked straightbred heifer. The bottom line presents the calculated $1,110 net cash income over the lifetime seven calf crops assumed. The right-most number in the bottom line presents the $963 discounted net income from a heifer and is expressed in today’s dollars. The $963 is today’s economic value of a preg-checked heifer that has seven consecutive calves for a typical Northern Plains ranch.
The key assumptions built into this NPV model presented in Figure 4 include:
If one were to purchase 100 heifers at one time, not all will have seven consecutive calves; some will be culled each year. The culling rate typically starts out high for three-year-old females, goes lower as females mature reaching the low around the fourth and fifth calf, and again goes up slightly as females approach the end of their productive life (my suggested cull/save rates are presented in Figure 5).
My numbers suggest that by the end of the seventh calf crop, about 28 of the original 100 heifers will have been culled. Clearly, these 28 dropouts aren’t going to be worth $963 NPV as calculated in Figure 4. So what are these dropouts worth?
The fewer lifetime calves a heifer has, the lower today’s economic value of that female. The calculated shorter productive-life values are presented in Figure 5.
Figure 5 also presents my final calculated average economic value (AEV) of 100 preg-checked heifers that have from one to seven lifetime calves before being culled.
The bottom right-hand number ($894) is my final projected AEV of a fall 2010 preg-checked heifer. Remember, this number has no debt service or family living draw built into it.
Is this $894 number large enough to trigger an expansion of the nation’s beef cowherd? I doubt it. I think ranchers will be very slow to expand the nation’s beef cowherd at least in the first half of this next decade.
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.