NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
August 5, 1999
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
A bred heifer today is worth all of her future annual net incomes, including her future cull value, discounted back to today's dollars. Conceptually, this is easy to do and microcomputers make the calculations relatively simple. What's difficult is gathering all the needed information.
This is the third in a series of Market Advisor columns that present a process ranchers and beef farmers might use to evaluate the economic value of breeding stock--in this case, the economic value of a bred heifer at the fall 1999 pregnancy check. (The purpose of this series is to get beef farmers and ranchers thinking about expanding their beef herds now in order to take advantage of the stronger beef calf prices projected down the road. A copy of my paper titled "Determining The Economic Value Of A Bred Heifer," is available free from my secretary, Paulann, at (701) 231-7393, or on the Web at www.ag.ndsu.nodak.edu/cow/handouts/handout.htm.)
In general, heifers held back in low-price times produce calves during times of high prices, and heifers held back during high-price times produce calves during times of low prices. My analysis suggests that the optimum time for heifer retention in the current cattle cycle is rapidly coming to an end. My analysis further suggests that once the spot cash market price goes up for feeder calves, it is too late to profitably hold back heifer calves.
The two previous Market Advisors projected that a bred heifer purchased for $783 this fall is projected to earn an 8 percent return on the $783 investment. This specific economic value is based on a specific herd operating in the turn-around and early expansion phase of the cattle cycle. This column will focus on adjusting the economic values for alternative numbers of calves during a heifer's lifetime.
While the projected $783 economic value of a bred heifer assumes that she will produce seven consecutive calves in her lifetime, North Dakota's Cow Herd Analysis and Performance System (CHAPS) database indicates that a significant number of 3-, 4-, and 5-year-old cows are culled. As a result, many females do not stay in a herd to produce seven consecutive calves. Once breeding cows get to be 6 years old, they tend to stay in the herd for several more years. Let's look at the economic impact of early culling of a bred heifer.
Note that the projected net cash income for the next seven years peaks in the year 2002, comes down slowly in the years 2003 and 2004, and drops dramatically for years 2005 and 2006. Cull cow prices are also projected to peak in 2002 and to hit the next cyclical low in 2006. Cows culled before 2006 are projected to bring more money. Finally, the time value of money has a major impact -- the further into the future, the larger the discount.
The most critical age to breed back is age 2 -- which means calving as a 3-year old. What, then, is the economic impact of a 3-year-old not having a calf? What if this open 3-year -old breeds back and calves as a 4-year-old and continues calving through the rest of her productive life? Let's assume that she produced one calf as a 2-year-old in year 2000, was open in 2001, returns to producing consecutive calves in 2002 though 2006.
As a result of not having a calf as a 3-year-old, the annual net cash flow for the second year is a negative $286, which represents the cash cost of keeping her around for that year so that she can breed back as a 3-year-old to calve again as a 4-year-old. The calculated net present value for a heifer not calving as a 3-year-old but having the rest of her lifetime calves is $432. The opportunity cost of this open heifer is a reduction of $351 ($783- $432) in net present value for a bred heifer missing her second calf. Why such a big difference?
During her open year, this heifer is assumed to cost $280 (the average total costs of females in that herd, feed, overhead, debt service etc.) to keep her around a full year instead of her projected net earnings of $123 net cash income as a 3-year-old. The discounted present value in today's dollars of this $403 ($280+ $123) future income is $351. This $351 dollar difference illustrates the economic importance of getting 3-year-old heifers re-bred.
The calculated net present value of a heifer having one calf and then being culled and sold as open at pregnancy check time is $475. My analysis suggests that selling the open 3-year old as a cull cow is more profitable than keeping her and having her calf as a 4- to 9-year-old. This decision to cull or keep, however, depends on where one is in the beef price cycle and changes with the beef price cycle. The decision also depends on the cost of her replacement heifer.
Let's now assume that this heifer calves consecutively but her number of lifetime calves is less than seven. The calculated economic value of a bred heifer that produces six consecutive calves from 2000 through 2005 is $779--only $4 less than one having seven consecutive calves. Remember that changing annual salvage value of cull cows has some impact on this. Even a bred heifer that produces five consecutive calves (years 2000 through 2004) has a net present value of $761--down only $22 from seven consecutive calves. A bred heifer that has four consecutive calves (years 2000 through 2003) has a net present value of $716--down $64. For three consecutive calves (2000 through 2002), her value went to $673. For two consecutive calves (2000 through 2001), her value is $587. A heifer that has one calf (year 2000) and is culling at next year's pregnancy check had a net present value of $475.
Remember that these relative economic values are specific to the starting year in the beef price cycle. The key here hinges on this question: Are calf prices high early or late in the bred heifer's life time? This discussion focuses on the situation where calf prices are high early in a heifer's productive lifetime.
How sensitive are these calculated economic values to changes in the input numbers?
A 10 percent increase in all incomes raised the economic value of the bred heifer 10 percent. A 25 percent increase in cull cow income raised the economic value by 7 percent. A 1 percent increase in the discount rate reduced the economic value by 4.2 percent.
My final conclusion is that profitable heifer management strategies must take the cattle cycle and the resulting beef price cycle into account. My calculated economic values for bred heifers have already peaked in the current beef price cycle. Timing of heifer retention is critical.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629
Click here for a pdf version of this graphic. (14KB b&w graph)
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