HUNTIN' DAYLIGHT -- REPLACEMENT PRICES HIGH BUT REASONABLE

by: Wes Ishmael

It's plumb difficult to get a feel for exactly how much herd expansion is taking place.

On one hand, analysts with USDA's Economic Research Service explained in the August Livestock, Dairy and Poultry Outlook, “Despite improvements in national pasture conditions and anecdotal observations, heifer retention for increasing future breeding cow inventories was not validated in National Agricultural Statistics Service's (NASS) July 1 Cattle Report.”

On the other hand, there is plenty of other anecdotal evidence and statistics to suggest expansion is under way. Net cow-calf returns are too high and there's enough affordable feed for it to be otherwise.

“Overall, it appears to me that some recovery of pasture, range and hay production has taken place in many regions,” Derrell Peel, Extension livestock marketing specialist at Oklahoma State University said in early September. “The process will need to continue for many months in some areas. There will likely be some fall stocker cattle demand in addition to strong feedlot demand for feeder cattle. Heifer retention is likely to accelerate this fall and herd rebuilding is likely beginning this year. The fact that heifer slaughter is down 8.6 percent for the year to date and beef cow slaughter is down 17.4 percent so far this year, are both indications of herd expansion. Generally better forage conditions will let the cattle industry begin to respond to market signals by doing what producers want to do rather than what Mother Nature is forcing them to do.”

So, ERS analysts say, “To the extent that heifer retention occurs, it will further reduce feeder cattle supplies for placement on feed. If heifers are not bred until next summer, it will be spring of 2016 before they calve, and 2017 before the bulk of those calves will be placed on feed and marketed as fed cattle. It will take several years of heifer retention to build up heifer/cow inventories to the point of significantly expanding beef supplies.”

The reduction in available cattle to grow and feed, along with the fact that more cattle traded earlier this year, is why there seems reason to believe historically high calf prices might still have some upside this fall.

That means the price floor for potential replacement heifers has never been higher.

So Far, Replacement Values Match Potential

As Stan Bevers, Texas AgriLife Extension economist noted recently, heifers are worth about $1,500 per head to a feedlot (basis 750 lbs.).

From there, Bevers emphasizes there's no right or wrong answer on how much heifers are worth as replacements; each unique operation has an answer that can be right for their outfit.

Bevers recently took a look at numbers relative to Texas. Heavy-bred heifers in the state could be had for $1,650-$2,300. Using one ranch he works with closely—an efficient one—he pegs the cost of a heifer retained and developed in the state at $1,400-$1,800.

Next, Bevers looked down the road, calculating the Net Present Value for two-year-old heifers calving this year and then for the next seven. He figured $750/year cow costs. The value was $2,301.

“We know the market is $1,650 to $2,300, and it takes $1,400 to $1,800 to raise her, and now she is worth $2,300 in my herd economically,” Bevers says. “What do you do with those numbers? Well, if nothing else, it illustrates how complex this decision is right now. It's not right or wrong. It's based on what type of operation you have and your costs. You finally have to decide to pull the trigger and say this is what we are going to have to do.”

Similarly, Randy Blach, CattleFax CEO explained to participants at the recent Hereford Genetic Summit it takes about 1.5 calves (550 lbs. steers) to pay for a bred cow. At least that's the average for CattleFax data. That makes a bred cow worth $1,980 if calves are $240/cwt. It makes a cow worth $2,145 if calves bring $260/cwt. Extend the ratio to 1.65 calves given pent-up demand and whatnot and you're talking bred cows worth $2,178 and $2,360, respectively. The point is that when judged through history, current prices seem to be within reason.

If the numbers suggest expanding the herd, Lee Shulz, Extension economist at Iowa State University (ISU) and Patrick Gunn, ISU Extension beef cow specialist emphasize in Raising Versus Buying Heifers for Beef Cow Replacement, “Selecting the most economical source of replacement heifers has major implications for effectively using resources, controlling costs, and sustaining business vitality.”

Among the factors they say need to be considered:

• Interest rates on savings or other alternative uses of capital

• Interest rates on borrowed capital

• Cash flow needs

• Feed costs

• Labor availability and costs

• Relative price difference between cull cows and heifer calves

• Reproductive rates

• Forced (or involuntary) culling rates (cows that must be culled each year)

• Environmental restrictions on growth to weaning

• Genetic improvement potential and/or maintaining a desired genetic base

• Ensuring the heifer population will thrive in the given environment

• Price and availability of bred replacement heifers

• Tax implications

Production Risk Matters More

Ironically, with so much money tied up in a single head of cattle, Peel pointed out earlier this summer that managing production risk becomes more critical at this stage of the game.

“Underlying market fundamentals suggest that prices are likely to generally stay strong or move higher for the next couple of years and downside market risk as a trend will be generally low,” Peel explained. “A relatively bigger concern today than protecting market price is making sure that you have something to sell.”

That's true in absolute terms, as well as in terms of value variation.

“Production risk is a big part of financial risk at this time as things like death loss and reduced productivity have significantly larger financial impacts,” Peel explains. “…Generally, higher animal values suggest that increased marginal expenditures on inputs to ensure animal health and productivity may be economical.”

For instance, in the case of calves and feeder cattle, Peel said. “Though death loss always causes loss, there is an optimal level of death loss which is not zero because the marginal benefit of reducing (or attempting to reduce) death loss below a certain point is less that the marginal cost. High animal values today suggest that additional measures to reduce death loss (or at least reduce the probability of animal death) are warranted. For example, enhanced use of metaphylactic treatment in some situations or additional labor to detect sick animals and treat more aggressively may be worth the additional cost.”

In the case of cow-calf production, Peel explained, “Additional measures to enhance reproductive productivity are justified by high animal values. For example, additional expenditure to ensure cow body condition at breeding resulting in some increase in pregnancy rate and calving percentage may be worth evaluating. There are many other examples of adjustments in production that can increase benefits or reduce the risk of losses. For example, the value of fertility testing bulls, or stated another way, the cost of not fertility testing bulls is much higher today than with lower calf prices.”

“This is not time to operate with old rules of thumb,” Peel says. “Economic theory is clear; when the value of the output increases, more use of inputs is consistent with profit maximization. Producers need to evaluate all aspects of production systems to identify ways to tweak their production system to enhance profitability.”







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