Valuing bred heifers during high prices

Valuing bred heifers during high prices

IN order to determine how high is too high when it comes to the price of bred cattle, South Dakota State University (SDSU) extension livestock business management field specialist Shannon Sand and SDSU extension cow/calf field specialist Warren Rusche recently offered advice on how to value bred heifers during a time of historically high prices.

"In the last few years, cow/calf producers have seen an increase in returns; however, expansion has been slow due to droughts, high feed costs, storms and high prices of replacement heifers. With the drop in feed prices and the expected high returns on cattle in the next few years, many producers have been wondering if it is time to expand their herds," they explained.

In order for a producer to know if it is the right time to expand, Sand and Rusche said it is important to look at the lifetime potential of the heifer and the number of calves she will produce over her lifetime.

To do this, they suggested using a set of price projections for both the value of the calf and the value of the cow when she is ready to cull. Table 1 shows projected prices for beef cattle, calves and cull cows through 2019. These projected prices are lower than what is currently observed in the marketplace.

"The importance of looking at these long-run projections when deciding whether or not to expand cannot be overlooked," they emphasized. "Using more conservative values helps prevent bull-market fever from affecting decisions."

In 2017, beef cattle prices are expected to decline slightly compared to 2016 and then increase again in 2018.

"Knowing these prices, a producer can better plan their future herd expansions," Sand and Rusche said.

It is also important for producers to look at their budget and know what it costs them to get a calf to market, they added, explaining that "if it is cost prohibitive to buy a bred heifer, then the producer may need to raise additional replacements rather than sending them to market or look at alternatives, such as buying an older bred cow."

However, if a producer can afford to add more bred heifers to the operation, then it is important to look at the potential revenue stream the heifer could generate in today's dollars, they said.

To evaluate the potential profit of a bred heifer and all of her potential offspring, Sand and Rusche said a net present value (NPV) model can be used, which adjusts for the time value of money.

NPV is defined as the difference between the present value of cash inflows and outflows and can be used in capital budgeting to analyze the profitability of investing in a bred heifer.

Table 2 shows the NPV of a bred heifer purchased in 2014. It assumes that the heifer will have her first calf in 2015 and her last calf in 2019 and will be sold as a cull cow in 2019. The calves are expected to weigh 550 lb. when they go to market, and when culled, the cow is expected to weigh 1,300 lb.

According to Table 2, the expected total profit for the heifer and all of her offspring will be $662.49 over the lifetime of the animal. Sand and Rusche explained that this would change based on how many calves the heifer actually produces.

"It is important, when looking at expanding the herd, that producers take a long-term view. This is especially true given the current market prices of buying a bred (heifer) or replacement," they said.

Although every situation is different and operations need to be evaluated with operation costs and production history in mind, Rusche and Sand said based on the assumptions in the NPV model, there currently appears to be potential for buying bred heifers and making a profit over the animal's lifetime.

 

1. Expected prices ($/cwt.) for calves, cattle and cull cows through 2019

 

2015

2016

2017

2018

2019

Beef cattle*

138.97

143.97

143.38

144.30

146.90

Calves*

191.32

198.62

201.88

201.29

201.82

Cull cows**

88.00

89.00

90.00

90.00

89.00

*Prices from USDA long-term projections, Feb. 2014.

**Prices from North Dakota State University EC1090 price projection publication.

 

2. Net present value (NPV) of a bred heifer

 

Initial

Costs of

 

 

 

 

Net

 

 

invest-

labor,

Net

Discount

-Expected price-

cash

 

Year

ment

feed, etc.

cost

rate, %

Calf

Cull cow

inflow

NPV

2014

2,500

447.51

2,947.51

2

0.00

-2,947.51

-2,947.51

2015

525.73

525.73

2

1,052.26

526.53

516.21

2016

536.24

536.24

2

1,092.41

556.17

534.57

2017

546.97

546.97

2

1,092.41

545.44

513.98

2018

557.91

557.91

2

1,107.10

549.19

507.36

2019

569.07

569.07

2

1,110.01

1,157.00

1,697.94

1,537.88

Total profit

 

 

 

 

 

 

 

662.49

Budget expectations calculated using the SDSU cow/calf budget at http://igrow.org/livestock/beef/what-can-you-afford-to-pay-for-a-bred-heifer.

 

Meat shelf life

Store lighting plays a role in how long meat retains the bright red color that shoppers favor, according to researchers at the University of Missouri who have been searching for ways to extend the shelf life of ground beef. After price, consumers next consider color when buying meat.

University of Missouri meat scientist Bryon Wiegand said discolored meat accounts for an estimated $1 million in lost revenue annually due to markdowns, which have become increasingly costly: Increased demand and a reduced supply have pushed retail ground chuck prices to an average of $5.76/lb.

The price gap between premium-priced meats and lower-quality ground product continues to narrow as consumers increasingly prefer ground beef for convenience, Wiegand said.

Ground beef has a shelf life of about three days, and extending that by even a single day can make a big difference.

That's partly because shoppers typically fall into two main categories: planners, who shop for the week's meals on Sunday nights, and demand shoppers, who shop Thursday through Saturday. That leaves a day in the middle of the week when ground beef can lose its red appeal and retailers can lose sales.

Changes in meat color and odor result from a variety of causes, including fat content, packaging and exposure to oxygen. Heat from store lighting in display cases also causes color to fade.

Wiegand and others at the University of Missouri's College of Agriculture, Food & Natural Resources and extension service are studying how retailers can keep beef on the shelf a day longer before it's discounted for quick sale.

The National Cattlemen's Beef Assn. and Mizzou Advantage funded the study.

Wiegand and colleague Carol Lorenzen studied meat color changes under fluorescent and light-emitting diode (LED) lighting. Colors were compared against a control group with no light exposure.

Meat that was not subjected to light kept its red color better than either group exposed to light, but meat under LED lights fared better than ground beef under fluorescent lights.

Fluorescent lights produced higher temperatures than LED lights, and meat turned brown more quickly.

Wiegand's information may help retailers reduce losses as low supply and high demand intersect.

"If beef is the new gold, let's do our best to preserve it for the consumer that stays loyal to its purchase," he said.

 

Online resources

With the cow herd at the smallest level since 1962, plus the recent moderation in grain prices and optimism for growth in domestic and export demand, the stage is set for expansion of the national beef cow herd.

Iowa State University extension beef cow/calf specialist Patrick Gunn said this has led to increased heifer retention numbers over the past two years, but environmental and financial concerns have tempered that optimism.

"Previous droughts in many areas of the U.S., coupled with high feed and land prices in recent years, have undoubtedly hampered realization of true expansion to date," he said. "However, with recent reductions in grain and land prices, combined with both fed and feeder cattle markets now at record levels, it appears the national cow herd is ready to expand."

The recent price boom in all sectors of the beef industry translates into increased value (and cost) of replacement breeding stock, so it's vital to understand how to maximize reproductive efficiency and breeding herd longevity for enterprises looking to expand, he said.

That's why the Iowa Beef Center at Iowa State offered two series — in 2012 and 2014 — aimed at the development of yearling heifers and maintenance of the first-calf female.

"In conjunction with the Iowa Cattlemen's Assn., in early 2014, the Iowa Beef Center offered a successful statewide educational program titled 'Heifer Development: Maintaining Your Investment.' Through this program, best management practices from pregnancy check as a yearling through breeding season as a two-year-old were outlined and resources shared," Gunn said.

Since then, the center has received multiple requests for that information. To assist with the demand, various staff and faculty members have created a series of YouTube videos and are compiling links to additional resources.

Links to the videos and additional resources are available online at www.iowabeefcenter.org/heiferdevelopment.html.

There are 10 new videos that highlight best management practices of first-calf heifers and eight videos from the 2012 educational series on best management practices for developing yearling females. Additional resources will be added to the page as they are identified.

Volume:87 Issue:03

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