The decision to rebuild a cow herd is based on profitability, not just current prices, said University of Arkansas Agricultural Economists James Mitchell and Ryan Loy, in a Livestock Marketing Information Center letter called In The Cattle Markets. A mathematical formula can be helpful.
The economists said there are many factors involved in the decision to build or not to build beyond the availability of pasture. There is a lot of money invested in the home-raised or purchased heifer, be she pregnant or open.
And that money has a cost, they said, even if it’s not borrowed. The investment is tied up for a long time before being paid back, all the while the money could have been used for something else.
A KEY QUESTION
The key question is: will the future stream of returns from those heifers over their productive life exceed the value of that initial investment today,” they asked. “To answer that, producers can use Net Present Value, a tool that accounts for both profitability and the time value of money.”
Start by estimating all future revenues from the heifer over her expected productive life, including her cull value, Mitchell and Loy said. Then estimate and subtract expected annual cow costs to derive future net returns.
Then discount those net returns into today’s dollars using a rate comparable to loan interest rates or expected return on investment, they said. An 8% discount rate is a reasonable starting point.
Finally, subtract the initial investment, whether it’s the purchase price or the value of a retained heifer, from the total value of the discounted net returns, Mitchell and Loy said. A positive NPV suggests the investment will add value to an operation, while a negative NPV suggests it does not generate a sufficient return and would not be worth undertaking.
NO ABSOLUTES
There is no single “correct” set of assumptions for this type of analysis, the pair said. Producers should test a range of scenarios by adjusting calf prices, input costs, reproductive performance, the discount rate, and cull value to reflect their operation.
If the investment only appears viable under highly optimistic assumptions, such as a cow producing eight or nine consecutive weaned calves without any setbacks, that should raise concern, they said. The likelihood of this happening is low.
And, if the investment requires everything to go exactly as planned over an extended period just to break even, it may warrant reconsideration, the economists said. It’s better to identify risks through planning than to be surprised later.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $212.90 per cwt to $216.02, compared with last week’s range of $207.38 to $214.72 per cwt. FOB dressed steers, and heifers went for $331.60 per cwt to $335.38, compared with $321.91 to $336.58.
The USDA choice cutout Tuesday was up $5.49 per cwt at $348.26 while select was down $1.30 at $323.82. The choice/select spread widened to $14.44 from $17.65 with 82 loads of fabricated product and 26 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef was $374.71 per cwt, and 50% beef was $113.94.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.18 to $1.30 a bushel over the May corn contract, which settled at $4.60 1/2, down $0.15.
No live cattle were tendered for delivery Tuesday.
The CME Feeder Cattle Index for the seven days ended Monday was $295.14 per cwt, up $1.43. This compares with Tuesday’s May contract settlement of $294.02, up $2.22.