What is a respectable beef replacement heifer value for the coming 2022 production season? This is the fifth annual beef cow replacement value forecast for Nebraska. The intention is to provide baseline replacement heifer values to producers and industry stakeholders. Forecasts provided are derived from a set of very complex interrelationships, many of which are themselves forecasts.
The information here is intended as a guide, which users would be expected to modify depending on their circumstances and expectations of future production costs and cow and calf values. The forecast price and cost variations are those specified by the University of Missouri’s Food and Agriculture Policy Research Institute (FAPRI) 10-year projections. The changes in percent of annual costs given by FAPRI were used to adjust the costs of Nebraska producers.
Selecting replacement heifers differs from ranch to ranch, but the value for both retained and purchased replacements generally depends on:
• Longevity, the replacement heifer’s ability to stay in the herd as a productive unit.
• Productivity, both the current and future expected difference between costs and revenues (calf price and cost differences over the heifer’s productive life).
• Genetic and phenotypical compatibility with herd mates (heifer conforms with the production system and performance goals).
• Operator goals and management style (heifer contribution to future of ranch).
• Financial standing, specifically debt related to cow purchases.
This forecast assumes producers know two things about their operation:
• Annual cost of production per cow: Authors used University of Nebraska-Lincoln’s (UNL) Cost Cow-Q-Lator to help calculate the three levels of costs.
• Average historical replacement rate: This is the number of heifers needed each year to replace culled cows or cull rate and is a measure of cow longevity.
The three annual costs of production for 2021 used to start the model do not include calving rate, replacement cost, depreciation expense or death loss since these are each accounted for within the simulation itself.
The 2022 three annual production costs per cow were identified as $735.48/cow (low), $866.30/cow (average), and $990.32/cow (high). Values were adjusted within the simulation using those derived from FAPRI cost differences.
These costs relate directly to the 2021 Nebraska state average low, median and high pasture rental rates found in the UNL Agricultural Economics department’s 2021 Nebraska Farm Real Estate Report. These rates are a low of $41.05/cow-calf pair, a middle rate of $51.32/cow-calf pair and a high of $61.27/cow-calf pair. Winter rates were half of those charged in the summer. The pasture costs ranged from about 38-43 percent of all costs and 65-68 percent of total feed costs, while feed costs ranged from 56 percent to nearly 60 percent of all costs.
Since it is difficult to anticipate and quantify all the possible conditions in which replacement cows are purchased, three representative levels of cost of production and three rates of replacement herd types were used to create a total of nine break-even value forecasts. Breakeven means that the average dollar value cost of purchasing cows equaled the dollars returned from that purchase.
The nine forecasts are a result of 1,000 randomly drawn outcomes from each simulated scenario. The nine scenarios were the result of the three cost levels described earlier and at three rates of 14 percent, 20 percent and 28 percent annual herd replacement.
To account for producers who require added working capital, the same nine scenarios were simulated with half the value of cow replacements borrowed at 5 percent interest. Cow purchase value averages $1,437.50/head. The break-even results from the two simulations are reported in Figures 1 and 2.
As expected, both the costs of production and replacement rates affect how much can be paid for replacement heifers and ability to break even. Borrowing money to help pay for replacements also reduces their break-even value.
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At the highest replacement rate (28 percent) and lowest annual cost ($735.48/head), there is an $89.34/head reduction in breakeven, as a result of financing. The largest drop in break-even value occurs with the lowest replacement rate (14 percent) and annual production costs of $990.32/head. That break-even value resulted in a reduction of $47.46/head, due to borrowing money. The overall average drop in break-even value caused by borrowing half the replacement value is $157.65/head.
The included tables are valuable and can be used to extrapolate changes in replacement cow break-even values based on replacement rate, annual production costs and/or both. Table 2 lists the decrease in break-even value for each percent increase in replacement rate by cull rate group.
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For example, the reduction in break-even value for no borrowed money (NBM) with a replacement rate between 14 percent and 20 percent in the lowest annual per head cost group decreases by $60.25/head. Scenarios where no money is borrowed for cow purchases have a slightly greater reduction for each percent in replacement rate increase than those with borrowed money (BM).
However, all break-even values for like scenarios of borrowed money are still less than those who do not borrow money. Finishing with an example, if a producer in the lowest cost category had an 18 percent replacement rate and a 3 percent increase, the breakeven would fall by $180.75/head. From Figure 1, that would mean it would decrease from $2,173.38/head to $1,992.63/head.
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Table 3 demonstrates that increases in annual production costs also decrease the break-even value of cow replacements. For every dollar increase in cost, there is more than a dollar’s worth of decline. The 14 percent replacement rate has the greatest impact on cow replacement value, more so with financed cow purchases.
At the 14 percent replacement rate with the highest annual production costs group, BM and NBM respectively have a $3.10/head and $2.65/head decrease in break-even value for every dollar increase in cost, the most for all scenarios.
The information found in Tables 2 and 3 is used to forecast break-even values for each 1 percent increase in replacement rate and for every $10/head annual production costs increase. Please see Tables 4 and 5. Table 4 has forecast break-even values for cow replacements bought without borrowing money (NBM). Table 5 lists the break-even forecast for replacement cows purchased with 50 percent of their cost being borrowed (BM). To find a forecast, simply identify the annual per cow costs of production you wish, which are listed in the far left column of the tables, then identify the appropriate replacement rate, the top row of each table.
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Once you have found the desired column and row, find their intersection. This is to the right of the cost and below the replacement rate. For example, using Table 4, let’s consider an annual production cost of $915/head and a replacement rate of 17 percent: Their intersection lists a break-even forecast of $1,575/head. Table 5 for the same production costs and replacement rate has a lower break-even value of $1,377/head, $198/head less.
Increasing productivity without altering costs would result in greater revenue, which would not be accounted for in any of the scenarios. Therefore, the accuracy of the forecast is dependent on how closely an operation’s productivity and revenue match those specified in the model.
Productivity changes include calving rates and calf growth rates among others. Revenue changes also play a role in altering break-even value. Demand and supply shifts that alter cattle prices also have an impact on replacement heifer break-even value. Higher calf prices lead to higher break-even values, while lower prices lead to lower break-even values. This last point may seem obvious, but remember it is complicated by a heifer’s productive life that can span more than a decade or less than a complete season.
Accurately forecasting these values leads to better forecasting of cow replacement values. An economically successful producer, on average, buys or raises replacement heifers for no more than what is needed in net returns over their lifetime. The purchase value of any particular replacement heifer is unknown without knowing her future longevity, productivity, costs and cattle prices. In other words, the purchase of any single animal has some very real risk associated: nothing new or earth shattering, but worthy of recognition.
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A positive outcome in purchasing replacements over time comes down to the animal’s ability to return as much or more value than was paid, and this is only accomplished if the operation selects the right type of animals, at the right price and at the right time. One can always find the instance where an overpriced replacement broke even or made money, as well as where an inexpensively purchased cow ended with a loss.
The important thing is that, on average, good choices outperform those that didn’t pan out. Remember, raising replacements doesn’t make them free. In fact, it is important to know what they cost to raise and how they rate in value relative to purchased animals. This, however, is a topic for another day.
As longevity of a replacement cow increases, the average herd age increases, and break-even values increase, except when cost exceeds revenue. Low cost, low replacement herds can afford higher valued replacement heifers and replace capital faster in their operations. When raising or purchasing replacement heifers, each heifer’s value is based on her ability to stay in the herd and the producer’s ability to manage that productivity, control costs and use the market to their advantage. Applying these principles is key to making an operation more profitable and resilient.
This year’s forecasts are not much different from last year’s report for the nine NBM forecast. Six of these scenarios were higher than last year’s break-even value, while three were lower. Production costs were higher than last year. Projected future costs are also elevated, but so are future animal values, compensating for the higher costs. — Randy Saner, Nebraska Extension educator, and Matt Stockton, Nebraska Extension ag economics specialist
