Annual Beef Heifer Replacement Forecasts 2020-21

By: Dr. Matt Stockton, Agricultural Economist and UNL-Extension Specialist

& Randy Saner, UNL-Extension Educator

Overview

The 2019-20 season has been a wild ride for the beef industry. Although the supply of beef livestock has been adequate, supply chain challenges have made retail cuts of beef more expensive without producers capturing any benefit from the higher price. Some parts of Nebraska have experienced drought-like conditions, leaving some individual producers short on forage resources, and concerned about the coming season. These issues further complicate the already complex decisions related to maintaining a brood cow business. One of the largest factors in this decision-making process is the value of beef replacement heifers for the upcoming 2020-21 production season. This report marks the fourth consecutive annual publication of the year’s forecast of beef heifer replacement expenses for Nebraska. The information found in this report is intended to clarify thinking and assist stakeholders in making the best possible decision(s). It should be understood that this report provides information to consider, as no one forecast is absolutely accurate, especially when it generally takes many years to fully pay for the costs incurred in replacement cow purchases. The hope is that this report will provide information that promotes a clearer understanding of current replacement options.

Since cow numbers are a necessary part of maintaining a viable business, the replacement decision must be considered annually. The following information is based on publicly available forecasted price and cost scenarios available from the Food and Agricultural Policy Research Institute (FAPRI) with the needed modifications to tailor information to fit the state of Nebraska (University of Missouri FAPRI Annual 10-year projections, https://www.fapri.missouri.edu/wp-content/uploads/2019/04/2019-US-Baseline-Outlook.pdf.) The information provided here, however, is valuable to anyone with similar costs of production and expected animal values, regardless of geographical location. While the selection of replacement animals in a herd of beef cattle may differ from ranch to ranch, there are three factors seen by the authors as critically important and impactful to value. These factors apply for both retained and purchased brood heifer replacements.

The following general factors are significant in making a replacement decision:

• Cow Longevity – the replacement heifer’s ability to stay in the herd as a productive unit
• Cost versus Value – both current and future expected difference between costs and revenues
• Genetic and phenotypical compatibility with herd mates and operators’ goals and management styles

For this analysis, the genetic and phenotypical compatibility is assumed to be a non-issue, but the other two factors will be considered closely. Since it is impossible to anticipate and quantify all possible future conditions, types, and choices that might occur on a ranch, three general cost scenarios of low, medium, and high-cost levels were combined with three different herd productivities of low, medium, and high cull rates and were used to create a total of nine benchmark breakeven forecasts. Each of the nine forecasts are the average of 1,000 possible outcomes based on a range of productivities and size of the cow, as well as her resultant calves, probable values, and cost variations. Those faced with the replacement decision are likely to consider other factors, which also vary the outcome, but are beyond the scope of these forecasts. These other factors relate to individually unique circumstances: levels of productivity, genetic differences, management styles, available resources, etc.

As mentioned, three levels of heifer/cow replacement costs were identified on a per head basis for the initial 2020-21 calving season and then adjusted in percent terms to reflect the nature of the forecasts made by the FAPRI at the University of Missouri for the next ten years. These production costs were directly tied to the Nebraska Sandhills (Nebraska Statistical District, North) pasture rental rates reported by the Agricultural Economic Department’s 2020 Nebraska Ag Real Estate Report found at https://agecon.unl.edu/realestate/2019-farm-real-estate-report . The Nebraska 2020-21 season’s low-cost cow herd was estimated to have an average cost of $716.16 per head. This cost does not include replacement, depreciation, or death loss and per head cost does not represent cost per calf. More cows are kept than there are calves produced. The medium-cost cow herd is expected to have a cost of $780.50 per head. The FAPRI national forecast cost value lies between these two values at $740.02 per head, closer to the low-cost estimate of $716.16 per head. The 2020-21 high-cost herd was estimated to be $831.20 per head. Forecasts relate directly to the reported pasture rental rates of the region, a minimum of $51.51 per cow/calf pair, a maximum of $69.31 per cow/calf pair, and an average rental fee of $61.45 per cow/calf pair. The aforementioned are summer pasture rates and reflect a slight increase in comparison to last year’s forecast.

FAPRI forecasts both production costs and prices for cattle for each of the ten years listed in their report. As indicated, these costs were used to create an index to adjust the three initial cow cost levels to the appropriate year in the forecasting model. Revenues are based on FAPRI calf and heifer forecasts for March-born calves sold in the late fall for the next 10 seasons with an adjustment factor for varying weights or the price slide effect. The animal productivity and information were derived from ranch records of the University of Nebraska Lincoln’s Gudmundsen Sandhills Laboratory (GSL).

Capturing the longevity of any one animal is a difficult prospect at best. Therefore, current cow longevity is used in the form of annual percent culled, as a predictor of cow low longevity. Since longevity is key in valuing any particular animal, a statistical model of life expectancy and productivity was created using the GSL data for three different expected cull rates, the lowest of which is a 14% cull rate. While there are an infinite number of ways to maintain a constant herd size and get a 14% replacement rate, a method of calculating a herd with a static age, averaged at 5.88 years, was applied for the purposes of this report. The other two herds were figured with a 20% replacement rate, medium cull rate, and a herd age average of 4.85 years, followed by a herd with a 28% replacement rate, high cull rate, and average age of 4.00 years. Results are reported in various ways: 1) as forecast average breakeven value, by scenario, and 2) changes in current assets where replacements on average cost $1,100 per head. It was assumed for simplicity that replacements were purchased with cash, not borrowed money. Therefore, the change in asset value over the life of the cow represents either a loss or gain in net worth.

The 2020-21 Breakeven Heifer Value Forecasts

Table 1. Forecasted breakeven values for replacement heifers per head for the 2019-20 production season, by cull rate and initial annual production costs per head

At the lowest rate of replacement, which is 14%, and the lowest cost of annual production, the breakeven value is the highest at $2,128.23 per head, whereas the highest replacement rate of 28% with the highest production cost has the lowest breakeven value at $1,036.24 per head. In producer language, that says a herd with a future cull rate of 14% and a cost of $717.16 per head is forecasted on average to breakeven, as if they had paid as much as $2,128.23 per head for cow replacement. The 28% cull rate and high-cost herd is forecasted to breakeven at nearly $1,000 per head less, calculating at $1,036.24. Higher cull rates and higher production costs result in lower breakeven values. As expected, cow longevity increases replacement breakeven values. This is inversely true of costs, with higher production cost resulting in lower breakeven value.

Table 2. The 2020-21 Forecast Changes in current assets per cow purchased

The average change in current assets per cow purchased forecast is listed by scenario in Table 2. A positive increase on average per cow is shown, except for Scenario 9, which shows 28% cull rate and the highest cost of production. Worth stressing is that this is an average outcome. For example, Scenario 1 cows culled after their first calf on average had a negative net change in assets of $355.90 per head, whereas culled 12-year old cows had a positive average net asset gain of $3,169.02 per head in the same scenario. The reason that these gains are so positive is directly related to relatively low purchase price versus the forecasted breakeven price.

In Scenario 1, with replacement costs of $1,100 per head, the 12-year old cows had an average net asset gain of $3,022.21 per head. If replacement costs are increased to $1,600 per head, however, net asset gain changes about the same amount at $2,625.07 per head. The variation from $500 per head is due to the nature of the model and the way it allows costs and cattle prices to be stochastically separate. Another reason for the large breakeven values is that the FAPRI forecasts are optimistic about cattle prices. For example, FAPRI forecasts 2021 feeder cattle prices to be $3.15 per CWT higher than the 2020 price and to climb an additional $5.56 per CWT, compared to 2022. Last year’s forecasts were much different, as they forecasted that 2020 feeder cattle price would be $5.68 per CWT lower than 2019, and that 2021 prices would continue to fall and be another $9.38 per CWT lower than the 2020 price. These forecasts have a huge effect on expected payback for two reasons, which are the time value of money and the odds of being culled.

The information from Tables 1 and 2, when combined and calculated, provides the needed information to identify varying costs and cull rates, found in Tables 3 and 4. Table 3 shows the effect of cull rate variations on replacement cow value, in terms of each percentage increase or decrease, depending on the direction of the change. Table 4 shows the reciprocal effect of production cost changes by cull rate category, which is the change in replacement cow value for each one dollar increase or decrease, depending on the cost level.

Using Table 3 and looking at a cost that is between the $717.16 per head and $780.50 per head, which assumes a producer has an average production cost of $750 per head, that also assumes that this producer has a 14% cull rate. This means that the breakeven is less than the $2,128.23 per head and more than $1,812.18 per head, shown in Table 1. Table 4 shows that in between Scenarios 1 and 2, for each $1 of costs more than $717.16, the breakeven value decreases by $5. In this case, the producer has a cost that is $32.84 per head more than the Scenario 1 production costs. Doing the math using the values from the tables indicates that the producer would have a breakeven value of $164.20 less than $2,128.23 or, in total, $1,964.03 per head.

Table 3. Dollar decrease in heifer replacement value for every 1% increase in cull rate

Table 3 is useful in extrapolating the effects on cow replacement breakeven of varying cull rates between 14 and 28%; for instance, a 17% cull rate with the low production cost of $717.16 per head. This is a 3% cull rate increase with reference to Scenario 1. Looking at Table 3, each 1% increase in cull rate results in a $70.80 per head decrease in cow replacement breakeven value. This increase in culling results in a discount of $212.40 per head.

Table 4. Dollar change in heifer replacement value for every $1 increase or decrease in production costs

These tables may also be used simultaneously for both a cull rate and cost change, as long as it is within the range of the corresponding costs and cull values. As a final example, suppose a producer wanted to estimate what his cow replacement value might be, knowing that his production cost was $789 per head and his cull rate was 19%. These values are close to Scenario 2, which has a breakeven value of $1,812.18 per head. From Tables 3 and 4, it is figured that the breakeven will increase this value by $41.72 per head, as a result of a better cull rate, and will reduce the breakeven by $53.57 per head, due to costs. This results in a breakeven value of $1,800.33 per head and is only about $12 per head less than Scenario 2.

Individual Cow Probabilities of Net Return

Costs and culling differences among the scenarios alter the probability that an individual cow must return or exceed the amount paid for her purchase. This payback should include her cull value and death loss factors. By measuring the number of cows that successfully returned their purchase value and dividing it by the number of cows purchased, then multiplying that number by 100, the probability of success is estimated. Table 4 lists this probability of success for each scenario. As expected, Scenario 1, which figures $717.16 per head, had the highest probability of payback with 76% of the cows at least returning their purchase costs. Scenario 9, figuring $831.20 per head cost, only had a 36% chance of returning or exceeding their purchase costs. When purchasing cow replacements, the supply and demand control the price. For illustrative purposes, in a given year producers will likely be unable to negotiate major differences from the market value. This is not to say individuals may find ways to pay less than others but that that price is only so flexible, depending on the year. If a Scenario 1 producer buys a cow, he is 40% more likely to breakeven than a Scenario 9 producer buying the same cow. This fact makes it clear that cow longevity and costs, which are somewhat antagonistic to each other, are major keys to ranch success.

Table 5. The Chance of an individual cow paying off or exceeding the $1,100 per head purchase costs

Conclusion

Altering the cost of production or cow longevity changes the breakeven value of heifer replacements differently depending on the replacement animal’s expected life and cost level. Table 4 shows a $10 per head decrease in cost at the 14% cull rate with a range from medium to low cow replacement breakeven value increasing by $63.00 per head. The same $10 per head cost decrease in a 28% cull rate herd would have a smaller gain in cow replacement breakeven value of $30.30 per head. Similarly, Table 3 displays that a 2% reduction in a 20% cull rate herd with the lowest cost of production is forecast to increase the breakeven cow replacement value by $140.60. However, at the same 2% decrease in cull rate in the 20-28% cull rate column, cow replacement is about half that found in the 14-20% category, with an increase in breakeven value by $70.82 per head.

So far, nothing has been said about changing productivity, which is something like an elephant in the room. Increased productivity without altering costs or changing cull rates will increase the amount that can be paid for replacement animals. But, like a two-edged sword, a decrease in productivity has the opposite effect. Examples of productivity changes include calving rate, calf size, and calf growth rate. Another factor that changes replacement heifer breakeven value is revenue change created by cattle price. Higher prices lead to higher breakeven values, while lower ones lead to lower breakeven values. This last point seems over simplified and obvious, but remember it is complicated by the fact that heifers have a productive life that can span a decade, and that during this productive span prices vary. If prices trend higher overtime, assuming costs are fixed, the purchase breakeven value increases, and vice versa. The economically successful producer is one that, on average, buys and raises replacement cows for at least no more than what is needed in net returns over their lifetime.

The relationship between costs and replacement rates is not constant, making production and cost choices critical to consider when paying for replacement animals. As longevity of heifer replacements increases, average herd age and breakeven values also increase, although over time, costs will inevitably exceed revenue with an aging herd. Low-cost, low replacement herds are able to afford higher valued replacement animals and replace capital faster in their operations. The key to buying higher priced, profitable replacements is based on individual cost structure and herd replacement rate, productivity, and future prices. The take home message, other than a bottom-line cow replacement value, is that when raising or purchasing replacement heifers, each animal’s value is based on her ability to be productive and durable, and the producer’s ability to manage productivity, control costs, and to use the market to their advantage. Paying attention to each of these factors adds to the odds of a more profitable and resilient business.