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Pricing replacement heifers
With the price of replacement females at record-breaking highs, penciling out affordability of their purchase is more important than ever. Each operation has a price threshold for making a profitable investment. “Understand your own costs before deciding what to pay,” says Karl Hoppe, area livestock specialist, North Dakota State University Carrington Research Extension Center. “Just because replacement heifers are selling for $2,000 a head doesn’t mean you can afford to spend $2,000.”
A practical yardstick for measuring the affordability of a price is to estimate the lifetime production potential of the female and subtract her lifetime production costs. Costs unique to each operation raise or lower the price you can afford.
Follow these three steps to estimate a workable price.
1. Figure annual feed costs.
“Using data from Farm Business Management (FBM) averages in central North Dakota, I total the costs for summer and winter feed and add yardage,” says Hoppe.
Yardage includes overhead such as the share of tractor repair and maintenance costs allocated to the care of the cattle as well as costs like labor, utilities, and depreciation (not including cow depreciation). In addition, yardage includes direct expenses such as fuel, oil, veterinary costs, and operating interest.
Using FBM data, Hoppe’s yardage cost comes to 50¢ per cow per day for winter feeding, or $90 for six months. Adding this sum to the region’s annual average feed and pasture costs of $468 a head gives an annual cost of $558 to maintain one cow.
2. Calculate production potential.
To determine an average number of calves a cow will produce in her lifetime, Hoppe uses data from the North Dakota Beef Cattle Improvement Association’s Cow Herd Appraisal and Performance Software (CHAPS), which reports an average age of 5.7 years for cows in herds participating in the program. Since a cow calves at the age of 2, she’ll produce an average of 4.7 calf crops in her lifetime.
Basing the price of the calf on present futures for feeders, a 600-pound calf might sell for $1.58 a pound, generating a market value of $948 per calf. Multiplying the value of one calf times 4.7 calves produced in a cow’s lifetime equals $4,455.
Salvage value of the cow, of course, is also part of her production potential. An average cull-cow price of 70¢ a pound times a live weight of 1,300 pounds yields a salvage value of $910.
“The total income for the cow comes to $5,365. I adjust that for a 3% death loss and in the end arrive at $5,204 gross income for the cow,” says Hoppe.
3. Subtract lifetime costs from lifetime production.
Multiplying a cow’s $558-per-year production cost times the 4.7 years she is in the herd gives a lifetime cost of $2,622. Subtracting this from her lifetime production potential of $5,365 yields a sum of $2,743.
“That’s the amount of money left over to buy the female and pay a profit to yourself,” says Hoppe. “Paying the full $2,743 to buy the bred heifer would bid all the profit out of the purchase.”
Yet variables unique to each operation can change the profit potential. “If your feed costs are low or if you have no principal or interest costs because your pastureland is paid for, you can spend more for a cow,” he says. “Longevity and higher weaning weights, too, can increase the production potential of a female.”
Conversely, a drop in feeder prices relative to this model lowers a cow’s lifetime earnings. “Given present prices for calves and midrange prices for replacements, there’s room for some profit for operations with average costs,” notes Hoppe.