By Aaron Berger & Matt Stockton
Calf prices are encouraging cow-calf producers to increase cow inventories to have more calves to sell. Consider the following points when evaluating growing the cowherd.
Contribution Margin
Is the operation fully stocked on owned land or on land leased by the acre? What are the current overhead costs including labor and equipment associated with owned and leased acres? If more cows can be added to the ranch to make it “fully stocked,” what is the additional “contribution to margin” that comes from adding a cow? For example, if the ranch land is owned and could run 500 cows, but is currently stocked at 450 cows, adding 50 cows will not be expected to result in a significant increase in overhead costs for labor, equipment, and land.
Adding 50 cows will, however, result in additional direct costs. Direct costs are those that increase whenever a cow is added to the herd. Examples of direct costs include vaccine, ear tags, salt and mineral, protein supplement, etc.
The revenue projected to be left after direct costs and cow depreciation are subtracted from the value of calves sold provides an estimate of added revenue. If this revenue is positive, the operation can then use it to help cover overhead costs and increase net returns. If it is negative, it indicates added expense to the operation.
Marketing of Large Groups or Load Lots
Selling calves in large groups or load lots, either off the ranch or through the auction market, can add significantly to market prices. Would the purchase of additional cows push the number of calves produced to a threshold level that would result in marketing opportunities that would command a higher total market price for all calves produced? What is the projected value of this?
Say we use a 90% calving rate, selling 550-pound calves at $2.25/lbs. with a $0.05 per pound premium for the additional numbers where 20% of calves are retained as replacement heifers. The 450 cows would wean 405 calves, of which 315 would be sold and 90 heifers retained. If 50 cows are added to the herd, then 500 cows would wean 450 calves. Of these calves, 100 heifers would be retained, and 350 calves sold. If the increased size of the marketing group resulted in the suggested $0.05 per pound premium, this would result in $9,625 of added income above the $43,312 of revenue from the additional 35 calves sold by increasing the herd by 50 cows.
Cow Depreciation
What is the expected depreciation on the bred female that is purchased or retained in the herd at current market prices? Weigh-up cow prices are high now but will likely begin to fall once cattle inventories climb. Young cows purchased or retained now will likely be sold in the future as weigh-up cows at lower market prices. Will expected calf prices and cow productivity cover other cow costs plus this depreciation?
Taxes
Cows are classified as a “capital asset” and therefore they can be depreciated just like a piece of equipment or a building. The purchase of breeding stock can be used as a tool to manage tax liability. Would the purchase of cows provide tax benefits to the operation in 2024 and 2025? Visit with your tax professional when evaluating the costs and benefits of purchasing cows and using the depreciation to offset tax liability
Cash or Borrowed Money
The opportunity interest on working capital or the actual interest on borrowed money is significantly higher than it was just two years ago. If using working capital or borrowed money for cowherd expansion, what will the interest cost be? Assuming a lending rate of 6% interest two years ago and the current rate of 10% for a three-year note, the annual payment on a $1,000 note grew from $374.69 to $403.10. Total interest paid over the life of the loan swelled from $124 to $209! That is $85 more in total interest per $1000 borrowed! The market price for bred cows has appreciated by approximately $1,000 per head since the spring of 2022 as well. Higher cow prices and higher interest rates have significantly increased the total amount of interest in the cost to produce a calf.
Business Stage and Plans
What is the position of the business currently? What are your plans and goals for the future? Is the operation in a growth mode or in a place of maturity and maintenance? Are there plans to exit the cow-calf enterprise in the next three to five years? Prices for all classes of cattle look to be strong for the next couple of years barring a “black swan” event. For producers who are considering getting out of the cow-calf business in the near future, now may not be the time to retain bred heifers or buy breeding stock to expand but to begin the exiting process. This may include strategically selling breeding stock. For more information on the potential financial benefits of selling raised breeding stock at high market prices see the article “Will You Capitalize on Increasing Cow Value?”
Source : unl.edu