Buying Replacement Heifers Versus Raising Your Own

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Buying Replacement Heifers Versus Raising Your Own

• Jim Sartwelle, III
• Extension Economist, Risk Management
• Texas AM University

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Lets cut to the core issue

• Pounds weaned per cow exposed is the 1 indicator
  of profitability
• (Average weaning weight number of weaned
  calves) ? (number of exposed cows)
• We materially affect the top and bottom numbers
  through our choice of replacement females

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Central issues

• How many females do you replace annually?
• Accurately compute the total cost of raising one
  of your own
• Type of cow you need to be running given your
  environment and management
• Being flexible given changing market conditions

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How many cows do you have to replace annually?
Weaned replacement heifers needed as a percentage
of the number of cows to calve to maintain
constant herd size
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What is the cost of raising a replacement heifer?

• What she was worth at weaning PLUS
• What it cost to grow her another 10-12 months
  PLUS
• How much did your ranch revenue decrease from
  allocating resources to potential replacements
  instead to other cows or stockers PLUS
• Production out of first calf heifers typically is
  less than that of mature cows
• More often than not, the cost difference
  is much smaller than one might expect

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How do you get a fair comparison of the two
strategies?

• Keeping your own heifers back
• In fall, put a good value on weaned heifers
• Account for full cost of feed/pasture
• Make them pay a share of overhead costs
• Dont forget youre paying interest the whole
  time
• Credit the group back for culls
• Youve kept heifers back for 12 months and
  have a set of bred long yearlings

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How do you get a fair comparison of the two
strategies?

• Purchasing bred heifers
• Account for full cost of feed/pasture
• Make them pay a share of overhead costs
• Dont forget youre paying interest the whole
  time
• Credit the group back for culls and weaned calves
• In 12 months, youve bought bred heifers, calved
  them out, and hopefully gotten most of
  them re-bred

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How do the strategies line up cost-wise?

• If you account for the additional cows you can
  run when youre not setting aside resources for
  your own raised replacements, the breakeven
  purchase value for a bred heifer is about 50 to
  100 higher than the cost of retaining and
  raising one of your own
• Varying stages of the cattle cycle can mess this
  up

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Should you even be thinking about keeping your
own heifers back?

• Whats the best cow for your environment?
• Are you producing feeder heifers or replacement
  heifers?
• Only you can prevent mongrelization of your
  cowherd
• This affects the merchantability of
  your calves for years

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Be market-conscious, but be in it for the long
haul

• Replacement female prices are better insulated
  from fluctuation than calf prices are
• If you have a plan of what you want to produce
  and know the kind of cow you will need to produce
  those calves, stick with the plan

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Is there a larger question here?

• Most of us retain and liquidate as prices ebb and
  flow thats why theres a cattle cycle
• Is there an optimal herd size strategy?
• 2000 Iowa State study compared
• Steady herd size
• Dollar cost averaging/rolling average
• Cash flow marketing

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ISU study told us

• Steady herd size had the most stable returns
  through the cycle
• Dollar cost averaging works with the cycle
• Higher average annual returns
• Higher net worth growth
• Cash flow marketing feeds the cycle
• Lower returns
• Smaller herd

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Closing points

• Impose management across your operation that
  looks to optimize pounds weaned per cow exposed
• Be vigilant comparing costs of raising your own
  replacements versus purchasing them
• Be more vigilant about developing a plan, making
  sure it evolves, and sticking to it

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Point to ponder
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Jim Sartwelle, III
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That leads us to breakevens

• Breakeven the minimum price you must receive
  for a product to cover the cost of producing it
• Why are they important?
• You are marketing if you have a target youre
  aiming at
• You are price-taking if you dont

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Two components of breakevens

• Variable costs
• Fluctuate with the size of the herd (number of
  cows, stockers, nannies, etc.) and management
  decisions (implant or not, castrate or not)
• ALL costs are variable in the long run
• For a cow-calf operation, you can accrue variable
  costs AFTER weaning, too

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Two components of breakevens

• Fixed costs
• Costs youre committed to pay regardless of
  actions you take during the planning period
• Investments in land, machinery, equipment, etc.
• Includes depreciation, taxes, insurance and
  interest
• Tough part is allocating fixed costs to a
  particular enterprise

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Allocating fixed costs

• Two methods to use
• By percentage of acres
• By percentage of projected gross revenue
• Percentage of gross revenue is the most preferred
  method
• Key not to distort relationships so you make
  the wrong choice of enterprise(s)

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Proceed to cow-calf example
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Why bother with calculating breakevens at all?

• You must cover variable costs in the short run
• You must cover all costs in the long run
• Fail to cover your breakevens for long enough,
  you eat up all your free cash, cant pay back
  your operating notes, and you go broke.