Cow-Calf Outlook and Profitability Kenny Burdine and Greg Halich UK Ag Economics.

Cow-Calf Outlook and Profitability

Kenny Burdine and Greg HalichUK Ag Economics

Outline for Discussion

• Current situation in cow-calf industry• Cattle cycles: past, present, and future• Framing breeding stock investments as a

capital investment decision– Applies to existing breeding stock as well

• Return simulations under various market assumptions

2011-2013

• Weather challenges in much of cattle country– Profit can’t make it rain

• Land allocated to highest value use– Competition for pasture / hay acres

• High cull cow prices, attractive capital gains, etc.

• We came into 2014 with a small, young herd

Economics

Data Source: USDA-AMS & USDA-NASS

Livestock Marketing Information Center

JAN APR JUL OCT30

40

50

60

70

80

90

BEEF COW SLAUGHTERFederally Inspected, Weekly

Avg. 2009-13 2014 2015

Thou. Head

Down 18% (565K) for 2014 Down 17% to date for 2015*

January 2015 Cattle Inventory

600K (2.1%)increase in beef cows

January 2015 Cattle Inventory

4% increase in heifer development - 0.8% of cow herd

July 2015 Cattle Inventory

750K cows (2.5%) increase in beef cow inventory

July 2015 Cattle Inventory

6.5% increase in heifer development – 1% of cowherd

Heifer Retention as % of Cow #’s(July 1 estimates)

Data Source: LMIC and USDA / NASS

Data Source: USDA-NASS

Livestock Marketing Information Center

BEEF COWS THAT CALVEDJANUARY 1, 2015

(1000 Head)

TX still down 700K cows from 2011

January 1 Beef Cow Inventory


1990 to 2004 – The last cattle cycle?


Considerations for this cycle…

• Pace has started pretty swiftly– Comparable to early-mid 1990’s

• How long will expansion phase last?• What will the net change in cow numbers be?• Wildcards – weather, demand shocks,

poultry / pork production• What price levels start to trigger liquidation?

– Or at least stall expansion?

Cattle Cycles and Competitive Markets

• Current incentive is to squeeze and hold– Prices and weather

• Calf crops will get progressively larger– Increased competition in the meat case

• Calf markets can fall a good bit and remain profitable for existing cows but…– They will do just that– Owned (squeeze) vs. purchased / developed (hold)

not apples-to-apples

Estimating the Profitability Outlook for Expansion in

Today’s Market

Our Approach to Breeding Stock Investment

• We are going to start with bred heifer value– Think heifers sold in fall to calve following spring– Math is the same whether purchased or developed

• Roughly one year from weaning first calf– Bred heifer purchased in fall, full year of expenses

before 1st calf is sold• Estimate is made on value of calves and

probability of weaning calf over 10 years• Cull value end of 10 years – moves with market

Net Income per Cow

• Calf sales per cow minus costs per cow• Calf sales

– Fall value of calves (weaning weight x price)– Steer heifer average– Discounted for weaning rate

• Costs per cow – needs to include everything! – Feed, pasture, mineral, vet / medicine, breeding,

labor, fixed costs, etc.

2015 Fall Market Estimate…

• 5wt steer calves - $250 per cwt• 5wt heifer calves - $230 per cwt• Average calf: 550# x $240 per cwt = $1,320

• Weaning rate effect– 90% - $1,188 per cow– 80% - $1,056 per cow– 70% - $924 per cow

Hypothetical Cash Flow per CowNow Year 1 Year 2 Year 3 Year 4 Year 5

($2,500)

$322 $322 $322 $322 $322

Year 6 Year 7 Year 8 Year 9 Year 10

$322 $322 $322 $322 $1,322

Now: $2,500 spent on bred heifer Yrs. 1-9: calf sales ($1,320 x 85% wn. rate)

minus expenses ($800) Yr 10: (Calf sales – expenses) + cull value

Assumptions of the Analysis• Total fixed and variable costs

– $600, $700, $800, $900, $1,000• Bred heifer costs

– $2,000, $2,250, $2,500, $2,750, $3,000• Bred heifer assumed to have 10 productive

years– 85% weaning rate

Market Assumptions

• Calf prices start roughly at fall 2015 levels– (1) flat prices – steer / heifer average $2.40– (2) 20% steady decrease over next 10 years– (3) 40% steady decrease over next 10 years– (4) Traditional cattle cycle approach – prices

decline for 7 years, then rally for 3• Cull cow prices move with calf market

Cow-calf Cost Estimates per Cow(Variable Costs)

Hay (2.5 tons @ $70 per ton) $175Pasture (2 acres@ $70) $140Mineral (91.25 lbs @ $20 / bag) $36Vet / Medicine $35Breeding $80Labor (5 hours @ $12 per hour) $60Commission $35Misc, fuel, etc. $20

$581

How does this translate to calf prices?

Variable costs $581Minimum acceptable profit $50

$631

15% open cow adjustment $742

Relevant 550# calf price $1.35 / lb

Calf Price Scenarios(Assuming $2.40 for fall 2015)

Return for Bred Heifers Steady Price Scenario 1

Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000

$2,250

$2,500

$2,750

$3,000

Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer and $2.40/lb combined price, $1,000 cull value.


Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000

$2,250

$2,500 18% 14% 9% 4% -

$2,750

$3,000



Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000

$2,250 21% 16% 11% 6% -

$2,500 18% 14% 9% 4% -

$2,750

$3,000



Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000

$2,250 21% 16% 11% 6% -

$2,500 18% 14% 9% 4% -

$2,750 16% 12% 7% 2% -

$3,000



Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000 25% 19% 13% 8% 1%

$2,250 21% 16% 11% 6% -

$2,500 18% 14% 9% 4% -

$2,750 16% 12% 7% 2% -

$3,000 14% 10% 6% 1% -


Return for Bred Heifers Moderate Price Drop Scenario 2

Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000 19% 13% 6% - -

$2,250 16% 10% 4% - -

$2,500 13% 8% 2% - -

$2,750 11% 6% - - -

$3,000 9% 4% - - -Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer, start at $2.40/lb combined price and decline to $1.92 by year 10, $800 cull value.

Return for Bred Heifers Large Price Drop Scenario 3

Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000 12% 3% - - -

$2,250 9% 1% - - -

$2,500 6% - - - -

$2,750 4% - - - -

$3,000 2% - - - -Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer, start at $2.40/lb combined price and decline to $1.44 by year 10, $600 cull value.

Return for Bred Heifers Cycle Scenario 4

Total Costs per Cow

Bred Heifer Cost $600 $700 $800 $900 $1,000

$2,000 8% 1% - - -

$2,250 6% - - -

$2,500 4% - - -

$2,750 2% - - - -

$3,000 1% - - - -Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer, start at $2.40/lb , $1.34 in year 6, $2.05 in year 10, $853 cull value.

Final Thoughts

• Cost Impressions– No opportunity beyond $900 cost level– Very limited beyond $700– Cost assessment is crucial

• Wean rate effect– 5% increase in WR increases ROR by about 3%

• Current bred heifer prices assume continued current profit levels

Final Thoughts• Bred heifer prices

– Hard to justify > $2,500 beyond scenario #2• Marginal cost of adding additional cows?• All cows are not created equal…

Contact Information

Kenny BurdineUK Agricultural Economics

(859) [email protected]

Cow-Calf Outlook and Profitability Kenny Burdine and Greg Halich UK Ag Economics.

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