Beef Producers Weigh Options on Buying Replacement Cattle12 February 2013
UK - A 32 per cent decline in Texas beef cattle has many pointing to drought as the main culprit, but there are other factors that have chipped away at inventory levels over the past couple of years, according to a Texas A&M AgriLife Extension Service economist.
“When somebody sells 100 acres outside of Waco, who is buying it? Folks are using it for a lot more reasons than just cows,” Mr Bevers said. “You’ve also got to factor in rising input prices. Land that’s being sold is not being bought by ranchers to run cows on.”
Overall, the outlook for cattle prices will continue an upward climb, a trend that could last for at least two more years, Mr Bevers said, unless rain returns through the Midwest and the Dakotas.
“(Ranchers) there are making the same decisions we were making two years ago during the 2011 drought,” he said.
Feedlot capacity is approximately 38 million to 42 million calves with this year’s calf crop being (only) about 34 million head, Mr Bevers said.
“Feedlots either pay high prices or they close down,” Mr Bevers said. “We are going to continue to see this market contract. If you’ve got cows, hold onto them. You aren’t going to get just decent prices, but good prices as a result of our supply situation.”
Mr Bevers said rebuilding the nation’s beef cattle herd has not begun. “We aren’t done going down yet,” he said. “We’ve got 29.3 million female cows and 34 million calves. We’ve seen very little indication that heifers are being held back even though the recent cattle inventory report showed retention in Texas. Most pastures have not recovered enough yet to sustain increased numbers.”
He said retail beef prices will likely continue to move higher and that’s going to test what price consumers will pay.
“We have many (cattle producers) scratching their heads, asking themselves, ‘am I going to buy replacement heifers?’” he said.
What has happened is a floor price was put in the replacement heifer market by feedlots needing cattle, Mr Bevers said. That floor price is approximately $1,100 a head. If a rancher wants to purchase replacement heifers, then the price will go up depending upon conditions such as color, quality, conformation, etc.
“The question a lot of folks are asking when paying $1,100 or more for replacements is, ‘will it work?” Mr Bevers said.
He said producers have to take into account the annual net income over the years of life of the cow and the value of the cow at the end of her life.
“Hopefully each year, the calf value is worth more than the expenses you (paid) to maintain her,” he said.
Mr Bevers said according to Standardized Performance Analysis data, it costs $594.78 annually to maintain a cow. Using this cost figure, and assuming average production for the next seven years, Mr Bevers analysed what a rancher could afford to pay for a four-year-old bred cow today.
“Each year of the cow’s life, varying net incomes would be received based on the productivity level of the cow, calf prices, and the annual maintenance costs for the cow,” he said. “As an example, in 2013, the cow would generate a net income of $404 based on the costs to keep her, the price of the calf sold, and the fact that she was already bred.”
However, in 2014, Mr Bevers said a calf from that cow would net only $155 due to lower productivity, higher maintenance costs for the cow and lower calf prices.
After seven years of varying net incomes and a useful life, the cow could be sold for a cull value of $900 assuming the female weighed 1,075 pounds and brought .83 cents a pound, he said. Given this seven-year net-income stream, the most a rancher could pay for a four-year bred cow today is $1,918.
“Your long-term investment is predicted to be zero,” Mr Bevers said. “If you paid more than $1,918, given these assumptions, you would lose money on your long term investment.”
The breakeven would be after calculating depreciation, annual maintenance cost over the life of the cow and other expenses.
Overall, Mr Bevers said cattle prices are projected to continue an upward climb based on fewer cows.
“The probability is very high that we will have high prices for the next two years,” he told attendees.