HOW IRRATIONAL IS $2,000?
$2,500?
$3,000?
$3,500?
Scott Clawson
NE Area Ag Econ Specialist
Contributing Factors
• Not so surprising Supply issue
• Surprising Demand issue
Soapbox
• WE HAVE TO REVISIT “RULES OF THUMB” AND OTHER
MANAGEMENT DECISIONS AT THESE PRICE LEVELS!
• We cant use $1.00/# management at $3.00/# price levels
• Buy LOW sell HIGH
Not so surprising SUPPLY issue…
35,000
34,000
US Beef Cow Inventory
33,000
33,543
33,697
2023
2024
32,630
31,837
32,000
30,992
31,000
30,000
33,031
33,245
29,741
29,631
29,042
28,922
28,991
2014
2015
2016
29,000
28,000
27,000
26,000
2013
2017
2018
2019
2020
2021
http://www.usda.gov/oce/commodity/projections/index.htm
2022
Somewhat surprising DEMAND response…
Despite all else, the real market
driver…
Buying Replacements
Bid Price
Factors
Buying Replacements
• How do we determine how much we should
pay??????
• Net Present Value Approach (NPV)
• Puts a current value on that series of future cash flows
• That current value then provides a benchmark for what
you could pay for replacements and hit a targeted rate
of return
• Works with all types of investments, particularly for
replacement purchases as we have a series of cash flows
or calf sales to look at
• Based on the concept that money in your hand right
now is more “valuable” than money in the future
Market conditions…
• Set a scenario to work with
• Expect heifers and steers to average 474 and 523
respectively with an average price of $2.68 for heifers
and $2.84 for steers per OKC Report 10/13, slightly
higher on 1/6/14
• Anticipating 8 calves in life cycle
• Financing
• 80% LTV
• 6.5% interest
• 5 year term
• Vary the possible purchase price
• Cow operating cost $700.00 annually
• 85% weaned calf crop
Judging the investment…
• beefextension.com (select Bid Price Estimate
Calculator)
Are these price levels a realistic estimate?
Better yet, is a constant 8 year annual cow cost estimate realistic?
A Good Investment Does Not
Always Equal Cash Flow
• Cash flow is limited in Years 0-5 due to initial
investment and financing!
• Financed cows don’t always equate to improved CF
• Annual debt service is $693/cow in this scenario
Annual Cow Cost is Vital,
Imperative, Essential, Critical…!
• Annual Cow Cost is a significant element in this
equation.
• Higher annual cow cost means that we have to get
a much better “deal” on the cows for the
investment to work.
Which would make you the most
nervous????
Assume a the financial and market conditions are the same. Purchase money
is being financed.
A. 40 Reg. SimAngus Heifers, high quality, $3,500 each
B. Buying a full load of 400# steers to feed/graze for 120 days
C. Buying $1,700 yearling heifers (40 hd). Buy, grow, breed,
sell as breds
D. Buying 40 thin open cows, feeding through winter with a
bull turned in
E. Retain ownership of existing calf crop for 120 days
• Its easier to predict the weather tomorrow than in 3 years.
• Price protection strategies exist for many short run options.
• Buying/financing breds at $3,000-3,500 will require maintains record
returns to not become a drain on unfinanced cows or other income
streams
Do record high prices mean that
everyone should expand?
• NO!
• There are other opportunities to consider
• Cull cow marketing
• Developing and selling bred heifers
• Stocker runs with excess grass (feed is pretty cheap
relatively speaking)
• Retained ownership of existing calves (sell as feeders or
keep hfrs and market your own breds)
• Invest in cost saving items, widen your margin
• Making money can be done in many forms, its not
only about increasing mature cow numbers.
Wrap up
• Markets can be delicate at high price levels
• Current conditions to reinforce that value of
replacements
• Still a weather component…
• Separation of cash flow and investment
• What will be the cyclical nature moving forward?
• Two things close the profit gap, rising costs and
shrinking sales…
• Maximize net returns on existing ventures
• Investing in the cattle business does not have to
mean buying more cows
THANK YOU!