Farm Management Minute: Can you afford to hold back heifers?
S.D. Center for Farm/Ranch Management
As we are seeing all-time highs in feeder calf prices, we are also looking at all-time high prices to purchase bred heifers. Logically, it would make sense to keep back your own and breed them, but at the current prices of selling calves, can you afford not to sell them?
If you are a younger farmer, diversified in grain and livestock, who is trying to grow your cow herd by holding back heifers, this year may be a year to sell heifers instead of keeping. As you are looking at potential losses in the grain enterprises on your farm in 2015, cash flow (and your banker) may dictate that you need to sell all of your calves in order to pay down operating debt and cover loan payments as opposed to retaining them and incurring additional debt while diminishing cash flow.
In the past, a heifer that is valued at $1,600 to $1,800 would take you 5-6 years to have her paid for and also cover feed costs. However, now that bred heifers are valued around $3,000 give or take either way, it may take up to 10 years or more to pay for her.
If you buy a cow for $3,000 and over a 10 year period, average profit from her and the calves roughly equals $100 per head per year. So in 10 years your profit is $1,000. After 10 years we sell the cow for weigh up and get a $1,000 salvage value which totals $2,000, leaving us $1,000 short of what we paid for her. In order for us to pay for that cow, we would have to profit $300 per year. Each year we have $100 of income, but costs of $300 leaves us $200 in the negative. If the markets would stay consistent for the next 10 years I would agree that the profit would be higher, but we all know that the commodity prices are likely to change. So you now are asking, what should I do? Unfortunately, there is not an easy answer. Every rancher that I work with will have a different answer depending on their own financial situation along with their short term and long term goals.
We all know that keeping bred heifers is a high risk. We can’t price protect those animals the same way that we are able to do for the steers or other market animals. Heifer conception rates are less than the older animals in our herd. We have a higher feed cost to get those animals in the body score for breeding. Also, by the time we get those animals old enough to raise a calf, there is no way to know what the markets will be in two more years. If the markets do decrease by then, you will still have that heifer, whose value will be at the high end of the market, with a lower rate of return from her calf.
If you do decide to keep heifers back, it is a good idea to focus on selecting for longevity and fertility in your herd. That animal that is sold early in her production is losing a large amount of money for your operation. An animal that is consistent in breed back and calving within the allowed time each year is profit for your operation. Longevity and fertility are trackable with many of the different breeds. Pathfinder cows and the number of calves ratio in that cow year has a lot of merit that some producers overlook. When looking at selecting a bull or heifer, there are specific sires and dams that carry those genetics to contribute to those desired qualities.
Every operation must look toward the future. Where are cow numbers today compared to where you want them to be in three years? How much profit/income you will need in the future to meet your loan repayment capacity? If you have questions on where you are today compared to where you want to be in three years, we can help. The SD Center for Farm/Ranch Management assists producers on budgeting or making cash flow planning and decisions for 2015. Contact David Koupal at 605 995-7193 or email David.Koupal@Mitchelltech.edu.
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