Buyer Beware During Cow Herd Expansion

Farm Business Management Update, February/March 2003

By Tom Stanley

Virginia beef cattle producers need to apply some caution when considering the purchase of new breeding stock. Bred heifer sales have become popular across the state of Virginia. Favorable feeder calf prices following the market debacle of 1995-96 have renewed the confidence of cow-calf herd operators across the Commonwealth and many are looking to rebuild their herds with quality breeding stock. The Virginia Quality Assured Heifer program is certainly is a good place to look for high quality heifers. Paying premiums for quality genetics is justified provided the cattlemen are marketing their calves so that they capture the value of the superior genetics of the offspring.

The sale of bred heifers has become a lucrative enterprise for many established Virginia cattlemen. Prices paid for bred heifers across the state have been consistently above $900 per head for the past year. Have buyers carefully considered the potential return on investment from purchasing these heifers?

Based on a low-cost cow-calf production system that utilizes stockpiled fescue in the winter and has a calving season in the late spring, annual cow-calf maintenance costs run around $221 per pair per year (Table 1). Based on the five-year weighted average price received at graded feeder cattle sales in Virginia (Tables 2 and 3), the average annual revenue generated by a cow will be approximately $403. These revenue estimates include an adjustment for a 90 percent calf crop and assume the calves are sold just after weaning, in late October with steers weighing 575 lbs. and heifers weighing 525 lbs. Therefore, the net income on a cow-calf pair has been around $191 each year for the past five years.

If the cow was purchased as a bred heifer for $750, it will take four years to recover her cost. If the cow was purchased as a bred heifer for $950, it will take five years to recover her cost. Another way to put it is to justify purchasing a bred heifer for $950 (current Virginia price), she will have to produce an extra calf in her lifetime compared to a heifer that was purchased back in 1997 for $750.

Table 1: Years to recover costs of a bred heifer
Budget Item	Detail	Value
Sale of Calf	April born calf weighing 550 pounds in late October and valued at $80.23/cwt (5-yr avg of heifer and steer prices). 90% calf crop weaned with 15% of heifer calves retained as replacements	$403.26
Cost of Cow	Cost to maintain and breed the cow for one year and provide care for the calf until weaning	$212.52
Net Revenue per Cow		$190.74
Years to Recover Cost of $750 bred heifer	If all revenue is devoted to recovering the cost of the bred heifer with no interest	3.9 years
Years to Recover Cost of $950 bred heifer	If all revenue is devoted to recovering the cost of the bred heifer with no interest	4.9 years

It is important to point out that these calculations do not include cost of labor, debt service, or opportunity interest costs of the new heifer investment.

If a farmer assumes labor costs of $8.00 per hour and expects a 3 percent return on the principal value of cows alone, then the $950 price tag for bred heifers is even less attractive. It then takes just over 7 years to recover the cost of a $750 bred heifer, but it takes over 9 years to recover the cost of the $950 bred heifer.

Beef cow-calf production has traditionally been a low-return investment relative to other industries. Many Virginia cattle producers are realizing very little annual income relative to the value of the assets they hold in their farms (land, equipment, buildings, cattle). They stay in farming for many other reasons and receive many non-monetary benefits from holding land and farming.

However, farmers seeking to increase their returns from found investments should pay close attention to investing in herd expansion when returns from highly productive cows will not compensate their owners' for their purchase. These estimated prices and returns demonstrate one clear point, all astute managers should make their own calculations based on their financial situation before expanding.

Table 2: State Graded Weighted Average Prices (Provided By Va Dept Of Ag & Consumer Services)
Feeder Steers - Medium & Large 1
400-500 LBS	1995	1996	1997	1998	1999	2000	2001	2002	5 YEAR AVG
JAN	86.13	60.54	66.28	88.50	81.57	103.56	113.35	101.91	97.78
FEB	85.78	58.49	77.02	90.73	88.11	105.47	116.77	106.08	101.43
MAR	87.62	63.13	88.07	98.23	90.78	107.71	119.15	102.95	103.76
APR	84.56	62.05	91.52	99.41	90.65	113.93	112.44	101.00	103.49
MAY	82.78	64.93	93.53	102.38	87.02	115.12	111.33	98.12	102.79
JUN	73.46	61.05	89.08	95.74	85.64	110.45	115.79	90.08	99.54
JUL	80.94	55.48	94.11	82.84	85.88	109.46	111.54	86.36	95.22
AUG	73.76	57.47	90.66	75.52	89.31	111.41	100.77	84.10	92.22
SEP	69.08	64.28	91.28	78.71	92.56	104.78	104.45	87.26	93.55
OCT	70.80	61.97	88.14	79.70	93.54	107.54	99.92	88.87	93.91
NOV	67.92	62.68	85.09	79.19	91.58	110.03	97.68	88.36	93.37
DEC	61.89	58.53	86.19	79.43	96.31	106.82	100.34	91.44	94.87
500-600 LBS	1995	1996	1997	1998	1999	2000	2001	2002	5 YEAR AVG
JAN	78.71	61.76	65.17	84.00	80.33	95.92	106.24	94.86	92.27
FEB	83.52	58.83	77.11	87.35	81.83	100.57	102.65	95.09	93.50
MAR	82.91	63.74	85.11	92.12	85.74	99.11	108.88	94.58	96.09
APR	80.54	62.81	89.09	95.63	85.68	104.47	105.17	93.67	96.92
MAY	79.63	65.50	94.15	98.96	86.11	108.94	102.87	91.39	97.65
JUN	83.65	66.90	84.79	91.15	84.42	109.74	108.36	83.83	95.50
JUL	75.33	58.07	90.41	79.53	82.71	101.25	103.90	81.52	89.78
AUG	73.12	60.43	87.33	74.89	84.98	99.56	98.92	79.63	87.60
SEP	66.92	63.75	83.13	73.36	86.78	95.11	94.13	80.95	86.07
OCT	65.34	60.11	83.66	73.74	86.70	95.32	89.61	81.99	85.47
NOV	67.00	60.19	79.62	73.30	83.98	97.12	87.61	82.43	84.89
DEC	60.90	57.37	84.74	74.67	91.71	101.74	95.18	82.65	89.19

Table 3: STATE GRADED WEIGHTED AVERAGE PRICES (Provided By VA Dept Of Ag & Consumer Services)
Feeder Heifers - Medium & Large 1
400-500 LBS	1995	1996	1997	1998	1999	2000	2001	2002	5 YEAR AVG
JAN	72.22	41.88	51.87	68.19	66.99	90.02	94.36	88.02	81.52
FEB	75.36	42.82	62.91	75.37	75.52	93.75	95.00	89.77	85.88
MAR	72.27	46.32	72.04	81.24	76.44	95.91	96.35	88.89	87.77
APR	70.30	43.85	73.45	82.27	75.34	97.09	94.19	84.75	86.73
MAY	67.34	45.07	75.02	80.78	75.60	97.82	94.16	83.35	86.34
JUN	67.47	46.87	75.26	78.05	73.77	97.84	103.47	78.78	86.38
JUL	69.33	44.95	76.74	70.93	75.63	99.21	95.77	75.71	83.45
AUG	57.25	45.60	76.82	64.35	79.72	98.58	92.21	71.83	81.34
SEP	57.31	48.78	74.27	62.99	79.40	89.47	86.77	74.43	78.61
OCT	54.70	47.02	71.51	63.42	79.25	89.53	85.22	74.73	78.43
NOV	51.64	47.12	65.55	63.55	77.31	89.94	76.17	73.52	76.10
DEC	50.37	47.64	68.80	63.32	82.75	89.03	86.05	76.76	79.58
500-600 LBS	1995	1996	1997	1998	1999	2000	2001	2002	5 YEAR AVG
JAN	69.31	45.29	54.49	68.65	67.10	84.39	87.22	81.00	77.67
FEB	69.58	44.36	62.36	70.97	69.90	86.38	87.69	81.94	79.38
MAR	69.20	47.06	70.65	77.01	74.82	88.27	88.64	82.71	82.29
APR	68.96	47.44	73.30	80.51	73.94	90.63	88.85	81.04	82.99
MAY	67.62	47.93	74.36	80.86	72.66	94.22	89.08	80.20	83.40
JUN	67.44	46.80	75.15	76.70	73.58	93.47	96.07	74.36	82.84
JUL	64.36	45.33	75.34	69.12	75.32	90.74	91.97	73.85	80.20
AUG	58.31	48.52	75.01	63.59	77.60	90.05	89.51	70.51	78.25
SEP	56.30	50.36	74.83	62.63	77.64	85.69	84.65	72.88	76.70
OCT	54.29	47.91	71.33	62.50	76.33	83.85	79.69	72.57	74.99
NOV	49.98	46.57	64.25	61.16	75.90	86.87	72.80	70.63	73.47
DEC	48.55	49.52	67.20	61.49	81.82	86.58	79.96	73.07	76.58

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