Budgeting for Heifer Development

Determining reasonable costs for developing or out-sourcing beef replacement heifers

Bob L. Larson, DVM, PhD, ACT          Vern L. Pierce, MS, PhD.

As veterinarians, we recognize that health is an important component in farm and ranch profitability, however, it is not the only, or even primary factor that dictates whether your clients will remain in business. Management, which encompasses: animal flow, animal husbandry, health, nutrition, capital acquisition and allotment, labor, buying of inputs, selling product, and other areas of beef production are all interrelated and cannot be separated from each other. In order to offer the best health and production advice to our clients we must have an understanding of how management in other, “non-veterinary” aspects of the farm impact the health and production aspects of the farm.

Efficiency and Profitability

Economists and veterinarians who have looked closely at the management practices associated with profitable cow-calf herds are able to direct practitioners working with beef-producing clients to efforts that are likely to have the greatest economic return. In a survey conducted by the National Animal Health Monitoring System (NAHMS) Cow/Calf Health and Productivity Audit (CHAPA) of 35 farms who completed a Standardized Performance Analysis (SPA), management practices for farms that had positive versus negative net returns were analyzed and summarized.[i] Researchers at Texas A&M University also used SPA data to evaluate management practices on 231 cow/calf farms in 20 states by allotting farms to the top, second, third and lowest quartile by net income.2 These evaluations allow us to focus on several areas of importance for profitability on beef farms.

The NAHMS data found that operations with positive returns showed a general trend toward optimum production rather than maximum production. For example, positive-return operations weaned slightly fewer pounds of calf per exposed cow than negative-return operations (422 lbs. vs. 428 lbs.).1 This implies that the negative-return producers were spending more to obtain a few extra pounds than their profitable counterparts. In contrast, the work done at Texas A&M showed that a key factor in determining net income is productivity measured in pounds weaned per exposed female.[ii] The percentage of calves weaned per exposed females was similar for all farms in the Texas study (85% for the first, second, and third quartiles, and 82% for the lowest quartile), therefore weaning weight was the important factor in the economic impact of pounds weaned per exposed female.2

The NAHMS study showed that positive-return operations were superior in efficiency, cost containment, and market price received than negative-return farms (Table 1). One area of improved efficiency for profitable farms was the age of first calving for replacement heifers. Three-quarters of the positive-return operations had their replacement heifers calving at 24 months of age compared to one-half of negative-return farms.1 Profitable farms also avoided feeding harvested feeds, likely helping to keep their costs lower. Fewer positive-return producers fed corn silage (8% vs. 18%), grain (8% vs. 27%), or creep feed (15% vs. 29%) than negative-return producers.1 Profitable farms were also more likely to utilize crossbreeding systems and computerized record keeping.1 The greatest cost savings for profitable compared to unprofitable operations came from capital invested per cow. The investment value for negative-return operations was $1,841 more per cow ($3,870 vs. $2,029) than for positive-return farms.1 Eighty percent of the difference in investment was attributable to real estate value. Given the market value of their land and buildings, negative-return producers were not producing enough beef value per acre to make the land pay for itself.

Table 1.1 National Animal Health Monitoring System (NAHMS) Data on 35 Farms (1993)

            The SPA data summarized by the Texas A&M researchers was reported by net income grouped in quartiles (Table 2). There were both differences and similarities when compared with the results from the smaller NAHMS survey. Whereas the NAHMS survey did not report a difference in farms size in reference to being either a positive- or negative-return operation, McGrann et. al. showed that although any size herd can be profitable (or unprofitable), larger herds were better able to control costs and return a higher net income.2 Fifty-two percent of the highest income herds have 200 or more cows, whereas thirty-six percent of the herds in the low-profit quartile have 199 or fewer cows. 2 The relationship between raised/purchased feed cost plus grazing costs and financial net income was in agreement with the NAHMS survey.  The higher the feed and grazing costs, the lower the net income. This relationship emphasizes the importance of managing feed and grazing costs, and points out an opportunity for veterinarians to be involved in finding methods to reduce these costs.

Table 2.2 Standardized Performance Analysis (SPA) Data on 231 Farms (1991-93)

In another assessment of the economic efficiency for beef cow farms done with 195 producers from Kansas, researchers found that like the NAHMS and Texas work, feed and capital costs are the largest costs incurred by cow-calf farms.[iii] They found that, on average, the farms were inefficient, and if farms had been producing at maximum efficiency, the same level of output could have been produced with 40% less cost.3

Table 3.3 Economic and Efficiency Analysis of 195 Kansas Beef Farms (1995)

The Kansas research also found that younger beef producers were technically more efficient than older producers.3 They surmised that younger farmers were more likely to adopt more efficient production methods. In addition, they found that larger beef herds were more technically efficient than smaller herds, again pointing out the likelihood that producers who owned larger herds were more likely to adopt more efficient production methods.3 In agreement with the Texas researchers, the Kansas report concludes that large farms were more efficient than smaller farms, however specializing in cow-calf production versus farms where cow-calf production was only one of two or more income sources did not have a relationship with overall efficiency.3

            Featherstone et al. evaluated the relationship between efficiency and profitability using correlation coefficients. They found that net income per cow was positively correlated with overall (0.95), technical (0.70), allocative (0.37), and scale efficiency (0.18) (p<0.01).3 Technical efficiency was relatively more important in explaining profitability than either allocative or scale efficiency, and the most important factor affecting technical efficiency was feed cost.3 The only significant factor explaining scale efficiency was capital; farms with lower capital costs per cow were more scale efficient.3 Therefore, the Kansas researchers concluded that producers who are experiencing low or negative levels of profitability need to concentrate more on reducing input use per unit of output rather than adjusting the size of their cow herd; and feed, labor, and capital costs represent roughly 91% of all costs.

All three papers emphasize the need to reduce costs in order to increase the likelihood of receiving a positive net income from a beef cow/calf enterprise. When veterinarians discuss low-cost production with clients, the denominator used to divide cost is extremely important. Some producers are very low cost on a per cow or per acre basis; however on a per pound of calf produced, or per dollar value of calf produced, these farms may not be the lowest cost operations. When evaluating heifer development costs, pregnant heifers should be the denominator. We must give special attention to not reducing quality when reducing costs, especially if the producer’s market price is a function of measurable quality.

Developing a Heifer Budget

The costs associated with heifer development are significant when compared to the life-time costs of maintaining a beef cow. In the following budget, heifer development cost accounts for 30% of the lifetime cost of the average cow in a herd.

Determining heifer development costs on an individual farm or ranch is necessary to identify areas of cost concern and to be able to evaluate other heifer development options such as purchasing pregnant heifers, or sending the replacement pool to a commercial heifer development operation. The following is a budget to use as an example when developing specific budgets for client farms. For the following example budget, 87% of breed, spring-calving cows are assumed to wean a 500–550 pound calf that is sold in November. The herd has a 15% replacement rate and a 1% cow death loss. One and half times the replacement rate of heifers is held past weaning in the potential replacement pool. Of course, budgets for specific farms will differ from this example, but the cost and income categories provide a sound starting point for developing an accurate budget for a beef farm or ranch.

Table 4. Cowherd budget up to weaning

Table 5. Weaning to yearling prebreeding examination budget: Nov 1 to March 21 (141 days)

1.5 ´ replacement rate (15%) are retained in replacement pool (22.5% of number in mature herd)

Table 6. Prebreeding Examination to onset of breeding March 22 to May 7 (47 days)

15.56% of heifers in replacement pool are culled at the start of this period

Table 7. Onset of breeding to pregnancy check May 8 to August 24 (109 days)

No heifers are culled during this period

Table 8. Pregnancy check to onset of calving August 25 to March 21 (209 days)

21.05% of heifers in replacement pool are culled at the start of this period

Table 9. Summary of costs from birth to onset of first calving

            Fixed costs vary greatly from one farm to another. Fixed costs not accounted for in this budget include: a charge for labor (including ownership and management), pasture (except for harvested hay), interest on investment in the breeding herd and other cash costs such as real estate and property taxes, building insurance and repairs, and other overhead expenses. Net return would include all the fixed and variable costs subtracted from income.

Determining the income potential for replacement heifers

            In addition to determining the costs for an individual farm, veterinarians should also assist producers in determining the income potential for heifers produced. Reasonable estimates of future prices and animal production values (weight, efficiency, carcass value, etc.) are needed. Production estimates can be obtained from several sources including published research, extension bulletins, and current farm production records. Agricultural economists, USDA statisticians, and futures markets provide information about the trend of prices, and national production estimates. The value of heifers depends on management, genetics, and where in the cattle price cycle the heifer enters the herd.

Management – When in the first calving season will she calve? Heifers that calve early tend to have heavier calves when sold at weaning and tend to have a higher re-breeding rate.

Genetics – What is the genetic potential for her calves to grow efficiently (ADG, F:G) and what is the value of her calves (weight, carcass yield, carcass quality grade)

Cattle Price Cycle – According to Dr. Harlan Hughes (North Dakota State Univ.), much of the year-to-year variation in beef prices is driven by cattle supply, which is cyclic in nature.[iv] Cattle numbers tend to behave in 10-year cycles, with periods of expansion, contraction, and turnaround phases. Cattle prices go in the opposite direction of the cattle numbers, in that during periods of high cattle numbers, prices are low and during periods of low cattle numbers prices are high.4 Because of the 10-year time frame of cattle price cycles, and the fact that the average cow will produce about 5 calves in her lifetime, which 5 years of the cattle cycle she produces those calves greatly impacts her income generating potential. If a replacement heifer is producing calves during the highest price time-period of the cattle, she will generate far more income than an identical heifer that produces her calves during the lowest-price time period of the cycle.

            Work done at the University of Missouri by Dr. Vern Pierce illustrate this point by showing that the value of a purchased group of pregnant heifers that have 80% of the calves born in the first 21-days of the calving season and 20% born in the second 21-days, compared to a group of raised heifers that had a 85% conception rate with a calving distribution of 30%, 20%, 20%, 10%, and 5% by 21-day periods of the calving season varied considerably depending on when in the cattle cycle the comparison was made (Table 10). In all cases, an 8-year model was used with identical growth rates for calves from both groups of heifers. Calf prices were based on historical or projected values.

Table 10. Cattle cycle effect on value of moving to an alternate heifer management strategy.

Beef cow profits in the 1990s began with high profits for 1990 through 1993, with low profits in 1994 through 1996, with a rebound in 1997. The value of heifers during those years was opposite to profitability, with heifers being worth more during periods of low profit and being worth less during periods of high profit. This is because heifers purchased during periods of high prices will have most of their calves during periods of low prices and visa-versa.

Decision Making Using Partial Budgeting

Farm business planning includes taking an inventory of resources, devising alternate uses of these resources, and choosing the best alternatives. Partial budgets assist in the planning effort by evaluating changes in resource use, and evaluating the economic effect of making one adjustment in some portion of the business. Partial budgets will not take the place of a cash-flow, a profit and loss statement, or any other financial measurement of a farm’s economic status. The success of using partial budgets for farm or ranch planning depends on their prediction accuracy, which depends on the accuracy of the information and estimates they contain. Partial budgets are useful to evaluate changes such as: adopting a new technology (example: estrous synchronization and AI), expanding an enterprise, adopting an alternative enterprise, hiring a custom operation to develop heifers rather than doing it on-farm, making a capital improvement, or changing marketing strategy. Partial budgeting is based on the principle that a change in the organization of a farm business will increase some costs and decrease others, and increase some returns while decreasing other returns. The net effect will be the sum of positive economic effects minus the sum of negative economic effects.

Mechanics of Partial Budgeting

Figure 1: Partial Budget Template

            Summaries of NAHMS and SPA data, farm records, university research, and production practices on other farms or ranches can serve as sources for alternate production or marketing ideas. Once reasonable alternate plans are identified, the consulting veterinarian and producer should collect data about the potential change such as current costs of production, costs of capital, commodity prices, or other items pertinent to the particular decision alternatives. An alternative to using one predicted set of costs or a given sale price is to use a range of costs and prices (low, medium, and high) to evaluate changes. This method will evaluate the price sensitivity of the projected change.

            The partial budget is ready to be developed after all pertinent data is assembled. The seven components of a partial budget are (Figure 1):

Additional returns are those that occur if the change takes place. Reduced costs are those that are not incurred under the proposed change. Additional costs are those that are only incurred if the change is implemented. Reduced returns are those that are no longer received if the change is initiated compared to the current situation. The difference between positive and negative economic effects is an estimate of the net effect of taking the proposed change. A positive difference indicates the potential increase in net returns if the change is made. Conversely, a negative difference is an estimate of the reduction in net returns if the change is adopted. The extent of the positive or negative difference, given the producer’s confidence in the numbers used, impacts the final decision made. Only the costs and returns that change by proceeding with the alternate plan should be included in the partial budget. The unit used to analyze the change may be any size (i.e. one head or the entire herd). After the analysis is performed, the result should be multiplied as necessary to show the economic impact on the entire enterprise or business.

            One question a beef producer may ask is what impact does improving 2^nd parity pregnancy rates have on costs and income. Table 11 displays the effect of changing pregnancy rate for first-calf heifers in 5-percentage point increments on the percent of the herd that must be replaced each year and the average age of the herd. In general, given the assumptions in the table, for every 5-percentage point improvement in first-calf heifer pregnancy rate, the number of replacements needed for the herd decreases by about 1 percentage point and average cow age increases by .01 years.

Table 11. Effect of 2^nd parity pregnancy rate on herd replacement rate and average cow age.

            Once the effect of 2^nd parity pregnancy rate is estimated on number of replacement heifers needed. The original farm budget (Tables 4-9) can be used to identify areas where number of heifers kept in the replacement pool affects both costs and income. These changes are entered into a partial budget to determine the value of such a change to a particular farm or ranch.

            Another question that producers may ask is what is the impact of increasing calf value (either weight or value/lb.) at the time of sale through changes in genetics or management. If the average age for a herd is 6 years at the start of the breeding season, then the average cow has 5 calves in her life, so the impact will be $/calf ´ 5 calves per cow ´ % of calves born that are weaned (assume 98%). Therefore, an increase in gross value of $10 per calf born will increase the gross value of the replacement heifers (10 ´ 5 ´ .98 = $49; section 1 of partial budget template). A partial budget that considers the costs of changing to a new genetic source will allow a producer and veterinarian to evaluate the economic impact of such a move.

Many questions about heifer development are appropriate for partial budget analysis:

1)      Should I increase the nutritional costs of developing heifers in an effort to have a higher pregnancy rate during an AI and subsequent 45-day breeding season?

2)      Should I increase the genetic value of my herd by utilizing AI in replacement heifers?

3)      Should I increase the genetic value of my herd by purchasing bulls that produce higher-value calves (at a higher purchase price for bulls)?

4)      Should I purchase replacement heifers rather than raise my own?

5)      Should I utilize a custom heifer development operation to grow and breed my heifers rather than doing the work myself on my own farm?

6)      Should I alter the date that I evaluate heifers in the replacement pool in order to avoid marketing windows with lower cull animal values?

It is imperative to realize that these examples cannot be applied to any farm other than that for which they are developed. The costs and savings will differ from one farm to another. However, the thought process is applicable to many situations.

Decision Making Using Cash Flow and Profit and Loss Statements

Some decisions in farm management are not best suited to a partial budget analysis and are better suited to cash flow or profit and loss evaluation. Many of the preventative health recommendations veterinarians make may not seem advisable when evaluated on a partial budget, or even a profit and loss statement, but are considered wise when looking at the effects on cash flow if a large economic loss due to disease occurs in a short period of time. In addition, management changes that result in either the economic benefits or costs changing over time may be better suited to serial profit and loss statements. An example would be selecting for larger heifers that increase the herd’s average mature size over time; increasing both the maintenance costs for the herd and the weight and value of the calves (and cull cows) sold.

Summary

            These examples and many others like them, illustrate the need for veterinarians to consider the economic consequences of any production recommendations they make, and point out that, depending on marketing strategies and production inputs for individual farms, recommendations will vary from one farm to another. Because of the breadth and depth of knowledge needed to accurately advise beef-producing clients, it is necessary for veterinarians, nutritionists, agronomists, and economists to be available for information input for production and marketing decisions. And, since practicing veterinarians enjoy a position of local contact and trust, as well as scientific training, they can serve as the coordinator and facilitator for decision analysis and implementation.

References: