Content area
Full text
Profits per cow grew in 2010 and preliminary data suggest profits per cow were up again in 2011. I project even higher profits for the next few years, all of which should trigger an expansion in the nation's cow herd, right?
While drought in the Southern Plains is currently inhibiting a fullblown national herd expansion, indications are that expansion may be underway outside the drought region. In fact, my numbers suggest that 2011 profits in the Northern Plains were over $160/cow - up from $113/cow in 2010. And, I project profits per cow to continue to be high for the next four years (Figure 1).
So, let's look at what this favorable outlook suggests for heifer development, and determine the economic value of a 2011 preg-checked heifer.
My primary source of long-run planning prices is the Food and Policy Research Institute (FAPRI) at the University of Missouri and Iowa State University. I utilized the latest FAPRI prices (yellow section, Figure 2) to generate my current expanded set of planning prices (white section). I project strong feeder-calf prices for the next several years (500-600-lb column). Meanwhile, Figure 3 presents FAPRI's cull-cow prices and my projected cull-cow values.
The economic value of a preg-checked heifer is determined by the sum of her future annual net income from each calf she produces while in the herd - plus her eventual cull income. Given the time value of money (albeit, record low), these future net incomes need to be discounted back to today's dollars. We can do all of this by using a net present value (NPV) model.
NPV is a mathematical model based on annual net cash flows. Net cash flow projections are very ranch-specific and, after taking production costs into account, annual net cash incomes must be adjusted for debt service and family living draw.
I used 2010 average North Dakota cost-of-production data as my base, and increased cash costs of production by $20/year (2.9% annual cost increase) for years 2012 through 2019. No debt service was considered, but a $100/head family living draw was taken into account. These long-run net cash flow projections are presented in Figure 4. In general, average net cash flow per cow is projected to trend up for the next four years,...