Today, we discuss the choice for cows in the COVID-19 world. Keep or cull? Is there a difference for bred cows, pairs, or open cows?
Opportunities & Resources
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Keep or Cull?
Decision-making is a difficult practice in our current economic environment. At times, long-term goals have to be reconsidered in the service of short-term cash flow. On a farm we have several ways to create a ‘plus’ on the cash flow statement including operating income, capital asset sales, non-farm income, and borrowing. Today we’re going to talk about the ale of capital assets; for beef producers this means cows.
Now in the short term if you are having issues with cash flow and cannot increase operating income (through normal farm activity), increasing non-farm income, or responsibly borrow for the short-term you might have to consider the sale of capital assets. Cash flow and the access to money is critical, particularly if the withdrawal side of your cash flow statement includes a need for returns to management or family spending. I apologize if this is too much accounting. What I really mean is, if you can’t bring in money another way, and need cash JG-Wentworth style (now) for your families well-being, you should consider the sale of assets.
What are capital assets?
Now, for those that have options, again, increasing operating income (through normal farm activity), increasing non-farm income, or responsibly borrowing for the short-term, the sale of capital assets is something to be evaluated thoroughly along with other options. That’s what we’re going to do today.
So, why do I say beef cows are capital assets? I’ve returned to my Dictionary of Economics for a definition. Capital assets are any asset – financial or physical – capable of generating income/wealth. So, since your cow can produce a calf (income) she counts as a capital asset. If you sell her, you are sacrificing the future revenue stream of calf sales for cash in the present. But, if the net present value of that decision (money today) makes you better off than selling the calves in the future (money next year), the decision is worth evaluation. I’ve created a High Plains example.
Cow Types and Price Assumptions
Right now, your cows are open, bred, or have a calf on the ground. Each circumstance comes with a different set of considerations. The big question is, “Do I sell some cows in the pursuit of some near-term cash or do I retain them and achieve an increase in net present value in the long-run?
What’s the value of selling cows now? The Agricultural Marketing Service Feeder and Replacement Cattle Auctions data report is updated weekly, and includes cow price information. Last week (4/20/2020-4/24/2020) open cows sold for about $740/head, bred cows sold for about $1,075/head, and pairs sold for about $1288/pair.
The future pricing is a bit complicated. On March 6, before the first domestic shutdowns induced livestock price declines, NOV 2020 feeder calves were priced at $137/cwt. At the same time JAN 2021 feeder calves were priced at $134/cwt. Finally MAR 2021 had no trades, but we’ll assume a similar $3/cwt spread as the one between the NOV 2020 and JAN 2021 contracts, for a value of $131/cwt. As a result of COVID-19, those prices have changed. For instance, the NOV 2020 contract is $128/cwt now. The JAN 2021 contract is currently $127, and the MAR 2021 contract is $128/cwt.
Options and their Results
I’ve taken the costs of production from our District 1 AgriLife Budgets which amount to about $527/animal unit, and developed an enterprise budget to evaluate the cull or keep decision. I’ve made some assumptions. First, all cows have 5 productive years left. If they are open, they can have five more calves. If they’re bred or have a calf on the ground, we’re assuming that they have five calves plus the one gestating or on the ground to go. In the model we’re trying out, calves are sold at 550 lbs. We’ll assume that if we choose to retain and breed the open cow, that she will have a calf for sale in March of 2021. The calf from the bred cow will be available for sale in January 2021. The calf from the pair will be available for sale in November 2020.
As a result of the COVID-19 induced price changes, I’ve evaluated two retention scenarios. The first outcome is a result of the older, higher set of prices listed above. The second outcome is a result of the newer, COVID-19 induced lower prices. Remember, these results assume 5 more calves plus the gestating one or the live calf for non-open cows. I’ve incorporated several assumptions. Remember, cow operating costs are $527 annually. I’ve assumed an 85% weaning rate. The plan is to sell calves at about 550 lbs, and that the cow will give us 5 more calves. The results of the enterprise analysis are included in the bar chart below.
Returns to Cull/Keep Strategies for Open, Bred, and Pairs
As you can see, based on the assumptions we’ve made it seems that retaining cows for the time being is still the long-term profitable option. Even with COVID-19 pressuring prices in the near term the value of 5 additional calves from the cow outweighs the costs of retaining her. Selling an open cow today would net $741/head. Retaining the same cow for five successful calvings would provide a net present value of $1,193 with ‘good’ pre-COVID prices. Even with post-COVID prices, retaining the open cow provides a net present value of $1,184, more than selling her today.
The same results occur for both bred cows and pairs, although the disparity in present values is a bit smaller. Retaining a bred cow nets an additional $172 or $157 compared to selling her under pre and post-COVID prices, respectively. Retaining a cow from the pair and growing her calf to standard sale weight nets an additional $113 or $94 compared to selling her under pre and post-COVID prices, respectively. The takeaway; for now, retention is still a better long-term decision than a sale at current prices.
Last Thoughts
These results to come with a caveat; short-term cash flow is king. If you are in a situation in which you are unable to service a debt, pay an operating expense, or provide for your family, the long term gain might have to be sacrificed to remain solvent. Additionally, the details of federal relief programs have not been published yet. If USDA relief programs are subject to number of head after a certain date this decision might also change. AgriLife will provide those details when they are available. Finally, your assumptions are key. If you have an older cow, the profitability gap between these options will shrink. If you have a higher annual cow maintenance cost, the gap will shrink. Keeping accurate records to use in these situations, and working closely with your lender are key in tight operating environments.
You can evaluate this decision and dozens of other cattle production management choices using free tools at https://agecoext.tamu.edu/resources/decisionaids/beef/