Replacement heifer prices are up, and most economists predict prices of replacement females will only continue to increase given increased feeder calf prices, the reduced size of the national cow herd and a shift from La Nina to El Nino precipitation patterns. That’s good news if you have bred heifers to sell, of course. But from the standpoint of cow-calf production, the cost of replacement females often represents the second-largest variable cost of production embedded into every calf produced. Do higher replacement heifer prices have you worried?
What enterprise are we talking about?
Most cow-calf operations develop their own replacement heifers. So when the topic of controlling the cost of replacement heifers comes up, I find most managers want to talk about feeding strategies for heifer development. That is not surprising, since feed is typically one of our largest costs of production. That said, there are really two different perspectives from which to view the costs associated with heifer development: the heifer development enterprise and the cow-calf enterprise. When we ask how we can develop bred heifers more cheaply, we are asking questions related only to the heifer development enterprise.
In previous articles in Progressive Cattle, I have touched quite a bit on selection of replacement heifers and how to think through whether we ought to have a heifer development enterprise at all. It’s time to talk more about controlling replacement costs from the perspective of the cow-calf enterprise.
The market sets replacement prices
This may strike you as oddly as it struck me when I first realized it, so hold on. When we are calculating gross margin of the heifer development and cow-calf enterprises as two separate enterprises, the cost of an individual replacement heifer for the cow-calf enterprise might best be thought of as entirely set by the market. Here’s why.
From my perspective, the initial purchase price of the replacement female should be considered as the fair market value of the bred female, not the actual cost of development. I say this because, from an enterprise accounting standpoint, developing replacement heifers for less than the market price of replacement heifers simply means we have a profitable heifer development enterprise. Ranch managers differ in their accounting approaches to heifer development, but I personally prefer to leave that margin showing on the books in the enterprise that generated it. Otherwise, we may overlook a very profitable and potentially scalable heifer development enterprise, as all the margin it generates simply shows up as lower replacement costs for the cow-calf enterprise. Alternatively, if the heifer development enterprise is actually generating net negative margin, we effectively force the cow-calf enterprise to purchase replacements at above market price by failing to realize we ought not be developing heifers in the first place.
Again, several good ranch managers who I respect choose to do their accounting differently, but I continue to recommend that replacement costs for the cow-calf enterprise be entered as the fair market price for which similar replacement females could have been purchased. From that perspective then, our management to control costs associated with heifer development just generates more margin in the heifer development enterprise. The cost of a replacement heifer for the cow-calf enterprise’s books is set by the market.
Understanding replacement costs for a cow-calf enterprise
Since replacement costs are set by the market, does that mean we have no opportunity to control the second-largest cost of production? I encourage managers to stop thinking about replacement costs alone and instead think about these costs as the annual cost of cow depreciation. For a more detailed discussion of cow depreciation as a concept and our opportunities to control this cost of production, see the University of Missouri Extension publication “Cow-Calf Systems That Minimize Cow Depreciation Costs.”
As with depreciation of any asset, cow depreciation is affected by initial purchase price minus its salvage value. To approximate the annual cost of cow depreciation for a cow-calf enterprise (assuming herd size is remaining constant), take the total cost of replacement females and subtract out the sales of any cows off the ranch (culled open cows, marketed bred cows, etc.). Taking this number divided by the number of calves produced gives cow depreciation as a cost on a per-calf basis. From my perspective, this gives a manager the most accurate understanding of how big this cost actually is.
Pay more attention to salvage value
Cow-calf producers intuitively understand that fewer replacements are required each year if cows remain in the herd for more years on average. In the language of depreciation, we might think about this as “years of service” for the asset. I won’t dispute that a cow that remains productive for 10-plus years can be a tremendous asset, but from a business standpoint, I worry we simply have too few cows that actually do that in most operations. In my opinion, the most overlooked opportunity to controlling replacement costs is not increasing cow longevity (years of service) but rather becoming very intentional about managing cow salvage value.
Unfortunately, most cow-calf operations only market cows when they are at their lowest value: open, older and/or excessively thin. We can often change cow salvage value dramatically by changing the age, stage of production, condition or pregnancy status of cows at the time of sale. There are a number of strategies to accomplish this, but I will highlight one: Have a pregnancy diagnosis performed early enough to get an accurate expected calving date and proactively market bred cows that conceived later in the breeding season. Those later-conceiving cows will be next year’s later-calving cows. Those later-calving cows will wean the youngest, lightest calves of the calf crop and be most likely to fail to become pregnant in next year’s breeding season. Choosing to market them as bred females at some point prior to calving can make a lot of sense, as we should find we sell fewer open cull cows next year.
Does this strategy protect us from high replacement heifer costs? Not entirely. However, higher replacement heifer prices often also bring higher prices for bred females of any age. Having a business model in which we market females when they are still valued by the market (e.g., as younger bred cows) puts us in a stronger position, as the elevated bred female market will now affect the revenue side of our books as well.
