USDA estimated that there were 29.833 million beef cows in the country on January 1, 2012. USDA’s annual cattle inventory report, to be released on February 1, will provide the year’s first count of the herd, but based on beef cow slaughter and expected heifer retention last year, beef cow numbers were likely 1-1.5% lower on January 1, 2013.  Much will be written in this column and others throughout the year about the possibility of the beef cow herd beginning expansion from its 50-year low. While expected record cattle prices point to growth in beef cow numbers, the individual choice for a producer to expand cow numbers is a complex, multi-year decision made difficult by high and volatile input prices.

A number of factors will influence cow-calf producers’ decisions regarding herd expansion in 2013, including availability of pasture, range, and other feedstuffs; land values and rental rates; expected cattle prices for 2013 and beyond; herd productivity; and lifestyle choices. Ultimately, the decision to expand this year will be based on the expected returns available this year. While there are a number of ways to increase cow herd numbers, including retaining additional heifers from the 2013 calf crop or calving retained bred heifers from previous years’ calf crop, in this analysis we’ll focus on buying bred stock so that a calf is available to be sold in 2013.

Let’s examine an enterprise budget projection for a ‘typical’ South Dakota cow-calf operation. Note that ‘typical’ does not fit any one particular operation as costs, productivity, and revenue vary greatly across operations. Therefore, producers should estimate budgets specific to their situation and operation. Still, an average-type budget provides some indicator as to whether the aggregate herd will increase in size this year.  In our enterprise budget, we’ll assume that our cow herd has a 92% calf weaning rate and replacement heifers are retained from within the herd. Our operation will cull 20% of its cows each year and will have 2% death loss. Therefore, each cow unit will have available to sell 0.46 steer calves, 0.26 heifer calves, and 0.18 cull cows each year. Assuming that the steer and heifer calves weigh 550 lb and 500 lb, respectively, in October 2013, prices of about $184/cwt and $174/cwt are projected for this fall based on October 2013 Feeder Cattle futures price near $164/cwt and a +$20/cwt and +$10/cwt historical basis for 550 lb steer calves and 500 lb heifer calves in South Dakota. We also project about $75/cwt for cull cow sales in November. Thus, each cow unit generates $830/head in cash revenue in 2013.

Feed and other costs are more difficult to project due to the variation caused by market prices and geographic differences. However, we will assume a $50/acre rental rate on pasture (or equivalently an opportunity cost for owned pasture) and $25/acre expense for fertilizer and weed control for 2.5 acres per cow. Additional feed costs will include four acres of corn stalks at $6/acre and 2.1 tons of alfalfa hay valued at $225/ton. Remaining feed expenses include 4 bushels of corn at $6.85/bu and 60 lb of salt and minerals costing $0.09/lb. Feed expenses then total $717/head.

Other variable expenses in the cow-calf budget include $25/head for veterinary and health expenses; $15/head for machinery, equipment, fuel, and repairs; $20/head for marketing and miscellaneous expenses; $20/head for interest on variable expenses; and $112/head for labor based on an hourly wage of $14/hour and 8 hours of labor needed per cow each year. These variable expenses add up to $191/head. So, total feed and other variable expenses are $908/head. That’s $78/head higher than the project revenue of $830/head calculated above.

Other fixed costs should also be included in the enterprise budget. Costs for machinery, equipment, sheds, fences, and other facilities could run $65/head based on replacement costs of common equipment needed for a 50-cow operation. Bull service costs would also cost another $16.50/head based on a $2500 bull being used for three years to breed 25 cows each year and having a cull value of $1275. Finally, ownership costs, interest, and insurance on the breeding animals will be about $181/head. These fixed costs add another $263/head to total costs.

Total variable and fixed costs are estimated to be $1,171/head for the year, or $341/head more than the projected revenue. A projected loss of this magnitude would suggest little cow herd expansion will occur in 2013. It is important, though, to note that some producers may operate or even expand their herds profitably in 2013, depending upon their costs. The example above estimated feed expenses at $1.96/head/day. However, if an operation could feed the cows for less than $1.72/head/day and not have any interest or labor expenses (which is quite possible to avoid on a cash basis, but their opportunity cost should ultimately be accounted for in the budget), the operator could expect a positive return, even with the fixed and other variable expenses noted above. Alternatively, the cow-calf budget also looks more appealing when only considering the cash costs (plus pasture). By omitting the noncash variable costs and fixed costs, a return of about $54/head is projected. While that isn’t sustainable in the long run, it does illustrate that expected revenue can cover variable cash costs and contribute to other fixed costs. Thus, an incentive to expand cow numbers exists, provided profit opportunities improve in future years.

Again, expected costs and productivity can vary widely across geographic areas and amongst producers. However, the average projections above suggest a limited number of producers will find a profitable opportunity to expand – and even then they have to have access to productive pasture and other feedstuffs and capital. Further, the risks will be considerable as an investment in a bred cow or heifer will cost $1,400-2,000/head and variable and fixed expenses to keeping the animal can exceed $1,000/head annually. But, the historically tight supply of cattle suggests feeder cattle prices should remain high for years to come, and suggest a profit opportunity may exist over the next several years for those that can make the investment to grow their herd. But, in all likelihood, any expansion plans this year will be governed by the drought and when/if it ends.

The information in this report is believed to be reliable and correct.  However, no guarantee or warranty is provided for its accuracy or completeness.  This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers.  The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information.  There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.