There is usually more than one method to accomplish the same goal. This applies to the cow replacement decision. Even with high calf prices, profitability in the cow-calf enterprise requires decisions of when and where to invest money. Ranchers have options when it comes to securing their replacements. These range from traditional home raised heifers to purchase of females from outside.
A capital budgeting technique called Net present value (NPV) is used to compute the break-even value for pricing replacements. NPV discounts the value of future cash flows in today’s dollars. By knowing today’s value of future cash flows the rancher has the information to evaluate his replacement purchase decision.
The table shows the net present value for replacements with a range of calf numbers and annual cow costs ranging from $500 to $700. For this example the cow production assumptions are:
- Saleable calves 93%.
- Average calf weight 550 lbs. @ $155 cwt.
- Annual cow death loss of .5%
- Annual cull rate of 10% weighing 1,250 lbs @ $60 cwt.
- Annual discount rate of 6.5%.
Using the above scenario the break-even purchase at $500 annual cow costs is:
- $1,800 for 7 calves.
- $1,650 for 5 calves.
- $1,400 for 3 calves.
Cow cost of $600 dollars lowers the break-even to:
- $1,360 for 7 calves.
- $1,280 for 5 calves.
- $1,140 for 3 calves.
Source: KSU-Beef Replacements.xls. A spreadsheet program to evaluate the economic value of purchasing beef replacements females.