Remember my December column; the holy hot stove one? Maybe you remember wondering how anyone, especially you, could afford to pay $1,046 for bred replacement heifers, as I stated. You weren't the only one wondering.
Whoa, wrote one of my readers, Jim McGrann an economist at Texas A&M University. We can't justify more than $700.
So, the question became, which figure is correct? Like many analysts, I used 100 percent values for many variables, leaving it to you to apply the example to your particular level of efficiency. For example, the weaned calf percentage was 100 every year. Dr. McGrann built numerous production inefficiencies into his analysis and also included financial and tax factors.
Using a spreadsheet sent to me by Dr. McGrann, let's call the operator in Dr. McGrann's sample Mr. Average. Mr. Average had a return on investment (ROI) figure of 11 percent. Let's change Mr. Average's goal to 10 percent. This revision increases the price he can pay for a bred heifer by $16. Mr. Average's weaned calf percentages were 95 in the first year, 85 in years two through five and 83 in year six. Each point shaved off Mr. Average's weaned calf percentage in years two through six, would increase his heifer affordability $18.
Mr. Average projected that his first-year average prices for 540-pound steers and 510 pound heifers would be 95 cents and 90 cents per pound, respectively. Assuming Mr. Average is thinking of prices in 2000, he's already 3 cents under the market average. And if Mr. Average's calves are average in quality and appeal, he can afford to pay another $20 per heifer for each extra cent per pound his calves are worth.
The cow cost per calf weaned for Mr. Average was $300, which did not include financing, depreciation, capital gains and income taxes. But if Mr. Average's per-cow cost were lower, he could afford to pay $21 more per bred replacement heifer for each reduction of $5. And there is more to be gained. Mr. Average could afford to pay additional amounts for bred replacement heifers for these efficiencies: $12 for each additional 50 pounds of weight over 1,000 pounds of cull cow and $18 for each additional 5 pounds of weaning weight over 540 pounds for steers and 510 pounds for heifers.
If you operate at the efficiency level reflected by these gains, you could pay $805 for a bred replacement heifer.
The reality is that you can afford to pay even more for bred replacement heifers with even greater improvements in management efficiency-better weaned calf percentage, better quality for better prices, etc. And there is additional profit potential to be tapped in the finance and tax area. For example, it makes considerable difference in financing costs whether heifers are purchased as additions or part of a cull and replace process. Under cull and replace, you finance only the difference in the prices paid and received. For additions, financing may be required for the entire purchase price.
So where does this leave you as a commercial operator on the question of replacement heifer affordability? If your management efficiency is at the level of Mr. Average, should you pay only for genetics that fit your management efficiency? Should you pay no more than $700 for bred replacement heifers, regardless of their genetic value?
The answers to these questions involve some very complex considerations, but the answer can be yes. As I showed in my December column, the herd-effect of replacing low producing cows at the 20 percent level with high-potential, high cost bred heifers can be very positive even at weaned-calf rates considerably under 100 percent.
But, these are just numbers-numbers that show one thing for sure. Efficient management makes a difference when management and genetics collide. In the end, however, good genetics always have a positive effect.
To contact Fred Knop, write Drovers or send e-mail to: firstname.lastname@example.org