Cattle prices are riding high, and with profit margins of $100 to $200 per head, it sure would be nice to have a few more cows in the herd. But bred cow prices at the sale barn also seem high, so why not save back a few more heifers for replacements? If that's what you're thinking, then you are not alone. Cattle producers have collectively reduced and expanded their cattle herds every decade over the past century in response to changing prices. The result is known as the cattle cycle.

Understanding the cattle cycle and evaluating your female replacement and culling options may enable you to take advantage of profit opportunities when the price cycle is up, and avoid financial wrecks when prices move lower.
The cattle cycle
"Cattle cycles are caused by the biology of the beef cow," says Harlan Hughes, livestock economist and professor emeritus at North Dakota State University. "Once a producer gets the price signal to expand, it takes three years from the time he holds back heifers to produce more calves until those calves are finally slaughtered. By that time, the price signal is to contract."

One explanation of the cattle cycle is that it is driven by the cash flow needs of beef cow enterprises. Their cash flow needs drive heifer retention decisions. When calf prices are low, producers sell more calves to meet cash flow obligations. As prices increase, they do not have to sell as many calves to meet their cash flow needs and can afford to retain more heifers. Naive expectations that current calf price will continue unabated also may play a role in the drastic swings in the number of replacement heifers kept back.

The good news is that producers can use the knowledge of the cattle cycle to make more profitable investment decisions. John Lawrence, beef specialist at Iowa State University, says that producers can make the cattle cycle work for them if they follow two basic economic principles. While these are easy to understand, they are not quite so easy to put into practice over night. First, Dr. Lawrence says to buy low and sell high. Second, pay attention to what everyone else is doing and then do the opposite.

One way of doing this is dollar cost averaging, which retains the same dollar value of heifers each year. A similar rolling average value strategy, which retains a 10-year average value of heifers each year, also can be used. Such strategies can out perform systems in which a constant herd size or a constant cash flow is maintained each year, according to a study of heifer replacement strategy led by Dr. Lawrence at Iowa State University.

On the downward side of the beef price cycle, when beef cows are netting little profit or are even losing money such as 1994 through 1996, cull deep.

"Culling cows that are losing money makes economic sense. I argue that the cost of production in a low year overrides the selling of cull cows for the lower prices," says Dr. Hughes. "Get rid of those cows losing money and replace them with young, productive, low-cost females that will make money even in the low price years. This requires, however, that producers know which cows are making money and which cows are losing money."

On the upward part of the beef price cycle, such as 1999 through 2002, Dr. Hughes recommends reducing the culling rate and selling all calves born. This is not the time to be holding back more heifers to build the beef cowherd, he adds.

If you're still interested in holding back heifers and developing them into bred animals, Dr. Hughes suggests that you consider selling them before 2004. Selling heifers as bred animals while calf prices are high may be a profitable option.
Remove the guesswork
Producers can project the economic value of a bred heifer at any point in the cattle cycle by comparing the economic value of a bred heifer to a heifer's acquisition cost.

"A bred heifer today is worth all of her future annual net cash incomes, including her cull value, discounted back to today's dollars," says Dr. Hughes. "That my be in contrast to what the price is at the local sale barn. The sale barn price is heavily based on current calf prices."

Determining the economic value of a bred heifer up front is important so that future profits are not unconsciously bid away to over-priced bred heifers. For example, when bred heifers were high in 1993 bred heifer prices reached $1,000. However the calculated economic value for bred heifers in 1993 was $640 due to low calf prices in 1994, 1995 and 1996.
Calculating value
The first step is to develop a set of projected calf prices for the next seven years, which is the average reproductive life span of a beef cow.

Next, use your projected prices to estimate the annual net returns from each of the seven calves born to that female. This will only be possible if you know or can estimate your cash cost of production per calf including feed costs, vet costs and interest. Also estimate cull salvage value for the cow.

The cash you invest in a heifer today should result in a return on your investment some time in the future. As an investor, the maximum amount that you want to pay to buy that animal is the sum of money that will grow at your desired rate of return. Therefore, the annual net income per calf must be adjusted to determine the real value of that income in today's dollars. This is called the net present value.

In table 2, net cash income is projected to total $1,468 per cow spread over seven years. When the selected 8 percent discount rate is applied to each year's annual net income, the calculated net present value of a bred heifer purchased in 2001 is $1,067. (See the sidebar on how to calculate the discounted present value.)

This tells us that if you pay $1,067 for a bred heifer in 2001, she is projected to earn 8 percent return on investment. If you pay less than $1,067 for a bred heifer, then expect to make more than an 8 percent return on your investment.

"The object is to try and find a positive difference between what you calculate the value of a heifer to be, and what you would buy that heifer for at the sale barn," say Dr. Hughes. "That's the time to own them." According to Cattle Fax, bred heifer sale prices averaged $428 in 1996. At that time, however, the net present value of those heifers was $900. Keeping back bred heifers in 1996 would have built in a $472 advantage and a much higher return on investment. In 2001 bred heifer prices will average near $800 while their net present value is $1,067-only a $267 advantage.
Culling considerations
Just as you use knowledge of the beef cattle cycle to make better investments in replacement heifers, you also can use it to make better cow culling decisions. Cowherd analysis indicates many females fail to produce seven consecutive calves. The most common case is the 3-year old female that does not breed back after her first calf. Should you cull young, non-breeding cows if they are open or give them another chance? That depends on where she is in the price cycle. Rather than guess, develop an economic analysis for each scenario.

Table 3 compares the economic value of culling a 1996 bred heifer after one calf vs. allowing her to breed back at age 4 and keeping her in production through the rest of her productive life. Table 4 makes the same comparison for a female that was purchased as a bred heifer in 2001 at the top of the cattle price cycle.

Because of low calf prices in 1996, keeping her in production until the higher price years increased her net present value. But if you look at the comparison of the heifer bought in 2001, you see that missing a calf during the high stage of the price cycle greatly reduced her total net present value. In fact, one calf plus her cull value were worth more than keeping her in the herd another six years.

Making decisions
There's no simple answer on when to keep more replacement heifers or cull more cows. Such decisions, however, should not simply be based on today's cattle prices, but made based on economic analysis of lifetime profitability projections and where we are in the cattle cycle.

Formula to figure Discounted Present Value

V=Discounted present value
V(1+%)# of years=net income

Solving for V at 8% in 2001

Solving for V at 8% in 2007