Alternative Cow Herd Investment Strategies

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Alternative Cow Herd Investment Strategies

• John D. Lawrence
• Extension Livestock Economist
• Director, Iowa Beef Center
• Iowa State University

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Motivation

• Cow herds are capital intensive
  enterprise
• Capital investment
• Long life span
• Initial investment for future earnings

• Cyclical business
• Prices impact investment cost cash flow
• Are there more profitable strategies to follow?

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Cattle Cycles

• Cash flow drives heifer retention
• When calves are cheap ranchers cannot afford to
  keep very many
• When calves are high they can afford to keep more
• Naively believe that todays prices represent
  prices in the future

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Are There Alternatives???

• Model alternative heifer retention strategies for
  a hypothetical producer
• Not meant to represent any one operation
• Ignores weather and government
• Compare apples to apples

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Heifer Retention Strategies

• Four alternative strategies
• Steady size
• Cash flow
• Dollar cost averaging
• Rolling average value
• Compare
• Herd size, returns, net worth

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Heifer Retention Strategies

• Steady size
• Keep same of heifers each fall to maintain a
  steady herd size
• Cash flow
• Sell/buy heifers or cows to maintain cash flow
• Annual cash flow equal to the Steady Size average
  cash flow

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Heifer Retention Strategies

• Dollar cost averaging
• Keep same value of heifers each fall
• Annual investment is equal to the Steady Size
  average investment
• Rolling average value
• Keep a 10 year average value of heifers each fall
• Annual investment is equal to the 10 year average
  value of 21 head

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Also Note

• The average value of heifer calves retained in
  fall was 9.9 of the value of bred females for
  the Steady Size and DCA herds.
• Heifers are added to the herd at cost, not at
  market value.

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Heifer Retention Strategies

• Starting point for strategies
• January inventory
• Bred Cows 82
• Bred 1st Calf Heifers 18
• Beginning Virgin Heifers 21
• Bulls 5

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Heifer Retention Strategies

• 1970-1999 price data
• University budgets
• Reflect costs and weights
• Assumes AUs are rented as needed
• Adjusted for inflation
• Simulate the strategies

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Do You Need Flexibility?

• Fixed land base
• Buy stockers to add flexibility
• Buy April, Sell September
• 200 pounds of gain
• Value added less 25

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Heifer Retention Summary

• Steady size had more stable returns
• Value strategies work with the cycle
• Higher average returns
• Higher net worth growth
• Cash flow strategy feeds the cycle
• Low returns
• Smaller herd

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Heifer Retention Summary

• Results robust with fixed land base using
  stockers or buying feed
• Results driven by net returns
• Sell more cattle at higher prices
• Lower cost of replacements

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How to Implement

• Flexibility is helpful
• Able to rent grass by the AU
• Fill in with stocker cattle
• Cash reserves for tough times
• Choose an investment amount
• Long run average value
• Stick to the plan
• Adjust with the cycle if needed