DILEMMA.Either way you crunch the numbers, you still seem to end up in a crunch
BY DANIEL WINTERS
Heifer prices are shooting for the moon.
Whether the real cause is frenzied money printing by central banks or a genuine dearth of beef, the bullish mood in the cattle sector has sent bred heifer prices rocketing upwards from $800 to $1,400 in the past 12 months.
Volatility in the entire commodity sector, such as the limit-down crash that happened after the Japanese earthquake/tsunami, has left many scratching their heads as to where the madness may all lead, said Marc Boulanger, a Manitoba Agriculture business development specialist.
“No one knows where the market is going, or where it might be a year or six months from now,” he said at a recent grazing club meeting in Pipestone, Man.
“How many of you knew that calves were going to be selling for what they are right now today? If you did, you probably bought a whole bunch of them last fall or the year before, and now you’re making out like a bandit.”
But for the crystal ball-challenged crowd, the question now is whether to buy heifers, grow your own, or, as one rancher in the crowd enthusiastically crowed: “sell, sell, sell.”
The answer, said Boulanger, is that there is no easy answer.
Bankers may be eager to lend ranchers money at low interest, but there are many aspects requiring thoughtful rumination, such as your operation’s financial and economic position, pasture capacity, and availability of labour.
Then there’s also the question of herd genetics and herd-health risks from bringing in new animals, and whether the new cattle are all the seller says they are.
After going on hiatus after BSE in 2003, many are predicting a return to the traditional 10-year cattle cycle, which is largely based on the reproductive capacity of retained heifers.
“Once prices go up, producers start keeping more replacements. That’s what drives the cycle. Once those calves hit the market, prices start to drop,” said Boulanger.
Many ranchers make the mistake of getting on the wrong side of the cycle, and “buy high, sell low.”
He himself got caught up in the waves of hype, he added, when he bought bred heifers for $1,350 per head to stock his new half-section farm in the fall of 2002.
Comparing long-term strategies
A study in South Dakota compared three long-term heifer retention strategies, one based on cash flow, the dollar value, and a “retain the same number” every year strategy.
The dollar-value strategy of riding the cattle cycle, which was essentially buying when prices were low, paid 55 per cent more than simply using sales to manage cash flow. Cash flow paid 33 per cent more than simply keeping the same number each year.
The problem with a countercyclical strategy, Boulanger said, is how to pay the bills when prices are low and “you know you should be buying calves.”
Boulanger provided an overview of the full spectrum of costs incurred in raising replacement heifers, such as land, opportunity cost and feed. He said the somewhat shocking result is that “if you add in labour, and actually pay yourself,” the cost of growing your own heifers isn’t much cheaper than buying.
At current Canfax prices, which last week stood at $1.37 per pound for a 625-pound heifer, the opportunity cost of keeping a heifer starts at $856. Feeding her for another 60 days until grass arrives in June adds another $67.50.
Pasturing her for the 135 days in the summer at 85 cents per day adds another $114 to the total.
Cost of getting her bred adds $30 in bull costs.
Then in October, feeding her 40 pounds of hay at 2.5 cents per pound, plus salt and minerals at 10 cents per day, as well as straw, fuel, utilities and death loss, brings the cost of wintering a heifer up to $1.60 per day, or another $288 to the tab.
“Wow, how can that little 600- pound heifer be worth $1,356 a year from now?” said Boulanger.
Of course, having land bought and paid for, and equipment, too, can tilt the total lower, he added, but the true tally isn’t much different from buying a heifer at the current market rate.
“So, if keeping your own heifer costs $1,350 and you can buy one from your neighbour for $1,350, does that still make sense?”
Making her pay
Once bought, the question remains: how can that heifer make you a profit in the next six years?
With a $1,400 price tag, or $1,356 for retained heifers, to break even she and all of her friends or cousins have to produce a 575-pound calf selling every year for $1.33 per pound, and return $780 when you ship her off to market as a cull cow.
With an 85 per cent weaning rate, the price of five-and six-weight calves has to rise to $1.56, or $1.61 for steers and $1.51 for heifers, using a typical 10-cent spread.
“Is that at all possible? Maybe. That’s the burning question,” said Boulanger.
What’s more, between now and then, there’s a lot of uncertainty, including border closures, disease outbreaks, earthquakes, the risk of a new oil crisis arising from trouble in the Middle East, and more.
Using a cost-of-production spreadsheet program available from Alberta Agriculture’s web-site, the upper limit for profitable heifers is $1,117.
“Is the bigger question, rather than whether to buy or raise your own replacements, whether or not to keep them period?” said Boulanger.
“Is it too late to expand? I think a lot of that has to do with stuff that’s not on the spreadsheet. How badly do you want to be in the cattle business?”