When it comes to deciding on expanding a cattle herd, or taking over an existing one, there are a few critical checkpoints to be considered.
“In recent months there has been a lot of talk about the potential for beef herd expansion due to the historically high beef and cattle prices the industry is experiencing,” said Bruce Viney, a business development and risk specialist with Alberta Agriculture and Rural Development in Olds.
“Experts from all facets of the industry have been writing and talking about the opportunities and limiting factors to start the next expansion phase of the cattle cycle.”
Once a family or business has decided that expanding the cow herd fits within its long-term business strategy, discussions should switch over to focus on expected long-term profitability, and eventually to the risk factors associated with the change,” said Viney.
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“The new or expanded cow-calf enterprise must have a reasonable chance of providing the business with an acceptable level of profit while not unduly placing the business’s equity at risk should unforeseen risk events occur,” he said. “But before the farm or enterprise analysis gets bogged down in risk and discussions around all of the bad things that have happened in the last dozen or so years, the analysis should first look at expected profitability.”
Estimating future profitability requires an assessment of potential costs and returns. These are made up of selling prices, feed prices and other production costs.
“It’s suggested that before you even consider expansion, managers should have a good handle on current production costs and how changes in commodity prices and other inputs can affect those costs. Production costs should be estimated out into the future for at least five years so that net cash flow and enterprise profit forecasts are reasonable.”
In preparing unit production cost forecasts, it’s important to assess changes in efficiency resulting from the expansion.
“In some cases, expansion can reduce the per-unit overhead costs due to more efficient use of capital assets and other resources,” said Viney. “However, it’s also important to realize that some herd expansions can actually cause an increase in the unit cost of production or break-even selling prices. If large additional capital investments or increases in labour expenses are required, those changes must be carefully evaluated in unit cost of production terms.”
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With a reasonable forecast of physical production and corresponding unit costs in hand, the next big challenge is to try and anticipate future selling prices.
“The recent climb to historically high prices is seen by some people as too high and an excellent time to sell out,” said Viney. “Others view this price move as merely the first advance to a new higher trading range in a tight supply and strong global demand environment. It is generally agreed that while no one can accurately predict future market prices, having the best available information is extremely important and will give confidence to your own price estimates.”
A well-researched price forecast will provide a road map so that timely risk management strategies can be implemented when prices deviate up or down from the forecast.
“In the last decade or so, producers who had predefined plans were able to quickly implement risk reduction strategies that minimized negative impacts on their financial position. Well-researched price forecasts and risk management plans also helped place many producers in a better position to capture current opportunities.”
To help in creating annual cost and return budgets, producers can access the ‘Rancher’s Return’ downloadable spreadsheet template from Alberta Agriculture’s website.
For further information and tools to assist with herd expansion and a variety of other management decisions, go to the Farm Manager home page on the Alberta Agriculture website or call the Ag Info Centre at 301-FARM (3276).