Replacement females are only worth the sum of the total cash they generate during their lifetime, including their salvage value as cull cows, less all the expenses they create. Of course, the size and the timing of the sale checks they generate are important. Because the payback period on a beef replacement female can be typically 6 to 10 years, we also need to account for the value of a dollar overtime. A net present value (NPV) analysis considers the time value of money, i.e., a dollar tomorrow is worth less than a dollar today, and discounts future returns such that outcomes are in “today’s dollars”. If the NPV is positive, then the investment has earned a rate of return greater than the discount rate and should be pursued. The discount rate is best thought of as an opportunity cost. It is the minimum rate of return the investor is willing to take to accept the risk associated with the investment. If the net present value is negative the investment should not be pursued.
Figure 1 below demonstrates the discounted cash flows of two different scenarios when dealing with open cows in today’s markets. Scenarios are based on a compilation of projected cattle prices provided by USDA and the authors, total heifer development costs of $1,600, annual cow costs of $900, and a discounted rate of 6%. Weaning weights are assumed constant at 540 lbs. for steers and 500 lbs. for heifer calves.
Scenario 1: Holding an open cow
With calf prices predicted to notably increase, some cattlemen may be wondering if they can afford to hold an open cow, breed her back on schedule, and come out money ahead. In reality, holding that cow open for a year forces her to generate several extra calves in the future to account for her not calving one today. With an expected NVP of -$327 in this scenario, missing a calf now is more impactful than missing one in the future because of the time value of money. Plus, calf prices are expected to be stronger in 2023 than prices several years down the road when the market may be back to cyclically lower prices. In other words, even if the female is successful in maintaining a yearly calving interval moving forward, after 6 additional years in the herd and culled at age 10, the investment to keep her on the farm lost more than $300. This compares to an expected NPV of $684 if she produced a marketable calf in 2023. With today’s markets, cattlemen will likely be money ahead to part ways and cull the open cow today and replacing her with a bred female.
Scenario 2: Selling an open cow and replacing with a bred female
If you were to cull the open cow today, you’d be losing $500 on your original investment of retaining and developing the replacement heifer. With strong cull cow prices and relatively low premiums for bred females currently, there is an opportunity for cattlemen to cash in on open cows and replace with bred females.
In this example, if you were to purchase a bred female today for $1,900, after 7 calves and with her eventual cull income included, she’d generate a NPV of $547 making her a wise investment. This $547 NPV plus the -$500 NPV equals $47 which compares favorably to the -$327 NPV of holding an open cow this year.
Interested in calculating your own costs and returns and exploring the Net Present Value of Replacement Females? Check out this free decision tool spreadsheet www.extension.iastate.edu/agdm/livestock/html/b1-74.html
