UW online tool assists producers in determining the present-day value of a cowWritten by Natasha Wheeler
Casper – “Determining the value of a cow can help producers make better decisions because there might be situations where we are over or under value what an animal is worth,” noted Research Scientist Brian Lee, with the Agricultural Economics Department at the University of Wyoming (UW).
Lee spoke at the Progressive Rancher Forum during the Wyoming Stock Growers Association Winter Roundup on Nov. 30 in Casper, sharing an online tool developed at UW to help producers determine the value of a cow.
The tool uses a number of different factors to calculate the net present value of an animal, including the number of calves produced, the sale price of those calves, the cull price of the cow at the end of her useful life and the costs associated with feeding and maintaining the cow and her calves before they are sold.
Net present value
“The value of the animal depends on all future returns of that animal,” Lee explained.
To use the tool, the producer enters data, such as estimated costs and market prices, into a table to determine the net present value of a cow.
“Future dollars have different value than current dollars,” he said. “Net present value accounts for the time value of money, as well as the size of the stream of cash flow over the life of the investment, and in this case, that’s a cow.”
Net present value can also be used to determine the value of other investments, such as equipment or buildings. A positive net present value indicates that the investment is worthwhile.
Another factor the tool considers is the discount rate of the investment.
“The discount rate can be described as many things. It is the opportunity cost of capitol or the minimum rate of return required to justify the investment,” Lee commented.
The discount rate can be determined by comparing returns from a similar investment of equal risk. For example, if a producer is buying replacement heifers, the discount rate could be set equal to an alternative investment, such as a bank account that builds interest.
“If there is an investment that we can put money into and make an equal gain, that is what our discount rate should be,” he stated.
The higher the discount rate, the lower the net present value. The discount rate can also be described as a measure of risk for the investment.
Producers can adjust the discount rate when they use the online tool, along with the other predicted costs and market prices. Results are then calculated by year, providing a table of values based on productive years from the cow. A cow that produces three calves has a different net present value than a cow that produces seven calves.
“It goes year by year, so if we hold out a cow for more years, she is worth a little bit more in dollars because of the additional calves raised. The idea is, we are able to see in current-day dollars what the animal is worth,” Lee explained.
By using the tool, Lee hopes producers will be able to make better-informed decisions about buying replacement heifers or other management.
The tool can be found at uwyoextension.org/ranchtools/cow-valuation-tool. Other economic tools can also be found on the UW ranch tools website.