Decision to buy, raise heifer calves provides economic, genetic consequencesWritten by Heather Smith Thomas
There are many things to consider when making a decision on whether raising or buying replacement heifers is the best situation for the ranch. These include feed costs, labor availability and costs, environmental factors, genetics, prices, tax implications, etc. It’s not always easy to figure out what might be best – and it may change from one year to another.
Lee Schulz, assistant professor in economics from Iowa State University, says BEEF Magazine did a recent survey that showed about 83 percent of producers hold back heifers to expand and about 37 percent buy heifers additionally.
“There are some combinations of that, since many ranchers retain heifers, as well as buy some. USDA’s survey also showed that about 83 percent hold back heifers,” he comments. “Many people raise their own but still take advantage of opportunities to buy, due to accelerated expansion in recent years and the current cattle cycle.”
“There have been very strong profits lately, so producers wanted to take advantage of this and expand their herds,” he says.
Making the decision
“It’s not always a very clear cut decision whether to raise or buy replacements. We really have to look closely to see if it really costs us less to raise them than buy them,” Schulz says. “There are significant costs and some risks in developing heifers.”
Of the risks, Schulz says the time between retaining a heifer and getting a payout in the form of a calf is lengthy.
“On the flip side, there is also a bit of risk on the open market in terms of availability,” he continues.
“We went through that in 2013 through 2015, seeing historic high prices for replacement heifers,” he says. “There is some risk in selling heifer calves and then going out in the open market and purchasing bred heifers.”
There are risks and advantages both ways, and producers doesn’t always know which would be best.
“We have some tools to help ranchers in these decisions, such as looking at the net present value of those heifers. This investment decision – either raising their own heifers or purchasing them on the open market – is a longer term investment, anticipating getting at least five, six or more calves out of that replacement animal,” Schulz comments.
Producers must consider not only the conditions in the market at the time but also the longer term regarding what the prices and costs are going to be, he says.
“It is very important to budget out that decision, not only today but also going forward into the future. If a rancher is purchasing heifers, they have to look at that multi-year gain potential in genetics and realize it’s not just a one-year investment. The genetic potential will exist over the life of that productive female,” says Schulz.
Sometimes a person can go out and buy genetics that are better in certain aspects than what they already have. , sometimes the genetics they’ve worked many years to create are better suited for the purposes of the ranch, he says.
“When looking at this decision, in terms of selling heifer calves and purchasing replacements, producers are assuming that they have on-farm feed production and facilities that would not be used if they weren’t being used for stocker production,” Schulz adds.
First, he suggests looking at feed resources. Feed that would be used to develop heifers should be considered at market value.
“But maybe there’s more potential for holding back more females and decreasing culling rate, and perhaps that return would be higher by putting the feed through the cattle instead of selling it,” Schulz says. “There are many factors at play, and each producer must make their own decision.”
He continues, “It’s difficult to give any rule of thumb because there is a lot of variability in expectations of price and costs, not only for the individual operation but also looking forward.”
It’s always a gamble as ranchers try to pencil it out and predict what the costs might be. The more homework they can do, the better off they are and more able to make the right kind of gamble.
“It’s very important to do a lot of sensitivity analysis around the assumptions for price, costs and productivity to look at what is really the best case scenario and what is the worst case scenario,” Schulz comments. “Ranchers need to really look at where the risks are, in each situation.”
Producers are advised to buy bred heifers if it truly costs less to buy them rather than raise them and if they value alternative uses of the money and time spent raising heifers, the reduced need for “heifer” bulls, and if they want to grow their herd faster, with an increased number of productive females sooner.
“It’s also an evolving situation. What might be better one year might not be better in another. Producers need to look at these things each time they try to make this decision,” says Schulz.
Some of the tools provided by economic research and analysis at the various universities can be helpful.
He comments, “We developed several tools in the height of this expansionary phase, and I think they have been used a lot by producers. These can help producers educate themselves on various aspects of this important decision.”