What You Can Pay For A Cow

[ALLFARMER]

Ya Perfecho you nailed it!

[farmers_son]

I am wondering if I had said all you could pay for a cow was $850 if that would have been more acceptable. There seems to be some reluctance to adjust to the new reality. That new reality is cows are profitable.

We have entered a new paradigm and cattle pricing is not going to go back to where it was. Which probably means the old ways of looking at purchasing a cow no longer applies, if it ever did.

I was told that a third generation herd of Hereford cows was dispersed last week with younger cows bringing $1900. And I think it will go higher and apparently the people paying $1900 have faith in the market too.

The reality is what you can pay for a cow depends upon your situation.

High income tax...you can buy cows and pay more for them.

Grass to spare...you have a competitive advantage when it comes to buying cows.

Already have a herd and are just looking to add some cows...you can pay more for a cow than the guy who has nothing and needs to rent pasture and buy hay.

There is an opportunity out there to buy bred females. And the opportunity is greater now then it was a couple of years ago because calf prices are so strong. Plus when spring comes you can insure against calf prices falling (CPIP) which you could not do a couple of years back.

I think the cattle industry is being hampered by extremely conservative and incorrect costing. It is crucial to understand the concepts of sunk costs, relevant costs, mutually exclusive costs, variable and fixed costs. It is crucial to get your costing right.

If you have 200 cows and add one cow do your fuel costs go up? What about fencing costs? Trucking? I doubt those costs would change one little bit, they are not relevant costs in the decision to purchase that cow. Yes if you were to double your herd size some of those costs might increase in which case they are relevant.

The only fly in the ointment is the decision to leave land in grass or break grass and rent the land for grain or grain farm yourself. But that decision is hugely dependent upon the carrying capacity of the grass. The decision is not sensitive to the price of cows because at the present calf prices you can easily justify the cow purchase as long as you are not throwing in a lot of irrelevant costs to the decision mix.

Believe it or not, you use one set of costs to determine your present cost of production but you would use a different set of costs in determining whether or not to buy a few more cows. A lot of your current fixed and even variable costs are not relevant to the decision to buy a few extra cows because few of those costs would change if you added a few more females to the herd.

[farmers_son]

I reread the previous posts. Some comments...

You have no way of knowing if the guy selling a calf in the ring for $550 is making money or not. There are operations out there that would be profitable at even lower calf prices.

Drive is not the biggest factor in an operation. Drive and determination can drive an operation right into the ground if they are determined to do the wrong thing. I have seen that happen. You need to be doing the right things right. And you will not know if you are doing the right things right if you do not know your costs and do not know how to cost the decisions you are making or should be making.

[ASRG]

farmers son: I can see an opportunity. Unfortunately........I have this partner (a son) who sees this as a short term ``blip`` and to hell with that!...and at the end of the day someone has to do the work......and I am tired.
I suspect that is the situation on a lot of farms. Thes young guys aren`t going to take a risk and roll the dice......and quite frankly I can`t blame them......after our government shafted us.

[grassfarmer]

"Thes young guys aren`t going to take a risk and roll the dice"

There is always risk in any business and in agriculture. For those adverse to risk go work in the oil patch. You still have risk though - you might lose your job tomorrow, or get injured.

[15444]

I agree ASRG. This might be the current reality, but I see it as short term as well.

If these high prices last for 5 years, they will not have even lasted the duration of the last reality, BSE.

I see major dispersals/reductions over the next number of years and no real pick-up in demand from newcomers. The younger ones (the few) will get bigger, but can everyone on here see themselves running another block of land and 50 extra cows in 5 years?

The young are relying on loans and don't have the cash reserves built up. If we see interest rates go on a roller coaster ride, you might seen an entire generation of cattle producers wiped out before they even got started.

[ALLFARMER]

Ok I am late 30's so I am to young to remember
high interest rates. Pretty much rates have been
going down the last 15 years yes? If interest
rates were to rise to 10, 11, 12% I think the a
whole lot of people would be in trouble, farmers
and non farmers alike. Anything more than 12%
and the economy would be on the brink of
colapse.

[smcgrath76]

There are a lot of ways to consider
things. From a cash flow perspective I
was always coached that a cow (group of
cows) should pay off principle, interest
and operating costs in the first 3
years. From a equity perspective a
$6000 cow carries a lot more risk that
she will drag down your equity than a
$600 cow.
I am still relatively young and I can
see us adding cows over the next 5-10
years if we can find the appropriate
land resources. We have a lot more cows
than we did when BSE hit (thanks drought
of 2002), but our per cow costs are a
lot lower. Our total costs are also
lower, but I believe we can drive these
down further without hurting our product
value/quality.
Depending on what your product is a cow
is not a cow. A $600 cow may not
actually be as good a buy as an $1800
cow that fits your operation and product
line if you are not just operating in a
commodity mindset. There are a lot of
"non-cash" considerations to make when
looking at buying cows.
We will not likely be buying cows as
part of our growth plan unless very
specific groups of cows become
available. In all likelihood we will be
using technology such as sexed semen to
get females from known genetics, with
known genetics.

[burnt]

Allfarmer, I don't think it would take 12% rates to cause collapse for quite a few operations even at the current market condition.

One prognosticator once made the statement that things always seems to contrive to work together to hurt the most people. He would envision what we call "the perfect storm" - a mix prices dropping to more historical levels, interest rates climbing steadily, inputs NOT returning all the way to past levels, a bit of a weather issue taking the top off of our crops . . .

We can handle any one of those issues individually, but when two or more combine they create a huge problem.

But 9 or 10% interest alone will cripple a lot of operations with the wy capital costs have increased in the past few years..

[ALLFARMER]

Good point Burnt about capital costs.

With all the input financing grain guys do higher
interest rates may affect them more than the
cattle guy.

[farmers_son]

Got this from the FCC newsletter.

Beef producers encouraged to expand
by Ron Friesen
Now is a good time for beef cattle producers to expand their herds because the North American market is ready for it, says a leading U.S. livestock economist.

Tight cattle supplies and increasing foreign demand for beef will create market opportunities for producers in the near future, says Jim Robb, a director with the Colorado-based Livestock Marketing Information Centre.

"The market is sending a signal to producers to expand over the next five years," Robb said at a recent provincial grasslands seminar in Winnipeg.

Tighter supplies are largely the result of a crippling drought in the southern United States which has reduced American cattle numbers significantly, says Robb.

According to the United States Department of Agriculture, the number of cattle and calves as of July 1, 2011 was 1.1 per cent below 2010 levels. Robb predicted a further two per cent decline by Jan. 1, 2012.

The U.S. beef cow herd has been decreasing steadily for the past five years.

Meanwhile, world demand for meat, including beef, continues to grow. Robb says economists predict the global demand for animal protein will double by 2050.

"We’re going to see a very strong increase in demand coming from overseas, both from growing populations and from growing incomes in other countries."

Since the U.S. will not be able to meet growing overseas beef demand because of its shrinking cow herd, Canada is well positioned to take advantage of increased export opportunities, Robb says.

Canada’s beef cattle numbers have bottomed out after dropping for years and are finally starting to recover, statistics show.

But in the U.S., herd rationalization continues. Robb says cow-calf producers in the U.S. Midwest are leaving the industry in record numbers because they find it more lucrative to grow cash crops such as corn and soybeans. Similarly, in the southeastern U.S., cattle producers are turning to peanuts and cotton.

The exodus of producers and the lingering effects of the drought have combined to produce record beef prices, both at the farm and retail levels, Robb says.

That trend is likely to continue in the year ahead, he adds.

Calf, yearling and fed cattle prices are all expected to be higher in 2012. Robb says U.S. cow-calf returns should exceed the record set in 2005.

However, strong cattle prices are tempered by even stronger prices for feed grains, driven partly by U.S. legislated requirements for ethanol production, he says.