Value of Replacements Females

It is always interesting to me to assess the value of replacement females in the market place to see how that translates into profit in the business. In recent times it seems, replacement females are grossly over valued in the market place and I often wonder how guys can pencil what they pay for heifers, young cows, middle aged cows and so on.

So every two weeks or so I go through the sale reports and see what different classes of replacement females are bringing and do a net present value analysis to see how over valued or under valued they are in market place based on my best estimations of future productivity and financial efficiency.

The NPV analysis takes into consideration that the value of a dollar today is less at some point in the future. So as we look at the value of a replacement female today and extrpolate out her financial productivity into the future, we must take into consideration that we make these extrapolations in todays value, which is more than that same value will be at that point in the future. Therefore we must discount todays values to represent what those values will be in the future.

That's a really wordy expanation for an analysis that is really simple. In these analyses, we will discount at 7% and use a base cow cost/lb of weaned calf of $421.39with an annual 1.5% increase. The base cow cost we are using is based on the SDSU IRM database average for South Dakota. You can view the IRM database report in the 2009 SDSU Cow-Calf Business Report which can be viewed on my website www.ranchmanager.org

Let's look at the latest....

April, 2010

Analysis
Buy bred heifers, pay $1150/hd

Assume 8 years of productive life with an average net weaning wt. of 542#

We will assume that the avg. price for calves in this weight range over the next 8 years will run about $1.20/lb.

We'll discount the net returns at 7%.

We will value this heifer as a cull cow in 8 years at $650.

Results
Lifetime Net Return = $113.65/hd

Breakeven Cost = $1250/hd

Discussion
So in other words, if you buy heifers right now for $1250 or more, those heifers will either breakeven or bleed a lot of red over the 8 years of her life.

If these heifers are bought for less than $1250, they will net a positive return over their productive life.

I'd say these heifers are valued about right.

But what about young cows you might ask?

Let's look...

Analysis
Buy 3-4 year old young cows, pay $1210/hd

Assume 6 years of productive life with an average net weaning wt. of 542#

We will assume that the avg. price for calves in this weight range over the next 6 years will run about $1.20/lb.

We'll discount the net returns at 7%.

We will value this heifer as a cull cow in 6 years at $650.

Results
Lifetime Net Return = <$41.16>/hd

Breakeven Cost = $1170/hd

Discussion
This set of 4 year old cows are going lose $41.16/hd over their productive life. They are simply over-valued at the market place. This analysis shows that 4 year old cows need to be bought at less than $1170/hd to turn a profit over their lifetime.

Analysis
Buy 6 year old cows, pay $1190/hd

Assume 4 years of productive life with an average net weaning wt. of 542#

We will assume that the avg. price for calves in this weight range over the next 5 years will run about $1.20/lb.

We'll discount the net returns at 7%.

We will value this heifer as a cull cow in 6 years at $650.

Results
Lifetime Net Return = <$281.68>/hd

Breakeven Cost = $910/hd

Discussion
This set of 6 year old cows are going lose $281.68/hd over their productive life. They are simply over-valued at the market place. This analysis shows that 6 year old cows need to be bought at less than $910/hd to turn a profit over their lifetime.

There are always over-valued items and under-valued items in any market place. With these types of analyses, we hopefully can find the under-valued and turn them into profit.