Tuesday, June 1, 2010

The Value of Replacement Heifers, Part IV

A few more words on this topic for two reasons, 1) I like this topic and 2) I have received a lot of questions and interest about it.

Just to be clear, in the previous discussions of replacement heifer value, I never meant to imply raising heifers was more appropriate than buying them from the market place. Nor was I advocating buying over raising them yourself, I was simply making a point (or trying to) that we can calculate the value of a replacement female based on the specs of an individual operation and determine her lifetime output in terms of dollars of profit.

Therefore, since we can make this calculation, we can also determine what an individual operation can afford to invest in a replacement female based on her lifetime output. Since we are able to establish the investment threshold in a set of replacement females we can then determine if those replacements should be raised out of the herd or purchased from the open market.

In this analysis however, we are going to work through it backwards based on herd size to determine the investment threshold to earn a fixed net income.

Let’s look at an example:

Rather than look at the analysis on a per head basis, let’s look at it on a whole herd basis, which may make some of the differences more apparent.

We will look at the total herd net return of females in three different herd sizes: 250 hd, 500 hd, and 1000 hd and at three different average levels of investment: $650/hd, $850/hd, and $1050/hd.

We will discount the net returns over an average economic life of eight years.

There are a couple of points to consider:

1)Obviously there is an economy of scale which works against the smaller producers. Even though a $200 average increase in average investment in a replacement female affects both the 250 head herd and the 1000 head herd equally on a percentage basis (25% drop in net return for both), the 250 head herd is obviously more sensitive to fluctuations in average investments and costs because there are fewer head to spread the dollars over.

2)Although it is equally important for any size herd to minimize average investment in replacement females, it is a critical control point for smaller herds.

3)If there were a list of three things, in order of importance that smaller herds need to focus most of their production and financial management on, the top of the list would be keeping average investment in replacements low.

4)There are few things an outfit can do that will have a bigger impact on their bottom line than this.

5)Knowing your raised replacements cost of development is critical to managing average investment.

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