Making the Cattle Cycle Work for You

Years of working with IRM cooperators led Harlan Hughes, Livestock Economist, to conclude that steer-calf marketing strategies pay the bills and most ranchers do about the same thing. What appears to make the difference in the earned profit and net worth generated by the beef cow herd is the heifer retention strategy. The economic reality of the beef price cycle is that heifers retained during the high part of price cycle produce calves that are sold during the low part of the price cycle.

Research suggests that retaining a constant number of replacement heifers throughout a complete beef price cycle substantially reduces annual net incomes and net worth from operating a beef-cow herd. In fact, if a beef-cow producer retains more replacement heifers when prices are high and retains fewer heifers for breeding when prices are low, he even amplifies the negative economic impact of the beef price cycles.

What is needed is a heifer retention strategy that will increase production in profitable years and reduce production in unprofitable years. An Iowa State University study by Economist John Lawrence suggests a very simple heifer retention strategy for producing more during high prices and producing less during low prices. One common business school strategy for investing in a cyclical enterprise is dollar-cost averaging - a commonly used strategy in purchasing mutual funds. The strategy is to invest the same dollar amount, say $100, each period. When stock prices fall, the $100 buys more shares; and when the stocks are expensive, the $100 buys fewer shares.

To test this business strategy on a beef-cow herd, Lawrence simulated two herds over a 25 year period. The first herd used the traditional heifer-retention strategy: maintaining a constant number of beef cows. The second herd employed the business school's dollar-cost averaging heifer retention strategy where a constant dollar amount of heifers were retained each year. When calf prices were low, a large number of heifers were retained and when prices were high, fewer heifers were retained. Therefore, the average cost of cows in the herd is lower because more heifers are purchased (retained) at the lower price than at the higher price.

Average annual profits for the business school's dollar-cost averaging retention strategy were 40 percent higher then the profits of the traditional retention strategy. The net worth of the herd at the end of the 25 years was $100,000 higher for the dollar-cost averaging strategy.

How does one establish the dollar amount to invest in heifers? A producer with enough pasture for a maximum herd size of 75 cows needs about 12 replacements each year to maintain constant numbers. He can look back to the low part of the price cycle to see what the value of a heifer was at that time. If that amount, for example, was $325 then multiplying the maximum number of heifers needed by the lowest expected price per head during the price cycle (12 heifers X $325 = $3900) provides an amount to use. Obviously, the $3900 will buy fewer heifers when prices are high ($3900 / $550 = 7 heifers). This results in gradual adjustments in herd size that puts one more financially "in-step" with the cattle/price cycle.

Depending on individual situations, the constant dollar investment heifer retention strategy will likely result in extra grass when herd numbers are down. Producers have several options but they may want to keep calves a little longer to take advantage of the extra grass. The value of added weight gain tends to be more valuable at the bottom of the price cycle.

Market signals driven by the cattle cycle provide beef cow producers an opportunity to invest more profitably in beef cow herds. Following a simple dollar-cost averaging investment strategy produces higher average profits and greater net worth than the more traditional constant herd number strategy.

Kent Barnes, Area Extension Livestock Specialist, NE District