Oklahoma State University Extension | Updated: March 7, 2012In the last issue of this newsletter, we pointed you to the Cow Bid Price Estimate Calculator as a tool that could help evaluate the profitability of investing in expensive cows or cow/calf pairs (download free from beefextension.com under Cow/Calf, Calculators). The Net Present Value calculations showed that a $2,000 or $2,250 purchase price could be profitable over the long run if a producer’s cow operating cost per year are low relative to benchmark data, say less than $550 per cow per year. Cost of production benchmarks in Standardized Performance Analysis (SPA) data for Texas and the southwest can be viewed here, and from Kansas Farm Management Association data at http://www.agmanager.info/kfma/ under Enterprise Analysis (select the beef enterprise that best matches your situation).
Over the long run is italicized for a reason. What was not stressed in the earlier article is that the net cash flow is negative for the first five years of the investment. And obviously, a business has to survive the short run to get to the long run. Hence, in this article, we want to spend a bit more time on the cash flow aspect of the repurchase decision.
Even if the production practices and related operating costs are similar in two businesses, the financial situation may be very different depending on how assets are controlled, that is, whether they are owned or leased. The amount of owner equity (the percent of assets to which no others have a claim) impacts the business financial position and may indirectly constrain rebuilding decisions. For producers who have owned land with debt servicing requirements, the need for cash is significantly greater than for businesss with either land owned free and clear or rented land. For instance, one producer might have $110 in rent for 10 acres of native pasture per cow while another has $110 per acre for principal and interest on a land note ($1,100 per cow). Use of debt to finance asset purchases and/or operating expenses means a producer may have fixed obligations to which new debt must be added to rebuild a liquidated herd. And, given record-high prices being established for cows and heifers, annual payments on a breeding female loan may be several hundred dollars per cow. Table 1 shows the loan payments on a $2,000 cow, given a range of down payments and loan repayment lengths at 6 percent interest.
Hopefully, producers who sold cows during the drought saved the proceeds from their sales for restocking as the larger the down payment, the smaller is the demand on future cash flow. Clearly, borrowing money to repurchase cows will require careful cash flow management as well as control of other costs.
This leads to a related question. How much loan can a cow support in the future? The answer depends on cost of production as well as how much income is generated by the cow on average. Table 2 shows the per cow net cash flow for a herd from which average calf weight is 500 pounds, average calf price is $175 per hundredweight and the calf crop is 86.5 percent, a recent Texas/southwest SPA average. No cull cow revenue is included in this estimate. Low cost producers may find it feasible to repay cow loans with the proceeds from calf sales with low interest rates and loan repayment periods of more than four years. Others may find that a loan will cash flow only if compare to (Table 1) for loan payments they can provide a down payment of more than 40% or get more than 5 years to repay the loan.
As a farm management specialist, I’m fond of saying that certainly production and marketing matter, but controlling costs is critical. In the coming months and years, it will be imperative.
Future income and cash flow for the short and intermediate term depends on the producer’s skills in managing costs, their initial debt/equity position and the choices made in responding to the drought, namely how many are long cows were kept and fed and what was done with proceeds from the cows sold. Of course, off-farm income and family living needs from the farm operation also impact the farm/ranch family’s financial situation and ability to tolerate risk. Thus, producers who have liquidated part or the entire cow herd will need to manage cash very carefully in coming months and years.
Source: Damona Doye, Farm Management Specialist