Financing replacements: Same decision, different angle

Posted: Tuesday, December 30, 2014 9:06 am

As expected, the current bred heifer market has reached remarkable price levels. While most of the discussion is focused on the initial price tag, looking at it from what each heifer/cow is expected to provide financially can provide some perspective.

Each operation has its  own set of parameters to determine how much to pay. Items like annual cow cost, price expectations, percent weaned ratio and weaning weight estimates all have value. But at the end of the day, financially speaking, what are we asking that cow to do?

Some sample calculations can be done to look at our situation. The current market would dictate an income from calf sales of $1,293. This number is based on the current calf market with adjustments for calf sex and covering some of the costs of open cows.

Next, we take out our annual cash cost for running that female through the year. An estimate of $800 for a high cost producer and $600 for a low cost producer are used. For the high cost producer that leaves ($1,293-$800) $493 and for the low cost producer ($1293-$600) $693 to cover land, labor, management etc.

The financing avenue has not yet been incorporated. We will set up a pretty standard cow financing note for 5 years, at 6 percent interest and financing 80 percent of the purchase. Buying a $3,000 bred heifer would leave that female needing to cover a $570 annual payment. Continuing the calculations from above, this leaves us at -$77 and $123 for the high cost and low cost producer respectively.

So does that make it a bad investment? Not necessarily.

Many additional factors need to be evaluated in this process. The purchase of breeding livestock is a long term decision that will be subject to ever changing sales and input prices.

Regardless of the decision, we need to be informed. Even with record margins for cow calf operators, replacements that are being financed under these prices may not make a positive impact on our annual cash flow until the financing has been paid off. This will leave us relying on other avenues to meet our cash flow demands in the near term.

Visit http://www.beefextension .com and check out the Cow Bid Price Estimate Calculator. Enter the numbers specific to your operation to help with your replacement purchase decisions.

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