This is a guest post by Huiting Huang, Research Analyst at Canfax Research Services.
Severe drought, high feed costs and limited feed availability in 2021 forced many producers to liquidate a portion of their cow herd. One of the consequences of a smaller herd is the higher cost per cow as overheads are spread over fewer animals. Therefore, when feed is available and pasture quality and quality allow, rebuilding the herd is desired in order to efficiently utilize available resources (such as land, labour, facilities and machinery) and to minimize equity loss.
With various drought conditions across the country, producers are likely to have different plans and timelines for herd rebuilding. Some might be planning to rebuild in 2022 if the drought abates, but those who are in a prolonged drought may need more time for pastures to recover.
Recovering from drought is a challenging period and requires strategic decision-making with considerations of the trade-offs of different rebuilding options from the economic, animal performance and land productivity perspectives.
To better understand the different rebuilding options, Canfax Research Services conducted an analysis focusing on the potential economic trade-offs of rebuilding with homegrown heifers or purchased breeding stock.
What They Did:
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The study used data from 17 drought-impacted benchmark farms in the Canadian Cow-Calf Cost of Production Network and estimated what the rebuild timeline, cost, profitability and cash flow may look like from 2021 to 2029 (10-year period) for these farms if they:
- Maintained herd size in 2021
- Reduced cow herd size in 2021 and retain all heifer calves in the following years until the herd is back to the original size
- Purchased bred heifers to rebuild, and the associated bank loans must be repaid within five years
The study used the agri-benchmark modeling approach and assumes that cattle and feed prices in 2021-2029 follow a similar trend of the late 1980s to early 1990s after the 1985 drought, where bred heifer and calf prices peaked two years after the drought.
What They Learned:
The key take-aways are summarized in the table below, followed by further explanations.
|Homegrown Heifers||Purchasing Bred Heifers|
|Time for Rebuilding||slower||faster|
|Cost per Cow (25%,50% and 75% culling rate) 10-yr Avg.||lower||higher|
|Whole Farm Profit (25% and 50% culling rates) 10-yr Avg.||higher||lower|
|Whole Farm Profit (75% culling rates) 10-yr Avg.||lower||higher|
|Cow-Calf Enterprise Profit (25%,50% and 75% culling rate) 10-yr Avg.||higher||lower|
|Cash Flow and Capital Cost||
less severe deficit
lower interest payment
more severe deficit
higher interest payment
Culling Rate: Maintaining herd size and paying for feed in 2021 is likely to be most profitable over the 10-year period, if feed could be found.
Maintaining herd size in the drought year has lower cost per cow in the long term compared to other strategies with a 25-75% culling rate as economies of scale are maintained. However, this would be expected to change for a multi-year drought.
Rebuilding Timeline: Purchasing bred heifers to rebuild is faster than using homegrown heifers when culling rate was high in the drought year.
With a 25% culling rate in 2021, all 17 benchmark farms are projected to reach the original herd size in 2023 with two years of herd building by using both homegrown heifers and purchased replacements. With a 50% culling rate, it takes two years to rebuild with purchased replacements, compared to three to four years with homegrown heifers. With a 75% culling rate, it takes two years to rebuild using purchasing replacement, compared to three to six years with homegrown heifers.
When a normal replacement rate was used, rebuilding took ten years or more resulting in pasture resources not being optimized. Therefore, it was assumed all heifer calves are retained for rebuilding. In reality, no producer will have 100% replacement quality heifers. This means using retained heifers to rebuild would take a longer time than estimated.
Cost and Profitability: Purchasing bred heifers resulted in higher cost per cow and lower profitability compared to homegrown heifers over the 10-year period, except when the culling rate was very high.
When the culling rate was 75% in 2021, purchasing bred heifers was more profitable for 15 out of 17 farms. At this severe culling rate, choosing not to purchase breeding females severely limits the capacity to generate calves for sale as heifers are kept for replacements.
Capital Cost and Cash Flow: Purchasing bred heifers requires taking on debt in most cases. Cash flow deficits are more severe, and interest payments are higher than rebuilding with own heifers.
Cash flow can be challenged by large swings in costs, such as purchasing a bred heifers at a high price. Even if it makes economic sense; the short term the cash flow can create a challenge when there are big swings from “normal” year to the purchase year when restocking is feasible.
What Does This Mean to Me?
The analysis is not a comprehensive analysis of all herd rebuilding options, but it does shed light to some of the key strategies from an economic perspective when planning for recovery.
Rebuilding by keeping back replacements is slower than purchasing bred heifers, but requires taking on less financial risk. With that said, developing replacement heifers comes at a significant cost. First, the reduced revenue from selling at weaning. And second, the costs and resources required for growing and breeding the replacement heifers. Penciling out the farm’s financial status and available recourses to be allocated to herd recovery can help finding the proper replacement rates in the rebuilding phase.
Purchasing bred heifers may be a faster but riskier rebuilding option given the potential cash flow deficits and cattle price volatility. Having a plan and a conversation with bankers and financial advisors can be helpful when the time comes to rebuild.
Drought recovery could be a long journey and many decisions will have to be made. Economics is only a piece of the puzzle. Pasture management, genetics, cattle performance, biosecurity as well as producers’ mental health and risk tolerance are all important in determining when and how to rebuild the cow herd.
Additional drought management and drought recovery resources:
- Decision Making During Drought – BCRC Blog Post, Aug. 18, 2021
- Experts Respond to Drought Questions – BCRC Webinar, July 29, 2021
- Resources for Drought Management – BCRC Blog Post, April 29, 2021
- Always Look a Gift Cow in the Mouth – Canadian Cattlemen magazine, Nov. 2021
- Producers Recover from Drought – BCRC Blog Post, Jan. 6, 2022
- Replacement Heifers – Money, Management and Momentum – BCRC Blog Post, Sept. 18, 2019
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