Livestock > Cost & Return > Profitability

Updated tools for calculating net present value of beef replacement females

pdf fileAgDM Newsletter
March 2016

Before decisions regarding purchasing or retaining replacement females are made, producers should consider the economic value of replacements entering the herd. Just like any other capital investment, replacement females are only worth the sum of all the cash they can earn over their lifetime, which includes their salvage value as cull cows, less all the expenses they create. The net cash flows the replacement females can generate over their life time depend on the future prices of calves, cost structure, and the eventual salvage value of the cull cows. Not only do the size of the cash flows impact the value of the replacement females, the timing of when the replacements generate income and expenses is important in determining the replacements’ value because money has earning power of its own. Information on the components for analyzing economic feasibility can be found in AgDM Information File B1-74, Net Present Value of Beef Replacement Females.

Decision aides

Two Ag Decision Maker Decision tools have been developed to aid in calculating payback period, internal rate of return, net present value, and maximum bid price of potential purchased or retained replacement females. The first spreadsheet, B1-74, Net Present Value of Beef Replacement Females (single replacement), specifies input and output variables outlined above on a per-head basis over the period of time between the decision to purchase or retain a replacement female and when the replacement female is projected to be culled from the herd. The second spreadsheet, B1-74, Net Present Value of Beef Replacement Females (group of replacements), specifies input and output variables on a group of replacements over the period of time between the decision to purchase or retain replacement females and when the last replacement female(s) from the group is projected to be culled from the herd.

These two decision tools differ in the number of inputs required and complexity of the models. The single replacement decision tool works off of a greater number of assumptions, primarily impacted by the user needing to project the number of calving opportunities and marketable calves for a single replacement. This model is useful for analyzing the single replacement case.

Many times replacement females are purchased or retained as a group. As such, accounting for the biological production realities associated with the particular group of replacements is important to the investment decision. The group of replacements decision tool allows users to input more management variables, such as cow death loss and cow culling rate, allowing the model to account for fall-out of animals from a contemporary group over time.

The key aspect of this model is that the productive life of replacement females, resulting from the user inputted magnitude and timing of death loss and culling, influences the investment decision.

Summary

Using capital budgeting analysis to determine the value offered by purchased or retained replacement females allows producers to properly reflect upon the economic opportunity presented by alternative investments in replacement females. Due to differences in enterprise goals and, perhaps most importantly their own costs, management practices, and expectations about future market prices, each producer should make this decision independent of other local operations.

 

Lee Schulz, extension livestock specialist, 515-294-3356, lschulz@iastate.edu
Patrick Gunn, extension beef cow-calf specialist, 515-294-3020, pgunn@iastate.edu