Appreciation comes before Depreciation in the Cow Business

There has been a lot of discussion about how cow depreciation is one of the biggest costs in the cow calf business, yet cow depreciation and the amount of shrink when selling animals are two of the costs that could be mitigated if they were only tracked.

When I talk about tracking cow depreciation it involves knowing your inventory value so you will recognize when your inventory value begins to drop and depreciation sets in.

First let me give you some background to this thought process.
It dawned on me some time ago that to be able to have depreciation, you also have to have appreciation. If you look at the price of a cull cow and a weaned heifer calf they are the same. At the time I’m writing this, an 1,100-pound cow sells for about $1,210 and a 500-pound weaned calf sells for about $1,205. It is a change in the value of this heifer calf as she grows and matures where the appreciation comes in.

At the time I’m writing this, it is also true the longer you keep a weaned heifer calf the more valuable she is. Keep her to be a yearling, or bred heifer, and she just keeps moving up in value. If she starts giving you calves you can start collecting the calf dividend, too.

Then when she’s 5 or 6 years old she has reached her maximum appreciated value and given you all the calf dividends without a cost of depreciation. After that point, the calves she raises will have to cover the depreciation cost that’s incurred in her inventory value. That’s because she begins to truly depreciate, or decline in value.

To take advantage of capturing appreciation we need to have some shifts in our paradigms — which are the mental maps we have fixed in our minds and which we use to make decisions.

Paradigm one- it costs too much to develop bred heifers.

We as an industry cannot stand an open cow. This is where the heifer development centers came to be. They had great success in getting heifers bred but at a huge cost. And the breed-up on the first-calf heifer was terrible. One of the best profit centers that I was involved in was buying these open first-calf heifers and re-breeding them and either selling them or using them in my own cow herd.

By developing these heifers in sync with the nature you greatly cut your costs and also develop a heifer that matures earlier. By doing this you can rough heifers through the winter and take advantage of compensatory gain in the summer and have a very adequate-sized heifer to breed.

Then you turn the bulls in for a short time and you will have selected for your early maturing heifers that will breed.The ones that won’t breed can be sold as heavy feeder heifers.

This is where the rub within the industry comes: You could have from 30% to 60% open heifers. And let me tell you, as the open pen is filling up and there’s a handful in the bred pen everyone around gets nervous. Everyone talks about selection but very few people do it.

I’ll get on my soap box for a moment –What we  have done in the cow business is made it so that the beef cow has quit working for us and now we work for her with all the inputs that we make available to her, or in other words enable her.

The fact is, my method of buying, raising and breeding heifers is where selection can be done at a reasonable cost. Those open heifers can be sold as feeder heifers or you can put a bull back with them and breed them. Then they have a chance to grow more and they’re just what everybody wants – a big, black, bred heifer. Oklahoma State University research shows that 50% of these heifers will be open again in their lifetime. This is where I have a problem with breeding heifers to calve as 3-year-olds. You have enabled later-maturing heifers to breed and now the ones don’t breed are cows and sell at a discount compared to feeder heifers.

Paradigm two-Having too many open heifers when breeding them back for their second calf.

Actually, however, this is more a problem of poor marketing and the lack of understanding of the markets than it is one of open heifers.

The open first-calf heifer that weighs 900 pounds is worth about $1,395 at the time I write this, and you’ve weaned a $1,300 calf off her. If she was on inventory for $2,700, you now have a pair that’s worth $2,695. So you take away the $500 cost to carry her on grass from the $2,695 and you have a value of $2,195. That shows we’ve lost $505 on that open heifer.

Another way to look at it is we take that open heifer that is worth $1,395 put $300 additional cost to carry in her now we have a $2,700 bred 3-year-old cow. Now you can add value of the bred cow in the value of her calf and take away the combined carry cost for that longer period. So that would be $2,700+ $1,300- $800 = $3,200. I realize they will not all re-breed, but the fact that we’ve taken a $505 negative to a $3,200 value is positive and it really changes the nature of this business.

The main thing I’m trying to point out here that we put a lot of selection pressure and did it profitably.

Paradigm three- Heavy weaning weights equal profit.

Wrong! There are two paradigms in the cow-calf business that eat up all hope of profit. They are heavy weaning weights and cow longevity.
Heavy weaning weights are eaten up by costs and you don’t get paid for the extra pounds.

Cow longevity is eaten up by depreciation.

I was watching Superior Livestock Auction’s Week in the Rockies sale recently. A ranch sold four lots of steer calves. One lot weighed 365 pounds and brought $4.05/pound = $1,478 each. Lot two weighed 440 pounds and brought $3.67/pound = $1614. Lot 3 weighed 485 pounds and brought $3.15/pound = $1,527 each. Lot four weighed 530 pounds and brought $2.92/pound = $1,547. As you can see in this example the market wasn’t willing to pay for any gain over 440 pounds. The market was telling you that you can make the 365 pound calves bigger and is willing to give you $1.81 for the value of gain.
It’s all about producing the most economic calf that your country can produce. This does not mean you should be the low-cost producer, but the most economical producer.

There is a time when a little bit of inputs will make great gains in the bottom line. An example of this is making sure that the rumen of your cow has all the degradable proteins they need every day of the year.

Then at weaning you can let the market tell you that you need to sell or keep the calves and put more weight on.

This is all about marketing. Understand where the appreciation comes from and where the depreciation goes.

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