BUYING REPLACEMENT HEIFERS---THE TIME IS RIGHT
P.J. Rathwell, Extension Ag Economist

The cattle cycle has turned around, calf prices are on the rise and the cattle business is profitable. Is it time to rebuild the herd? Is it time to buy heifers?

Now may be an excellent time to buy heifers. Why? As profits go up in the cattle business, so do the prices of good quality replacement heifers. The level of increase in the price of quality replacement heifers will closely follow the rise in calf prices (figure 1). And, as the cattle industry becomes more profitable over the next few years the price of replacement heifers will continue to be bid up. Consequentially, the best time to buy replacement heifers is now--don't wait for prices to get higher.

The value of the replacement heifer to "your cattle operation" is directly related to the value of the calves that the heifer will produce. Don't wait for calf prices to get higher to consider buying replacement heifers. If you don't have many dollars in the heifer and she is producing during the up swing of the cattle cycle she will generate a higher level of return than if you bought her when cattle prices were high and ran the through the bottom of the cycle.

What can you afford to pay for a quality heifer? The value of the heifer to your herd's profit generating ability should be greater than what she will cost. The greater the difference between the dollars she will produce for you and what it takes to buy the heifer, the greater value this heifer will have in your herd.

The actual dollar value of the heifer is based on the sum of the values of all her future calves plus her cull market value when you sell her. Economists would say, "Her value would be the discounted net returns of her calves expressed in today's dollars. A key point to get from this statement is that we are talking about her value to your herd and not today's sale barn price for heifers. The current sale barn price is frequently based just on today's market for calves and may not have anything to do with the heifer's future value to you herd.

There are several easy steps in determining the heifer's value. First, you need to determine the heifers expected life in the herd. Consider the average age of your current herd as a guide. Second, you need to develop a budget for every year she will be in the herd. Third, estimate a salvage value for the heifer at the end of her productive life. A historical average of prior cull prices will help you estimate her salvage price. Fourth, you need to estimate an appropriate interest rate to calculate the time value of money. A good estimate is what the local bank is paying on 5 to 10 year CDs. If you are a big timer you might want to consider the return from stock investments. Finally, you need to do a simple math calculation.

I have calculated some estimates of a replacement heifer's worth to a Carolina cattle producer based upon Clemson University beef cattle budgets and state average calf prices as reported by USDA's Agricultural Market New Service. I need to make some additional assumptions to help clarify the heifer's environment in our typical Carolina herd.

Assume that our heifer will calve near age two and she will stay in the herd for six calving seasons. Her average calf's weaning weight is 500 pounds. Out-of-pocket cost for carrying this animal through the first year is $208. These costs are assumed to increase by 2 percent each year over the life of the heifer in the herd. We don't have a crystal ball to predict calf prices over this planning time frame but feel that the average price over the last few years would be a good estimate for predicting future calf prices. And finally, salvage value of the cow is estimated to be $440. Our discount rate for the time value of money calculation is 9 percent, determined by a local bank's long-term CDs.

Given these assumptions, this heifer is worth $936 (Table 1). This is based on the predictions that the heifer would stay in the herd for six calving seasons and average 500-pound calves. We can pay up to $936 and break-even. In other words, the income from her calves over her life in the herd would be equal to $936. If we paid less than $936 our returns would be large. If we exceeded the $936 estimate our returns would be negative.

Table 1. Estimated Replacement Heifer Values
Calving Season	Weight of Calf
	400 lb.	500 lb.	600 lb.
Purchase Year*	$232.00	$232.00	$232.00
1st Year	337.06	377.73	423.76
2nd Year	432.65	509.03	596.85
3rd Year	519.92	628.99	755.05
4th Year	602.82	742.03	903.36
5th Year	676.56	843.37	1036.98
6th Year	744.49	936.59	1159.80
7th Year	807.24	1022.57	1272.94
8th Year	865.35	1102.04	1377.40
Average value for each weight group is ($ Price x wt. - cost of production)

* Assumes animal is sold at end of year, i.e., ( $440 - $208 = $232 )

A heifer's value varies based upon several important factors. Two factors are especially worth mentioning. First, the expected calf's weaning weight. In most cases, the heifer that produces an additional 100 pounds of calf per year will add appreciably to the cattle producer's net return. If the replacement heifer produces calves that weigh 400 pounds instead of 500 pounds, her worth would be $744, in year 6 or a difference of $192. A 600-pound calf average would be worth $1,160. Again, this is an "upper limit."

Second, if you look at Table 1 carefully, you will see that the value of the heifer varies dramatically based on the assumptions you make about her productive life. The longer the heifer remains a productive animal in the herd the greater the returns to the cattle producer. If our example heifer would stay in the herd one additional year (seven vs. six calving seasons), her value increases to $1,102.

It is readily apparent that the cattle producer can pay more for a better heifer. An animal that will improve weaning weights or stay in the herd longer as a productive unit is worth more to the cattle producer. When you evaluate your cattle operation this year and think about expanding, take the time to analyze what a heifer will do for your herd. Good heifers, at this sate of the new cattle cycle are probably worth considerably more than you will need to pay for them--poor quality heifers are always expensive and will never pay for themselves.