1. Cow-Calf Outlook and Profitability Kenny Burdine and Greg Halich UK Ag Economics

2. Outline for Discussion Current situation in cow-calf industry Cattle cycles: past, present, and future Framing breeding stock investments as a capital investment decision – Applies to existing breeding stock as well Return simulations under various market assumptions

3. 2011-2013 Weather challenges in much of cattle country – Profit can’t make it rain Land allocated to highest value use – Competition for pasture / hay acres High cull cow prices, attractive capital gains, etc. We came into 2014 with a small, young herd

8. Economics Data Source: USDA-AMS & USDA-NASS Livestock Marketing Information Center Down 18% (565K) for 2014 Down 17% to date for 2015*

9. January 2015 Cattle Inventory 600K (2.1%)increase in beef cows

10. January 2015 Cattle Inventory 4% increase in heifer development - 0.8% of cow herd

11. July 2015 Cattle Inventory 750K cows (2.5%) increase in beef cow inventory

12. July 2015 Cattle Inventory 6.5% increase in heifer development – 1% of cowherd

13. Heifer Retention as % of Cow #’s (July 1 estimates) Data Source: LMIC and USDA / NASS

14. Data Source: USDA-NASS Livestock Marketing Information Center BEEF COWS THAT CALVED JANUARY 1, 2015 (1000 Head) TX still down 700K cows from 2011

15. January 1 Beef Cow Inventory Data Source: LMIC and USDA / NASS

16. 1990 to 2004 – The last cattle cycle? Data Source: LMIC and USDA / NASS

17. Considerations for this cycle… Pace has started pretty swiftly – Comparable to early-mid 1990’s How long will expansion phase last? What will the net change in cow numbers be? Wildcards – weather, demand shocks, poultry / pork production What price levels start to trigger liquidation? – Or at least stall expansion?

18. Cattle Cycles and Competitive Markets Current incentive is to squeeze and hold – Prices and weather Calf crops will get progressively larger – Increased competition in the meat case Calf markets can fall a good bit and remain profitable for existing cows but… – They will do just that – Owned (squeeze) vs. purchased / developed (hold) not apples-to-apples

19. Estimating the Profitability Outlook for Expansion in Today’s Market

20. Our Approach to Breeding Stock Investment We are going to start with bred heifer value – Think heifers sold in fall to calve following spring – Math is the same whether purchased or developed Roughly one year from weaning first calf – Bred heifer purchased in fall, full year of expenses before 1 st calf is sold Estimate is made on value of calves and probability of weaning calf over 10 years Cull value end of 10 years – moves with market

21. Net Income per Cow Calf sales per cow minus costs per cow Calf sales – Fall value of calves (weaning weight x price) – Steer heifer average – Discounted for weaning rate Costs per cow – needs to include everything! – Feed, pasture, mineral, vet / medicine, breeding, labor, fixed costs, etc.

22. 2015 Fall Market Estimate… 5wt steer calves - $250 per cwt 5wt heifer calves - $230 per cwt Average calf: 550# x $240 per cwt = $1,320 Weaning rate effect – 90% - $1,188 per cow – 80% - $1,056 per cow – 70% - $924 per cow

23. Hypothetical Cash Flow per Cow NowYear 1Year 2Year 3Year 4Year 5 ($2,500)$322 Year 6Year 7Year 8Year 9Year 10 $322 $1,322 Now: $2,500 spent on bred heifer Yrs. 1-9: calf sales ($1,320 x 85% wn. rate) minus expenses ($800) Yr 10: (Calf sales – expenses) + cull value

24. Assumptions of the Analysis Total fixed and variable costs – $600, $700, $800, $900, $1,000 Bred heifer costs – $2,000, $2,250, $2,500, $2,750, $3,000 Bred heifer assumed to have 10 productive years – 85% weaning rate

25. Market Assumptions Calf prices start roughly at fall 2015 levels – (1) flat prices – steer / heifer average $2.40 – (2) 20% steady decrease over next 10 years – (3) 40% steady decrease over next 10 years – (4) Traditional cattle cycle approach – prices decline for 7 years, then rally for 3 Cull cow prices move with calf market

26. Cow-calf Cost Estimates per Cow (Variable Costs) Hay (2.5 tons @ $70 per ton)$175 Pasture (2 acres@ $70)$140 Mineral (91.25 lbs @ $20 / bag)$36 Vet / Medicine$35 Breeding $80 Labor (5 hours @ $12 per hour)$60 Commission$35 Misc, fuel, etc.$20 $581

27. How does this translate to calf prices? Variable costs $581 Minimum acceptable profit$50 $631 15% open cow adjustment$742 Relevant 550# calf price$1.35 / lb

28. Calf Price Scenarios (Assuming $2.40 for fall 2015)

29. Return for Bred Heifers Steady Price Scenario 1 Total Costs per Cow Bred Heifer Cost$600$700$800$900$1,000 $2,000 $2,250 $2,500 $2,750 $3,000 Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer and $2.40/lb combined price, $1,000 cull value.

30. Return for Bred Heifers Steady Price Scenario 1 Total Costs per Cow Bred Heifer Cost$600$700$800$900$1,000 $2,000 $2,250 $2,500 18%14%9%4%- $2,750 $3,000 Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer and $2.40/lb combined price, $1,000 cull value.

31. Return for Bred Heifers Steady Price Scenario 1 Total Costs per Cow Bred Heifer Cost$600$700$800$900$1,000 $2,000 $2,250 21%16%11%6%- $2,500 18%14%9%4%- $2,750 $3,000 Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer and $2.40/lb combined price, $1,000 cull value.

32. Return for Bred Heifers Steady Price Scenario 1 Total Costs per Cow Bred Heifer Cost$600$700$800$900$1,000 $2,000 $2,250 21%16%11%6%- $2,500 18%14%9%4%- $2,750 16%12%7%2%- $3,000 Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer and $2.40/lb combined price, $1,000 cull value.

33. Return for Bred Heifers Steady Price Scenario 1 Total Costs per Cow Bred Heifer Cost$600$700$800$900$1,000 $2,000 25%19%13%8%1% $2,250 21%16%11%6%- $2,500 18%14%9%4%- $2,750 16%12%7%2%- $3,000 14%10%6%1%- Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer and $2.40/lb combined price, $1,000 cull value.

34. Return for Bred Heifers Moderate Price Drop Scenario 2 Total Costs per Cow Bred Heifer Cost $600$700$800$900$1,000 $2,000 19%13%6%-- $2,250 16%10%4%-- $2,500 13%8%2%-- $2,750 11%6%--- $3,000 9%4%--- Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer, start at $2.40/lb combined price and decline to $1.92 by year 10, $800 cull value.

35. Return for Bred Heifers Large Price Drop Scenario 3 Total Costs per Cow Bred Heifer Cost$600$700$800$900$1,000 $2,000 12%3%--- $2,250 9%1%--- $2,500 6%---- $2,750 4%---- $3,000 2%---- Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer, start at $2.40/lb combined price and decline to $1.44 by year 10, $600 cull value.

36. Return for Bred Heifers Cycle Scenario 4 Total Costs per Cow Bred Heifer Cost$600$700$800$900$1,000 $2,000 8%1%--- $2,250 6%--- $2,500 4%--- $2,750 2%---- $3,000 1%---- Assumptions: 10 productive years; 85% combined calving/weaning rate; 550 lb steer/heifer, start at $2.40/lb, $1.34 in year 6, $2.05 in year 10, $853 cull value.

37. Final Thoughts Cost Impressions – No opportunity beyond $900 cost level – Very limited beyond $700 – Cost assessment is crucial Wean rate effect – 5% increase in WR increases ROR by about 3% Current bred heifer prices assume continued current profit levels

38. Final Thoughts Bred heifer prices – Hard to justify > $2,500 beyond scenario #2 Marginal cost of adding additional cows? All cows are not created equal…

39. Contact Information Kenny Burdine UK Agricultural Economics (859) 257-7273 kburdine@uky.edu