Cow Herd Decisions Keep and Feed vs Sell

Cow Herd Decisions: Keep and Feed vs Sell – Buy Back Rodney Jones OSU NW Area Extension Economist, Enid OK

Economic Decision Thought Process • “Classic” example of a partial budgeting application • Compare the “net costs” vs the “net benefits” between the two alternatives • You could bring in a lot of factors that make the decision very complex; however, there are so many uncertainties that I would recommend reducing the decision down to a few simple factors to consider

Factors To Consider • Cost per day if I keep the cow (costs that will not be incurred if I sell the cow) • Current sale value of the cow • How long will the difficult environmental conditions last • Cost of replacement in the future • Time value of money • Tax issues

Cost Per Day If I Keep The Cow • Mostly feed, but if you sell there are some other costs that stop occurring (vet, labor, repairs, etc. ) – Feed costs (could be $2. 00 to $3. 00 per day) – The other costs probably amount to 20 to 40 cents per day • For most folks you would not consider “fixed or overhead” costs because you probably will not sell your machinery or facilities

Current Sale Value Of The Cow • Varies from one situation to the next • Certainly lower than they would be if not in a drought • On the other hand, held up somewhat by the overall high price levels in the general cattle market • Use a number that represents your situation ($1, 000 - $1, 200)

How Long Will Drought Last • Do you think you will be able to establish winter forage (cheapen cow costs) or are we looking longer term? • My assumption is longer term based on current forecasts

Cost Of Replacement In Future • Really, the driving factor is the spread between value now, and cost to replace in future. – To be most accurate, you may need to consider a bred cow now, vs a pair in the spring

Cost Of Replacement In Future • Will depend on many factors, including how large of a geographic area is trying to rebuild at the same time – Will you be lucky at the expense of others? • My assumption is very high valued replacements when conditions improve (a very high spread)

Time Value Of Money • Interest rate – If you sell the cows you will have some money to either • Stop the interest on some borrowed money • Invest – Same applies to the operating and feed cost dollars • Probably a minor consideration compared to the other factors

Break-Even Sell-Repurchase Margin Examples Variable Cost per Day to Maintain Cow Days till repurchase $2. 50 $3. 00 $3. 50 First of year 150 $395 $470 $544 May 1 270 $716 $851 $987 Year from now 370 $985 $1170 $1355 Assumes 5% Time Value of Money Example: Your cost per day is $3. 00, and you think May 1 is a reasonable target date. If you think the sell – buyback spread will be less than $851, you should sell and buyback.

• Other considerations ? ? ? • Thank You