The sixth annual beef cow replacement value forecast from the University of Nebraska offers a valuable tool for decision making in the beef cattle industry. It provides a starting point for evaluating whether to buy, sell or trade replacement cows. The forecasts incorporate a range of factors, including current and future costs, productivity, and revenue projections for cows, calves and related items. The information here is a guide, where users would be expected to modify, depending on their circumstances and expectations of future productivity, costs, and revenues. The forecasted price and cost variations were those created by the University of Missouri Food and Agriculture Policy Research Institute (FAPRI) as the current 10-year projections. These annual FAPRI changes were used to adjust the expected costs of Nebraska producers for the current season, 2023.

Selecting replacement heifers differs from ranch to ranch, but value for both retained and purchased replacements generally depends on:

• Longevity - the replacement heifer’s ability to stay in the herd as a productive unit
• Productivity - both current and future expected difference between costs and revenues (calf price and production costs differences over the heifer’s productive life)
• Genetic and phenotypical compatibility with herd mates (the animal conforms with the production system and performance goals)
• Operator goals and management style (heifer’s contribution to future of the ranch)
• Financial standing, specifically debt related to cow purchases.

These forecasts assume producers know four things about their operation:

1. Annual cost of production per cow. Authors used UNL’s Cow Cost Cow-Q-Lator combining producer production information and real estate survey data to calculate three levels of costs, Low (LO), Medium (MD) and High (HI). 
2. Three average levels of cow replacement rates, Figure 1. This is measured as a percentage of the total number of cows in the herd. This value is constant each year and keeps the herd at a constant size. This number represents the percent of replaced, culled, or dead cows and is a practical and tractable measure of average cow longevity.
3. The average cost to a replacement heifer/cow is set at $2500 
4.  The average calving rate used here is 93% randomly ranging between 88% to 98%

The three annual costs of production for 2024 do not include calving rate, replacement cost, depreciation expense, or death loss. These variables are accounted for within the simulation itself. As stated, the values and costs are adjusted annually for 10 years within the simulated forecast period. Many of these factors are derived from the FAPRI 2024 projections published in March of that year. This detailed breakdown provides a comprehensive look at the cost structure and breakeven analysis for replacement heifers in 2024. Here's a summary of the key points:

2024 Annual Production Costs

• Nebraska State estimated annual production costs per cow:
  • Low (Lo):                   $943.83/cow
  • Medium (Med):         $1,106.71/cow
  • High (Hi):                   $1,377.10/cow
• Costs include factors like feed, pasture, and hay but exclude calving rate, depreciation, death loss, and replacement costs (accounted for in simulations).
• Pasture Costs (UNL Ag Econ Real Estate Report, 2024 average):
  • Low: $33.68/pair/month
  • Median: $46.88/pair/month
  • High: $60.00/pair/month
  • Winter rates are half of summer rates.

Cost Distribution

• Pasture and hay account for 33–42% of all costs and 66–73% of total feed costs.
• Total feed costs make up 50–58% of all costs.

Breakeven Value Forecasts

The forecasts are derived from 1,000 simulations for each of the nine sub-scenarios, considering:

1. Replacement Rates: 14%, 20%, and 28%.
2. Starting Costs: Lo, Med, and Hi values.

• 14% Replacement Rate (Highest Breakeven Values):
  • Lo:      $4009.94/head
  • Med:    $3,281.91/head
  • Hi:       $2,231.93/head
• 20% Replacement Rate (Typical Scenario):
  • Lo:      $3,337.07/head
  • Med:    $3,857.26/head
  • Hi:       $2,387.26/head
• 28% Replacement Rate (Lowest Breakeven Values):
  • Lo:      $2,231.93/head
  • Med:    $1,999.51/head
  • Hi:       $1,740.49/head

Key Insights

• Lower Replacement Rates result in higher breakeven values due to increased cow longevity and productivity.
• Higher Costs (Hi) significantly reduce breakeven values, emphasizing the impact of input costs on profitability.
• The use of representative cost levels and replacement rates allows flexibility in applying these insights to diverse operational contexts.

This analysis provides a robust framework for evaluating replacement heifer investment decisions, aiding producers in navigating economic uncertainties while optimizing herd profitability.

Factors Influencing Breakeven Values (BV’s)

1. Productivity Enhancements:
   • Higher Productivity = Greater Revenue = Higher Breakeven Values (BVs).
   • Calving rates - percentage of cows bred that wean a calf, Calf growth rates - pounds of calf available to be sold, and operational efficiencies, productivity of resources and per head cost of production, all play pivotal roles.
2. Revenue Variability:
   • Fluctuations in calf prices directly impact BVs.
   • Higher calf prices → Higher BVs; lower prices → Lower BVs.
3. Cost-Productivity Relationship:
   • Higher per unit production costs relative to per unit revenue diminish profitability, reducing available capital to invest in replacements.
   • Low-cost herds with lower replacement rates (e.g., Lo 14%) have the highest BVs, making them able to afford higher replacement costs.
4. Replacement Rates:
   • Lower Replacement Rates (e.g., 14%): Cows have a longer productive life and are available to contribute more revenue, increasing BVs.
   • Higher Replacement Rates (e.g., 28%): Have the opposite effect, shorter productive lives leading to lower BVs.
5. Operational Longevity:
   • The longer a replacement cow remains productive, the more likely she will positively contribute to the herd's profitability, except in cases where annual production costs exceed revenues, turning ownership into a liability.

Key Management Implications

• Right Animal, Right Time, Right Price: Successful producers focus on selecting cows that thrive in their specific operational environment and market conditions.
• Raising vs. Purchasing: While raising replacements may seem cost-effective, it’s critical to account for all associated costs and compare them with purchased replacements to ensure profitability.

Practical Considerations for Producers

1. Match Simulations to Reality:
   • The closer an operation's actual productivity and costs align with simulation assumptions, the more accurate the BVs become as a decision-making tool.
2. Adapt to Market Variability:
   • Flexibility in herd management and marketing strategies is crucial to capitalize on favorable market conditions and offset unfavorable ones.
3. Focus on Longevity:
   • A balance between maintaining herd age and productivity while managing replacement costs is key to maximizing profitability.
4. Evaluate Costs Accurately:
   • Know the true costs of raising versus purchasing replacements, considering both short-term expenses and long-term herd impacts.

This strategic approach to replacement decisions fosters greater resilience and profitability in beef cattle operations, enabling producers to optimize herd value over time. Table 1 underscores the importance of balancing replacement rates and annual production costs to optimize breakeven values (BVs) for replacement cows. 

Table 1 Observations:

1. Replacement Rates:
   • Lower Replacement Rates (14% to 20%) (Part A):
     • Are the result of longer productive lifespans for cows, leading to higher average herd ages and increased BVs.
     • Herds with lower cull rates can afford higher initial replacement costs because cows generate revenue over a longer period.
   • Higher Replacement Rates (21% to 28%) (Part B):
     • These rates are the result of shorter average production lives of cows, reducing their cumulative revenue contribution and leading to lower BVs.
     • Higher turnover rates in the herd increase operational costs due to their increased frequency.
2. Effect of Costs on BVs:
   • As costs rise, BVs decrease, as there are fewer profits available to justify the investment in replacements.
   • Operations with higher annual production costs may face financial challenges, particularly in years where revenue dips below overall costs, making cows bought at a high price a liability.
3. Revenue-Cost Balance:
   • The longevity of a replacement cow contributes positively to BVs only if annual production costs remain below annual revenue.
   • Economic success hinges on maintaining a favorable revenue-to-cost ratio.

Applications of Table 1

Table 1 is designed to serve as a forecasting tool and may be used to:

• Analyze Trends: Understand how changes in replacement rates and costs affect breakeven values.
• Plan Financially: Align purchasing decisions with operational costs and market conditions.
• Optimize Herd Management: Adjust replacement rates and evaluate costs to maximize profitability.

Practical Insights for Producers

1. Low Replacement Rate Operations (e.g., 14%):
   • Offer greater flexibility in managing costs and productivity.
   • Enables producers to capitalize on older cows’ extended productive lifespans.
   • Reduce the frequency of capital outlays for replacements.
2. High Replacement Rate Operations (e.g., 28%):
   • May benefit from increased genetic turnover and younger herd profiles.
   • Risk lower profitability due to shorter productive lifespans and higher replacement costs.
3. Cost Management is Crucial:
   • Keeping production costs low is vital for increasing BVs and profitability.
4. Adaptability to Market Conditions:

Producers must be ready to adjust replacement strategies based on fluctuating calf prices, production costs, and revenue trends.

Table 1. Breakeven values of beef cow replacements based on annual production cost and replacement rate.

If you compare last year’s forecast, the prices paid for replacement heifers have risen. This can be explained by FAPRI projection that this year’s increased costs will be more than covered by an even greater escalation in calf returns over the next several years. These larger returns directly expand the forecast BV making it more than double last seasons.  The current probability, using these forecasts, indicates that successfully paying for a heifer that cost $2,500.00/hd for the nine sub-scenarios ranges from a low near 21% for the 28% cull rate/Hi cost to a high of about 67% for the 14% cull rate/lo cost. All of the nine estimated probabilities are listed in Table 2 below.

Table 2. Probability of paying back the $2,500/hd. purchase price of the heifer, under each of the nine sub-scenarios.

This analysis highlights the complexities and risks involved in purchasing high-priced replacement heifers. Here's a breakdown of the key points:

Key Findings

1. Probability of Payback for $2,500 Replacements:
   • At Hi/28% high cost and high replacement rate, the expected probability of a heifer paying back the $2500 purchase price is 20.98%.
   • This means 79.02% of the cows are expected to not fully pay back their purchase value under the conditions of this scenario.
   • The BV reported for this scenario is approximately $1,740.49/hd. (Figure 2 above) 
2. BV as a Benchmark:
   • When the purchase price matches this average BV ($1,740.49/head), the probability of cows paying their way rises to 44.9%.
   • Although 55.1% of cows fall short, the profitability of the 44.9% that equal or exceed the BV offsets the losses of the others.
3. Trends in Replacement Costs Relative to Salvage Value:
   • Historically (2008–2012), replacement cow prices were about 1.69 times the salvage value of cull cows.
   • Between 2013 and 2022, this ratio increased to 2.10, reflecting rising replacement costs.
   • For 2024, the ratio has climbed further to 2.62, resulting in the higher replacement cost of $3,000/head.
4. Impact of Buying these Higher Priced Replacements:
   • Substituting this higher replacement price leads, as expected, to a substantial decrease in payback probabilities. See table 3.
   • High replacement costs amplify the risk of unprofitable cows in a herd.

Table 3. A listing of a selected number of probabilities of paying back the inflated costs of the $3,000.00/hd. purchase price for replacement heifers December of 2024.

Presentation by the authors of this report as a webinar hosted by UNL’s Center for Agricultural Profitability (CAP),are available at: Heifer Price Forecast Webinar (approx. 50 minutes). 

Implications:

1. Profitability Requires Balance:
   • Producers must carefully consider the relationship between replacement costs and expected revenue over a cow’s productive life.
   • Overpaying for high-quality cows or underpaying for low-quality cows leads to greater financial risk.
2. Cow Quality is Key:
   • Selecting cows with higher potential productivity and longevity at the “right” price is critical to offset high initial costs.
3. Long-Term Considerations:
   • Focus on cows that align with the operation's management style and expected market conditions to maximize the probability of profit.
4. Market and Cost Sensitivity:
   • Producers should consider monitoring market trends as closely as they might monitor cows during the calving season. What is the replacement-to-salvage ratio? What is the production costs? These are all helpful to managers’ replacement decisions so that they avoid overextending financial resources.

Final Takeaways

To maintain profitability, producers should consider the following replacement cow relationships:

• Cow Longevity: The longer a cow is productive the greater the likelihood she will surpass her BV.
• Strategize Replacement Purchases/Retentions: Avoid overpaying or over-retaining replacements, especially in a strong market. Know the difference in the cost and productivity of buying versus retaining animals.
• Adapt to Market Trends: Be prepared for markets to change direction. Stay informed about replacement costs relative to salvage values and calf prices.
• Mitigate Risk: By diversifying replacement purchase strategies. Balance herd replacement management strategies with revenue expectations. Increase cow longevity cost-effectively. Look for opportunities to forward price when conditions provide suitable profit margins. Look for ways to economically increase calving rate or lower cow cost while maintaining productivity.