July 2013 Articles

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Replacement Bull Purchases

Replacement Bull Purchases Ross Pruitt, Dept of Agricultural Economics and Agribusiness LSU AgCenter
Like prices for all types of cattle, cull bull prices continue to inch higher. Prices for slaughter bulls have been in excess of $100/cwt in recent weeks at USDA reported auctions nationally. Depending on the age and the original purchase price of the bull, this could allow the producer to recoup a significant amount of the original purchase price in salvage value. At the beginning of the year, bulls weighing at least 500 pounds were 4.8% lower than a year ago. Much of the decline owes to the declining beef cow herd, but health issues such as trichomoniasis have also impacted the number of bulls.
The price of replacement bulls has been on the rise in recent years, but like replacement females, bulls are assets that should be generating a return on your investment. If one bull is servicing 30 cows with an expected weaning percentage of 85%, that equates to approximately 25 calves per year (125 over the life span of the bull assuming 5 years in the herd). Paying for a higher quality bull may cost more up front, but because it’s an investment, the returns over the bull’s useful life must be considered. Net present value (NPV) analysis combined with information from expected progeny difference (EPDs) can help make the investment decision between two bulls easier.
As an example, consider two bulls that could be purchased for $2,000 or $3,000. The difference in price can be partially attributed to the fact that the more expensive bull is expected to produce calves that weigh 15 pounds heavier at weaning. Both bulls are financed with a 5 year loan at 5% while the desired rate of return (discount value) is 4%. As annual maintenance costs for the bulls are assumed to be the same, interest and depreciation are the only expenses included in this analysis. Depreciation is calculated as the difference between the purchase price and expected salvage value ($105/cwt for 1500 lbs) divided by the five years the bull will be kept. Expected calf prices come from USDA’s baseline projections through 2017. The first calves weaned from these prospective sires would occur in 2013.
Table 1 illustrates the differences in costs and revenues between the $2,000 and $3,000 replacement bull. The positive NPV suggests that purchasing the more expensive bull is a good economic investment and that the producer could pay more than the current $1,000 differential in price and still receive his desired 4% rate of return. A wider differential in price also suggests the bull purchased may be of higher genetic quality than described in this example which would lead to higher future returns.
Looking at the analysis slightly different, the discounted difference in total expenses is only $2,072.92 when the purchase price differential is $1,000 dollars. This discounting reflects all expenses incurred by ownership of the more expensive bull over a multiple year time period and adjusts those expenses into the value of today’s dollar given the desired 4% rate of return. The additional $1,072.92 is the interest and depreciation charges by purchasing the more expensive bull. This total equates to approximately $16.58 per calf when the total discounted cost is divided over the 150 calves expected to be weaned. Although one will pay $2,072.92 more in today’s dollars for the bull, the discounted revenues (revenuesWeek Ending Friday, June 3, 2012 LACMU Vol. 5, No. 12 in today’s dollars) associated with the bull’s offspring is $2,474.94 (approximately $19.80 per calf over the lifespan of the bull). This would provide an additional $3.22/calf in net returns in today’s dollars ($19.80/calf less $16.58/calf in costs).
$500 Difference in Bull Purchase Price
Difference in Cash Expenses Difference in Income Net Inflow
2012 $1,250.00 ($1,250.00)
2013 $240.95 $617.66 $376.71
2014 $231.45 $579.23 $347.77
2015 $221.47 $529.95 $308.48
2016 $211.00 $508.65 $297.65
2017 $534.83 $534.83
NPV $386.55
Purchasing a bull is an important investment decision and there are many genetic and environmental factors that may lead to results being different than expected. There is also the quality of the breeding females which can lead to better or worse than expected results with regards to weaned calves. How the bulls are managed is also critical to the end result. Purchasing a higher cost bull today may result in better quality replacement heifers being developed within your operation and reducing the monetary expense in futures years to purchase replacement heifers. Placing an economic value on improved quality of replacement heifers is difficult and something else to consider in your operation. Every operation has different financial constraints, but as this example shows, it often makes economic sense to pay more for improved genetics.