How ranchers can use net present value (NPV) to determine if an investment is worthwhile is described in a University of Wyoming Extension bulletin.
NPV discounts future returns based on the riskiness of an investment and compares them directly to current or future costs, stated authors of “Net Present Value,” B-1302.
“Many decisions on a ranch require significant capital investment to facilitate change,” said Bridger Feuz, UW Extension livestock marketing specialist. “This type of investment typically includes initial costs but also provides returns over a period of time.”
The time value of money must be included in an investment analysis because these returns occur over time.
The bulletin is free to view or download by going to www.uwyo.edu/uwe and clicking on Find a Publication then type the number or title in the search field. The bulletin is available in pdf, HTML or ePub formats.
Imagine this: Your cattle contract brucellosis from infected elk. The cows abort their calves. When the federal government quarantines the herd of 400 for a year, you face costs up to $143,000. Not only are your profits from the cow-calf-yearling operation wiped out, your neighbor’s are too, as all potentially affected animals are quarantined until infected animals are identified and culled.
This threat brought cattle producers to the table with a team of University of Wyoming agricultural economists and other experts in 2013 in Worland, Wyoming. The researchers were asked to investigate the economics associated with different types of cattle operations and their ultimate profitability for producers in the region.
The result is “Economics of Transitioning from a Cow-Calf-Yearling Operation to a Stocker Operation as a Potential Strategy to Address Brucellosis Risk in Northwestern Wyoming.” The new publication is available as a free download from UW Extension at http://bit.ly/stockeroperation.
The risk of contracting the disease is greatest in the Greater Yellowstone Area of northwestern Wyoming where brucellosis is endemic in wild elk and bison populations. The switch to stockers eliminates this risk completely, says Christopher Bastian, professor in the Department of Agricultural and Applied Economics and one of the publication’s authors.
Intact breeding females are replaced with stocker cattle. Stockers are males or females purchased in spring, fed and maintained until they reach a target weight, then sold. Steers and spayed heifers in a stocker operation cannot spread the disease to other animals.
The authors acknowledge the decision to switch doesn’t come easy. Analyses indicate the cow-calf-yearling operation is generally more profitable than the stocker operation. Brucellosis is the kicker.
“If you think you are at high risk of contracting brucellosis, it would only take one quarantine to negate the advantage of staying in a cow-calf-yearling operation rather than transitioning to stockers,” says Bastian.
This publication offers a starting point for producers in the Greater Yellowstone Area looking at alternative management strategies.
“No analyses to our knowledge have investigated the transition itself,” the authors explain. “Thus, for producers considering a switch to stockers, there has been little guidance on the economics of how best to transition to such an enterprise.”
Authors Shane Ruff, farm management specialist for the Kansas Farm Management Association and former graduate research assistant at UW; Bastian; Dannele Peck, director of the USDA Northern Plains Climate Hub and adjunct associate professor, UW Department of Agricultural and Applied Economics; and Walt E. Cook, assistant professor, Department of Veterinary Sciences, Texas A&M University offer comprehensive analyses for one-year and eight-year transitions, as well as remaining a cow-calf-yearling operation.
Here are some of their conclusions:
More total income could be available from the cow-calf-yearling operation if a producer is staying in the cattle business more than 20 years.
More total income could be available from the eight-year transition if a producer is staying in the cattle business 20 years or less.
A producer must consider the risks of infection versus profitability and income variability.
The switch to stockers (other than getting out of the cattle business altogether) is the only 100-percent effective strategy to avoid the costs associated with quarantine.
The guide is one of many free publications available at bit.ly/UWEpubs, covering brucellosis, ranch budgets, finances and profitability and cattle markets and economics.
For more information, contact Bastian at (307) 766-4377 or firstname.lastname@example.org.