Economic impact of four strategies to manage feed shortages

919

Source: Alberta Agriculture and Forestry, http://www.agric.gov.ab.ca/

With a shortage of feed in various regions of the province, the question specialists at the Alberta Ag-Info Centre hear most often is “what is my best option?” Herman Simons, economics extension specialist at the Ag-Info Centre, compares the financial implications of four different options to manage a feed shortage of 25 per cent for an established herd of 100 cows.

“It is very important to understand that each farm is different and therefore doing your numbers as they pertain to your situation is paramount,” says Simons. “In addition, each option has different pros and cons which should be listed and taken into account when determining the best suitable option for your own operation.”

Simons is using Net Present Value (NPV) to determine the economic cost and benefit over time for each option. NPV will translate the value of a sum of money in the future in today’s dollars applying a discount rate of five per cent.

The assumptions:

The objective is to get back to the original size of the herd – 100 cows – as quickly as possible, using the following parameters:

Option 1: purchase feed

The first option is to purchase the additional 25 per cent of feed needed to feed the full herd of 100 cows. Explains Simons, “There is no reduction in size of herd, so all income and expenses stay the same. In this case, the cost in year one for getting the feed needed would be about $43,000 delivered to the farm. These funds have to be borrowed or cash-flowed from available funds. Either way, associated interest costs are spread over 5 years. The NPV of this option is estimated at negative $46,000.”

Option 2: move 25 per cent of herd to custom feeding

“Rather than hauling feed, this option is about hauling animals,” explains Simons. “Take the percentage of cows that is equal to the percentage of your feed shortage – in this case, 25 per cent. Have another producer tend to them at a cost of $3.75 per head per day. Take into account hauling 400 miles, twice. The cash cost is year one is estimated around $32,500, and we will use the same timeline for interest costs. The NPV of this option is estimated at negative $34,500.”

Option 3: sell cows and buy back heifers

“To maintain full production, this option is to sell off 25 per cent of the herd – cows, bulls, and heifers – then replace them with pregnant heifers early into the next season. This replacement will ensure selling the same number of calves by the end of the next production year. The net cash cost in year one of this option is about $20,000. It is the net difference between the purchase price of replacement stock, reduced by the revenue of the sold animals. The NPV is estimated at negative $21,100.”

Option 4: sell cows and replace with internal replacement only

“With this last option, sell the cows as in option 3, and use only homegrown heifers at a normal replacement rate until the herd is back to its original size,” explains Simons. “In this case, a quarter of the herd has been sold. So, eleven heifers remain to be added to the herd in year two, and a sufficient supply of heifers in following years brings the herd back to its original size by year three. Up to this point, a loss of revenue needs to be considered. This loss is offset by excess feed that would have been used to feed the original herd but is now available for inventory or sale. All other expenses stay the same. Rather than a cash cost, we estimate a positive cash position of almost $30,600 for the first year and a cost of $10,400 for the second year (see table below). By year three, all is back to normal. The NPV of this option is estimated to be positive $19,700.”

What to consider:

Simons says that producers need to consider the following:

    • “Each of these options have different risks and opportunities that need to be carefully considered when making a decision. Each option has different cash flow implications. The financial situation of the farm can make different options not viable. Many variables make each situation different, so it is important to do your own analysis.”
    • “While buying feed to replace the shortage gives the most control, it also seems to be the most expensive option in this example. I have used hay as the primary feed, but look at the opportunities in your area for alternative feed sources such as straw, pea straw, or greenfeed from hail-damaged crops.”
    • “Custom feeding has different risks that need to be considered. Well written agreements that lay out the commitments for both parties are important to ensure a successful outcome.”
    • “Market price uncertainty is the key variable for selling and buy-back.”
    • “Downsizing and grow back using own raised heifers seems to be the most financial positive option, but consider the additional implications of this option. For example, if you are not selling the hay do you have sufficient income for living expenses? What are the tax implications of reducing your herd size?”
    • “When increasing the level of feed shortage, the time period for recovery for option 4 is extended, but the order in which the options would impact the farm remains the same.”

For more information, contact the Alberta Ag-Info Centre at 310-FARM (3276).

Contact:
Alberta Ag-Info Centre
310-FARM (3276)