Be strategic when rebuilding your cattle herd following drought

Producers who were forced to cull their herds during last year’s drought may need years to rebuild their herds back to pre-drought levels.

“When the drought hit last summer, one of the questions that came up was what if guys had to cull really hard,” said Brenna Grant, executive director of Canfax.

“Every operation has been impacted differently by this drought. Some were able to purchase feed and bring it in. For others, there may have been other constraints aside from feed availability, like cash flow.

“So we wanted to know what herd recovery would look like if you were to rebuild from within the herd versus purchasing replacements.”

Canfax researchers looked at how long it would take 17 benchmark farms in its Canadian Cow-Calf Cost of Production Network to rebuild in the 10 years after the drought if they either maintained their herd size in last year; culled but retained their heifers in the following years; or culled in 2021 and purchased bred heifers to rebuild the herd to its original size.

They also evaluated three different culling rates — 25 per cent, 50 per cent, and 75 per cent — on these farms (all located between B.C. and northwest Ontario).

While it’s tough to pinpoint how many cattle producers across Canada would have culled at those different rates during the drought, the national statistics show that cow marketings in 2021 were up 6.5 per cent, to just under 2019 levels, and culling rates were also in line with 2018 and 2019 levels.

“So we were in liquidation, but it’s one where we were really surprised that we were only down one per cent in beef cow inventories on Jan. 1, according to Statistics Canada,” said Grant.

“We’ve heard of areas that have stockpiled feed last year, and that might have been one of the reasons why we didn’t see liquidation as hard as we expected.

“Some of those areas that were able to stockpile feed were able to purchase those cows and keep them within the breeding herd.”

But the full impact of the drought may not have been realized yet.

“Cow slaughter is up seven per cent year to date from last year, remembering that we weren’t in a liquidation rate of cow slaughter in the first quarter of last year because the drought wasn’t quite evident yet. So I think the drought impact is not done yet.”

And those impacts will be felt even harder by producers forced to cull at higher rates because of a lack of feed availability or other cash flow concerns.

“Everything is so driven by economies of scale, and one of the things that happens when you cull really hard is your per-cow costs are impacted because you still have all of your overhead costs but you don’t have as many cows to spread them over,” said Grant.

“Either choice you make, the objective is to minimize the equity drain on the operation. Yes, you want to rebuild as quickly as possible once you have your grass back and it’s suitable to restock, but there are cash flow considerations and other concerns producers are going to be looking at.”

Strategic rebuild

“In previous droughts, you have a big increase in bred heifer prices when everyone who has liquidated is now looking to rebuild. That creates strong demand for bred heifers, and then prices go up,” said Grant.

“If you’re purchasing replacements, the rebuild happens faster — which is a pro — but when you look back to the 1985 drought, basically three years later, bred heifer prices had increased by 36 per cent between the drought year and the peak.”

Ultimately, though, the researchers found that at both the 25 and 50 per cent culling rates, rebuilding with your own heifers would be more profitable for the majority of farms.

“I think there are a lot of producers who would choose this option anyway just due to cash flow considerations,” said Grant. “Even if you’re rebuilding from your own herd, you have the opportunity cost of not selling that heifer calf, but usually, as long as you have reasonable development costs for those bred heifers, that is a better option for most.”

But once you’re over a 50 per cent cull rate, “it simply takes too long to rebuild from within because you don’t have the sheer number of heifer calves you need to rebuild with,” she added.

“Now you’re talking about potentially eight to 10 — or more — years to rebuild to your ideal herd size, and you still have all of your overhead costs during that 10-year period.”

Additionally, if feed is available and cash flow isn’t a concern, purchasing feed — even at higher prices — was more profitable long term because it allows for the economies of scale to be maintained.

It’s important to talk things over with your lender, she added.

“Do you want to get a loan now for feed and maintain your herd size, or do you want to get a loan later for purchasing bred heifers? So it’s important to have that conversation and talk about cash flow challenges and the risks associated with those two choices.”

Of course, this all assumes that there will be a period of recovery following the drought, as happened during the drought of 1985 and 1986.

“For a multi-year drought, that might not be the case, and then it will just push that rebuild out another year,” she said. “When the driving consideration is how to maintain equity in your operation, that really puts a strain on producers if they had liquidated last year and they’re unable to rebuild in a timely fashion.

“That means they’d have to go another year without that income, but they still have those overhead costs to cover. So they may not be considering rebuilding until next year or even further out potentially, depending on how quickly grass comes back.”

But hopefully this study will have cattle producers thinking ahead so that they can strategize their herd rebuild and capitalize on any opportunities that come up.

“We knew that it wasn’t necessarily going to be helpful for producers this year,” said Grant. “But it’s important for them to be thinking about how to protect farm equity so that they can be set for the future when it comes time to rebuild and they do have grass.”

The Canfax study can be found online.

— Jennifer Blair is a reporter for Alberta Farmer. This article originally appeared in the May 16, 2022 edition (page 12).