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Effect of interest rates on beef cow bid price

The Bid Price for Beef Cows decision aid factors in the desired return or discount rate.

Francisco Abello, Assistant Professor and Extension Specialist

August 25, 2023

2 Min Read
cattle in feed yard
Shelley E. Huguley

Determining the appropriate bid price for beef cows is important for buyers and sellers in the ranching industry. The Bid Price for Beef Cows decision aid is a practical and valuable tool that simplifies the bid price calculation and enables insightful “what if” analysis based on your financial expectations and productivity projections. This tool employs a net present value (NPV) approach, factoring in the desired return or discount rate.

Several variables play a significant role in determining the bid price for a cow, including: the total debt of your operation, operating costs per cow, estimated future calf prices, cull cow prices, required loan amount, interest rate, number of calves per cow, weaning weight, weaning rate, and more. In this example, we focused on the effect of higher interest rates in the bid process.

The amount of debt required for cow purchases and the interest rates directly affect the bid price. The higher the debt and interest rates, the lower the amount a buyer can afford to pay. For instance, an interest rate of 11% will reduce the bid price by $367 per head (Graph 1) compared to the 6% interest rate we may have seen a couple of years ago.

Figure 1: Beef Cow Bid Prices vs Interest Rates

In conjunction with operating costs, future calf prices are crucial in determining the bid price. Calf prices have increased in recent years as well as operating expenses. For the example bid prices in Fig.1, we assume an initial increase in calf prices for the next three years, followed by a slight decline. We expect prices to decline when the US cow inventory grows and US beef production increases. We also included a variable discount rate that rose to 7% with higher interest rate scenarios.

Using the Bid Price for Beef Cows tool will allow ranchers to analyze different scenarios and understand how much they should pay to restock their operations. Find the tool here and give it a try.  Estimating reasonable future prices for your cattle and operating costs is imperative to better assess how much you can afford to pay for a replacement cow. By carefully considering these variables, you can make informed decisions and ensure the financial viability of your operation.

Source: Southern Ag Today, a collaboration of economists from 13 Southern universities.

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About the Author(s)

Francisco Abello

Assistant Professor and Extension Specialist, Texas A&M AgriLife Extension

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