TAX REFORM AND BEEF COW REPLACEMENT STRATEGY

This paper models optimal beef cow replacement strategy in a stochastic environment under U.S. income tax rules effective before and after the Tax Reform Act of 1986. Under each tax regime, the producer's buy versus raise decision and optimal culling age choice are analyzed. Per-cow profit levels are also calculated. Results of the numerical analysis indicate that tax law changes, particularly the loss of the capital gains exclusion and restrictions on preproduction expensing, will have significant effects on both optimal decisions and profitability of beef cow operations. When provisions of the Tax Reform Act of 1986 are fully effective in 1988, the optimum age for culling beef cow will increase, as will the after-tax costs of beef cow operations.