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Managing Margins: Net Herd Replacement Costs

Nov 10, 2012

Many dairy managers are culling cows at a heavier rate to make room for heifers. Unfortunately, this strategy can backfire.

Bodart, Steve 3 12By Steve Bodart and Matt Lange, Lookout Ridge Consulting

Having a barn or pen full of heifers is a proud testament to your reproduction management and genetic selection. Having a barn or pen full of more heifers than your operation needs, however, is a drain on operational performance and profitability.

With strong cull prices nationwide and excess heifers, many managers are culling cows at a heavier rate to make room for all those heifers. Unfortunately, this strategy can increase an operation’s net herd replacement cost and decrease profitability.

Knowing and understanding your net herd replacement cost and managing this margin can help you improve your operation’s performance, improve cash flow and increase profitability. Net herd replacement cost/cwt. is the difference between the cost of a replacement heifer and the value of the replaced cull cow. If a dairy has a replacement cost of $2.50/cwt. with cull revenue of $1.10/cwt., the operation’s net herd replacement cost is $1.40/cwt. The herd replacement cost is not the cost of raising a heifer but rather her value as a replacement compared to her cull value. There are a number of ways to manage this margin and reduce its impact on total cost of production.

Establishing a target replacement rate will enable you to benchmark your performance based on a number of key areas. For a 1,000-cow dairy (dry cows included) with a calving interval of 24 months and a replacement rate of 30% with a 8% loss on heifers that do not make it into the milking stream, it needs approximately 648 heifers to maintain herd size. Heifers in excess of this number that enter the milking stream will increase the replacement rate. The first step in identifying ways to reduce additional heifers that can increase replacement costs is to establish a benchmark for your replacement rate and value your heifers for their productive life less their cull value.

Increasing milk production can also reduce net herd replacement costs, but this is just a small piece to realizing a true reduction in cost. Reducing the number of involuntary culls to a herd will provide greater opportunity for managers to determine when and what cows will be culled. Gaining control over culling decisions can increase overall milk production and ultimately decrease net herd replacement costs.

High cull prices can reduce net herd replacement costs as well. For over the last 20 months, cull prices have been strong, which has helped shield operations from high herd replacement costs, even in herds with over a 45% replacement rate. While future cull values look strong, managers have little control over the marketplace and values may decrease. Managers can, however, establish sound voluntarily cull protocols to reduce dead cow numbers. Proactively culling can convert death loss into a positive in the cull cow revenue stream, thus reducing net herd replacement costs.

Reducing your net herd replacement costs is critical to lowering your overall cost of production and improving your profitability. It is essential to establish a target replacement rate, identify those heifers destined for the milk line and those that can be sold, reducing your number of cull cows (especially those prior to second lactation and those less than 60 days in milk), increasing milk production, and turning death loss into cull revenue. Formulating a strategy that makes efficient use of your heifers, you will have a full barn that will be a testament to both your management and your profitability.

Steve Bodart’s dairy expertise began as a Livestock Production Specialist with the Co-op Equity Association, where he managed dairy rations and feed programs for Land O’Lakes. He continued his career with Land O’Lakes from 1989 to 1999 as the Dairy Business Trainer, and then the Dairy Business Specialist. Steve trained and provided dairy financial and consulting services and performed expansion and facility design, inventory, budget and operations management. In 1999, Steve became the CFO of Emerald Dairy, LLC, where he developed and managed several pieces of the operation and conducted direct consulting with select large dairy businesses.

In 2001 Steve joined Lookout Ridge Consulting (formerly AgStar Family Business Consulting) as a Senior Business Analyst, and in 2004 became a Senior Agribusiness Consultant and Dairy Industry Leader. Steve has a deep understanding of the family dairy business and large producer operations. Contact him at: Office: 715-688-6364; Cell: 715-928-2946 or steve.bodart@lookoutridgeconsulting.com.

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