Replacement costs are not often considered as drivers of the cost of production. However, in some dairies, replacement costs are greater than labor expenses.
By Steve Bodart, Lookout Ridge Consulting
The major drivers of a dairy’s cost of production are feed, labor and replacement costs. The first two are probably no surprise to anyone, but replacement costs are often not considered as drivers of cost of production. However, in some dairies, the replacement costs are greater than the labor costs.
Replacement costs as a component of the cost of production, are comprised of two different factors: heifer-rearing costs and dairy herd turnover.
Let’s start with heifer rearing costs. Once a manager understands these costs, he or she can begin to make some very important decisions: Should he or she sell excess heifers as calves? Should he or she sell excess heifers as springers, or should he or she manage for a higher turnover rate in the adult herd?
A key factor in replacement costs is understanding the cost to produce a heifer. Whether heifers are raised on-farm or custom-raised, the largest cost of raising a heifer is feed, followed by equal costs allocated to labor, capital, other production costs and overhead. When added up over the length of time required to get a baby calf to freshening, this adds up to $1,400-$1,600 per head.
In addition to the costs of all of the inputs required to develop a heifer, the manager must also consider that heifer calf’s own value, which represents an opportunity cost had the manager chosen to sell her. This brings the total cost to produce and raise a springing heifer to $1,600-$1,900.
The next question is: What it would cost to purchase a springing heifer? In most parts of the country, this would be somewhere in the $1,400-$1,800 range. So one question a manager might ask himself is, “What is the potential for profit from raising heifers and selling excess heifers prior to freshening?” These calculations would suggest that those opportunities are probably minimal and, at the very least, inconsistent.
The next thing a manager must consider is how he’ll ultimately pay for the costs to develop that heifer. The potential contributions from that heifer to pay her rearing costs include her production, her future cull value and the value of future offspring, again taken as an opportunity cost. On average, a mature cow generates about $750 in profit per year or about $3.00 per cwt. The cull value might average about $675 when mortalities that do not generate any revenue are factored in. Offspring are valued here as a weighted average of heifer and bull calf values.
So, once management has considered the costs and the potential revenue streams from that female to offset those costs, she needs to produce over 31,000 lb. of milk before she has covered her raising costs and her ongoing cost of production and is adding to the profitability of the operation. In most operations, she is somewhere near peak milk in her second lactation before that occurs.
So, let’s think about managing replacement costs again. Dairies have a significant investment in developing a heifer, which does not differ dramatically whether raising her at the dairy or employing a custom heifer-raising operation. There is limited profit potential with raising excess heifers to be sold as springers. And finally, we need that cow to stay in the herd long enough to reach her second lactation before she generates profit for the producer.
With this in mind, we can think about how we might manage replacement costs in a commercial dairy. It includes avoiding situations where we raise excess heifers and building our herd such that we have optimized the proportion of cows we have that are in the profit window of their productive lives.
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 firstname.lastname@example.org