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Enhance dairy profitability: Should you raise every heifer?

Richard Wallace for Progressive Dairyman Published on 31 March 2017

Feed and labor. These are usually the two biggest items on dairy producers’ minds when they think about their cost of production. What they might not think about as often is the cost of replacement heifers. Between feed, labor, production, capital and overhead costs, herd owners have reported spending between $1,533 and $2,628 for each heifer raised.

On most dairies, this can be the second- or third-largest cost of production – even higher than labor costs for some.

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Recent research has shown profitability has a direct correlation with net herd replacement costs. So what should producers do to help manage these costs? Sell excess heifer calves? Sell excess springers? Should they be managing higher turnover in the mature herd?

Step 1: Understand the cost of raising heifers

The cost of herd replacement is not just the difference between replacement heifer costs and the value of a cull cow. Replacement costs consist of heifer-raising costs and dairy herd turnover.

So should producers sell excess heifers or excess springers to help manage costs? In comparison with the investment in raising them, potential profit from selling excess heifers prior to freshening is inconsistent and often minimal. Steve Bodart, principal business consultant and dairy industry specialist at AgStar Financial Services, helps put this in perspective.

Assume a Holstein heifer calf at birth has an intrinsic value of $200 to $300 and the current market price to purchase a springer is between $1,800 to $2,100. The potential profit to be realized from raising some heifers for sale as springers is minimal and may be negative.

What if producers have high turnover in the mature herd? Often, high turnover in the lactating herd is due to excess springers waiting to fill adult cow stalls. With improved fertility rates, many dairies are made up of more than 40 percent first-lactation cows. Understanding the amount of time it takes for replacement heifers to generate positive cash flow is important.

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The potential contributions from a springer to recover the costs of raising her from birth to first calving include milk production, future cull value and the value of her future offspring. Bodart quantifies this in another great example.

Assume an average mature cow generates about $500 in profit per year (about $2 per hundredweight) on average. He says the cull value might average about $800 when factoring in mortalities that do not generate revenue. Average Holstein heifers are valued around $300 per head at birth.

Therefore, in order to recover raising costs and her ongoing cost of production, Bodart says she would need to produce more than 34,000 pounds of milk. By the time most cows achieve this level of production, they are usually in their second lactation. Some animals never make it to their second lactation, leaving the remaining animals to cover raising costs for those culled early.

Evaluate the percent of the herd leaving before they complete their first lactation. For many dairies, this value may be higher than assumed and contributes significantly to lower profitability.

Step 2: Quantify the impact of dairy herd turnover

Because the dairy herd is going to have turnover, producers need to raise some heifers to maintain herd size. Producers need to evaluate why animals are leaving the herd.

Cull rate is a common metric. However, it doesn’t always provide a consistent view of the economic impact of varying turnover rates. For instance, two herds can have the same cull rate, but different economic situations. Are producers removing animals in early lactation and getting minimal return?

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Or are they removing animals in late lactation? Is there a higher proportion of mortalities versus cows that can be sold? Also, excess heifers in the replacement herd can push higher-producing and more profitable cows out the door early.

A more accurate measure of evaluating a herd’s impact on cost of production is net herd replacement cost. Net herd replacement cost considers the important variables missing from cull-rate metrics – the number of animals removed from the herd, the economic value, cull cow income and hundredweights of milk produced during the time period being evaluated.

To achieve a lower net-herd replacement cost, which has a direct correlation and will lead to profitability, Bodart says producers need to aim for a net herd replacement cost of less than $1.50 per hundredweight. According to Bodart, this is nearly impossible to achieve with a high culling rate in the lactating herd.

Consider a scenario that compares a 1,000-head adult herd with a 43 percent replacement rate with a herd that has a 35 percent replacement rate. The 43 percent replacement-rate herd would need to see an increase of 5 pounds of milk per cow per day and receive an additional $147 per cow sold in order to match a net herd replacement cost of $1.50 per hundredweight that the 35 percent replacement-rate herd achieves.

Step 3: Manage to reduce net herd replacement costs

Data show efficient heifer inventory management, to reduce net herd replacement costs, substantially supports successful operations.

Let’s take a look at a couple of different scenarios for heifer replacement management. In a whole-herd financial analysis, two different situations, both with a fixed-herd size of 1,000, were compared over four years and evaluated for financial factors including cash flow, change in net herd replacement costs and overall profitability.

The first scenario was a more common strategy – where producers are retaining 100 percent of available heifers as replacement heifers and still culling heifers as needed, but focusing more on culling adult cows to maintain the static adult herd size.

This was compared with a strategy using genomic testing in combination with culling the bottom 15 percent of heifer calves at 4 months of age based on genomic milk values. While the milk trait does not explain all potential profit gains from genomic testing, using this trait provides a conservative estimate of the full economic potential.

In this strategy, producers manage replacement heifers at a younger age and are better able to manage and reduce net herd replacement costs for increased profitability. Results from this analysis show the latter culling strategy in young calves significantly improves cash flow and cumulative earnings over four years compared with the first scenario.

When genomic information for the replacement herd was available, producers were not only able to make more informed culling decisions but, by the end of four years, they also were able to see the impact of these economic decisions, including:

  • Reduced heifer-raising costs. By only keeping the top 85 percent of replacement heifers versus 100 percent, heifer-raising costs were reduced by $331,000. The analysis also considered that if the costs of raising replacement heifers grew from $2.55 per animal per day to $2.80 per animal per day, producers would realize an additional $46,000 in cumulative earnings by using genomics to guide a heifer-culling strategy.

  • Increased net farm income. There was a slight decrease in net income in the first year, but beginning in the second year, the strategy using genomic testing to make heifer replacement decisions became more profitable. By the end of four years, the 85 percent retention strategy increased profit by $169,000 more than the 100 percent retention strategy.

  • Increased cash flow available to the farm immediately. Cash flow started to improve in the first year in the 85 percent retention strategy, even while factoring in the cost of genomic testing. After four years, 100 percent heifer retention was at a negative cash flow, while the strategy of heifer culling, with the help of genomics, made a difference of $345,000.

  • Decreased cost of production. After four years, the cost of production was $0.36 per hundredweight higher when retaining 100 percent of heifers and culling more adult cows versus retaining 85 percent of heifer calves born.

  • Accelerated genetic improvement. Beginning in the third year, revenue improvement from genomic selection begins and continues to improve over the next several years when compared with the 100 percent retention model.

    This occurs because a higher proportion of the herd has been genomically selected, and eventually their offspring and granddaughters also enter the herd. By continuing to genomically choose the right group of heifers to raise as replacements, producers will see more revenue gain into generations to come as animals pass on better genes to their offspring.

By right-sizing heifer inventories, dairy farmers are investing in replacements that have a better chance of adding short-term and long-term value to the herd. In addition, herds may see improved animal health from less-crowded heifer pens and decreased environmental load.

Producers should work closely with their team of advisers on a plan that applies to the individual operation. Seek assistance from a genetics representative to run genetic economic models specific to the dairy. Decisions about the herd genetic composition made today can have a strong positive impact on current and future cash flows and long-term earnings potential.  end mark

References omitted but are available upon request. Click here to email and editor.

Richard Wallace
  • Richard Wallace

  • Managing Veterinarian Dairy Technical Services
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