High replacement rate is not always less profitable

WISCONSIN DELLS, Wis. — Having a source of high-quality replacement heifers dictates the future of dairy farms. Many variables come into play when a producer considers the source of these females.

Dr. Michael Overton spoke about those variables at the Professional Dairy Producers Business Conference March 14 in Wisconsin Dells.

“Heifers are a necessary investment,” Overton said. “We need to get the best return on that investment in terms of both future milk and beef production. These animals represent your future herd.”

Investing in replacement heifers allows farmers to upgrade their herd by keeping the most profitable animals. Cows are typically replaced for two reasons: biologic failures such as death, chronic lameness, mastitis, reproductive failure or other health issues; and selective replacement, culling low-producing animals to improve production potential.

Current market trends have made it necessary for dairy farmers to continually reevaluate their approach to replacement animals to ensure growth and improvement. Overton pointed to the current market value of beef-on-dairy calves coupled with pressure from the beef side of the market, which brings competing dollars for dairy heifers.

“The inventory and prices of heifers is dramatically different right now than in recent history,” Overton said. “The inventory of heifers is going down. The replacement herd is down 14,000 head from 2023. Wisconsin has been identified as losing more animals from 2023 to 2024 than any other state, down about 50,000 animals.”

Overton said farmers tend to focus solely on the cost of replacements with two goals in mind: lower the replacement rate as much as possible and raise heifers as cheaply as possible. Overton cautions against looking at cost simplistically.

“When cows need to be replaced, you should be improving your herd,” Overton said. “That improvement comes at a cost.”

Overton said that focusing solely on the tangible, explicit costs of replacements can result in a significant lost opportunity cost because poorer quality animals — those that are poorly grown or have chronic health issues — might be kept in the milking herd longer.

Looking at the average cost versus the marginal cost of raising heifers is important in determining the best path for a farm to follow, Overton said.

The average cost spreads the total cost over a set number of heifers, with an industry average of $2,300-$2,600. Adding in a few extra heifers, beyond that set number, represents what Overton calls marginal heifers.

“Raising 5% more heifers than what you plan for can be easily managed,” Overton said. “That 5% is the least expensive to raise because you have already allocated the fixed expenses over the others. The average cost may be $2,500, but your marginal cost is $1,800. If we can raise a few more heifers without dramatically overcrowding, we can lower the cost per heifer and allow ourselves more flexibility in decision making downstream.”

Overton reminded producers to not just consider acquisition cost but to factor in the salvage value of the animal being replaced.

“A higher replacement rate doesn’t always mean less profitable, if done for the right reasons,” Overton said. “The salvage value of a cow is dramatically influenced by how we manage our cows and when we make those decisions. The longer a cow stays, the less salvage value she has. It is better to be more proactive in your replacement decisions. Don’t wait for cows to be thin, lame or run-down before culling. Selling at a more opportune time increases salvage value.”

How replacements are raised factors into their value as well. Overton said there are three options for providing those replacements: raising heifers on-farm, out-sourcing heifer raising to a grower, or selling all calves and purchasing replacements back from the market, a concept Overton termed “flying herds.”

Historically, raising replacements on-farm has been the most common approach. Overton said producers tend to want the control that direct oversight gives them, and some may have biosecurity concerns about animals leaving the property and returning. The perception has been that raising heifers on-farm is a lower cost, but Overton said that is likely not true because hidden or less tangible costs are often not factored in.

Factors that drive producers to choose off-site raising of their heifers include a lack of space and housing, along with issues surrounding manure management, ability to produce enough feed, access to water and potential labor issues.

“With the economic investment required to build heifer facilities, a grower might be able to do it cheaper,” Overton said. “There are certain efficiencies of size and scale a heifer raiser growing 50,000 heifers that a 500-cow dairy does not have.”

Care is necessary when choosing a heifer grower. Overton warns farmers not to incentivize the grower to underfeed calves in pursuit of cheap heifers, noting the cheapest heifer is not necessarily the best value.

Overton encourages producers to give a grower flexibility in adjusting pricing with increased feed costs over a locked-in flat rate or per diem. This allows the grower to keep their margins in line.

The flying herd was an attractive option when replacements could be purchased for $1,300 and market cows could be sold for $800 but is now a painful prospect with low heifer inventories driving up the price of replacements, which may potentially be of lower quality, Overton said.

Overton urges producers to consider all aspects of raising replacement heifers, focusing on profit over the cost of the transaction, and warns against limiting options by under-producing heifer calves.

“Raising fewer heifers improves cash flow now but can hurt long-term profits,” Overton said. “Keeping less productive cows in the herd in pursuit of greater lifetime milk ignores future lost opportunity costs.”