Cost of raising heifers isn’t all that impacts bottom line. The number and quality of heifers also affect your dairy business’ profit.

Cost of raising heifers isn’t all that impacts bottom line

The number and quality of heifers also affect your dairy business’ profit

By Jason Karszes

Dairy producers generally look at what they’re spending per day per animal. And rightly so, since the total cost associated with raising dairy replacements is 18 to 24% of the total cost to operate a dairy. But that’s not the whole picture of a replacement enterprise’s impact on a business’ bottom line.
Three other areas have as much, if not more, of an impact:

The number of replacements required to maintain herd size.
The quality of heifers raised and how they perform once they begin milking.
The investment tied up in such things as buildings and number of animals due to areas such as delayed age of first calving.

    Attaching the actual monetary impact to these areas can be difficult. But it’s necessary when analyzing the dairy replacement enterprise and making decisions on changes to a replacement program.
    Comparing two similar-sized dairies drives home the point. Both farms are stable herds shipping 23,000 pounds of per cow. One dairy is raising 540 heifers (.9 heifers to 1 cow); the second dairy is raising 390 heifers (.65 heifers to 1 cow). Neither is selling excess animals.
    The first dairy that raises 540 heifers not only has higher operating costs for raising more heifers, but has more money tied up in facilities, land, manure storage and animal inventory that impacts the balance sheet. The reason, the higher cull rate and delays in breeding require this number of animals just to maintain herd size.

Numbers tell story
    To understand the potential impact of the dairy replacement enterprise and animal longevity and performance on a dairy’s financial picture, look at the model of a dairy replacement enterprise (Table 1). In this example, the dairy treats the replacement enterprise as a separate business in its accounting system. The dairy sells the calves to the replacement enterprise and then budgets a fixed amount of money to buy replacements annually from the heifer enterprise. Assumptions for the example are based on a stable herd size.
    The base situation shows a negative return of 12.48%. If this is expensed back onto the dairy cow, the dairy net farm income decreases by $23,846. This is the additional money that must be spent just to bring the replacement enterprise to a 0% return on assets.
    By treating the dairy replacement enterprise as a separate business with a fixed income helps show how changes in the replacement enterprise impact the returns generated from it.

*Table 1. Base Dairy Farm and Heifer Enterprise Information* Dairy
Size, average milking and dry cows	150
Cull rate	37%
Dairy replacements needed	55.5
Budgeted expense/year for replacements, net	$68,000
Value of heifer calf sold to replacement enterprise	$200

Replacement Enterprise
Cost/day/animal (all raising costs)	$1.40
Age of first calving	28
Capital investment/animal (barns, equipment)	$500
Calculated number of heifers	130
Percent heifers not entering dairy herd	8%
Extra heifer needed due to heifers not completing system	10
Extra heifers raised	0
Average number of heifers being raised	140
Cost/day/heifer	$1.56
Total cost/animal (excluding value of heifer, interest on investment)	$1,332

Replacement Enterprise – Return on Investment
Total income	$68,000
-Total raising expense	$79,858
-Total expense to purchase calves	$11,988
Net enterprise income	- $23,846
Investment in buildings, equipment	$69,930
Investment in cattle, cost basis	$121,139
Total investment	$191,069
Percent return on total investment	-12.46%

*Raising costs are those costs paid during the year to raise a heifer. Depreciation costs, interest on investment, interest on borrowed capital and losses for animals that die or are sold aren’t included. All labor expenses, including owner and family labor, are paid.

*Table 2. Impact of Changes on Heifer Enterprise*
	Net Enterprise Income	Total Investment	Return on Investment	No. of Heifers
Base	- $23,846	$191,069	–12.5%	140
Lower costs	- $16,235	$182,191	–8.9%	140
Lower calving age	-$14,776	$148,258	–10.0%	115
Lower dairy cull rate	$5,942	$129,101	4.6%	95
Lower heifer cull rate	-$21,552	$186,839	–11.5%	137
Premium paid	-$18,296	$191,069	–9.6%	140
Combined changes	$21,130	$94,223	22.4%	76
Combined changes,	$18,477	$128,602	14.4%	76
Initial building invest.
Make a difference Seven management changes in raising heifers and in the dairy herd’s requirements and payments can impact the dairy’s bottom line to different degrees (Table 2). As each change is made, the costs and investments are recalculated to reflect only what is required, and new profitability measures are calculated. This is a key assumption as heifer numbers change and the total cost of buildings change because fewer are needed. 1. Lower the $1.40 cost per heifer per day by 10% through better management. The result: Net enterprise income increases by $7,611. Return on investment rises to –8.9%. Total investment decreases by $8,878, reflecting the lower cost value of heifers. Management question: Can you lower the cost of production through better forages, nutrition, labor efficiency or other management areas while maintaining or improving heifer quality? 2. Lower calving age from 28 to 23 months, thus cutting the number of heifers being raised. Costs were assumed to increase by 10% due to feed changes to meet this goal. The decrease in the number of heifers required more than offsets the increased cost of raising them. The result: Net enterprise income increases $9,070 over the base. Return on investment is –10.0%. Number of animals raised drops to 115. Total investment falls $42,811 to $148,258. Management question: Can you decrease the average age of calving through better management, but maintain or improve animal quality and hold costs below the potential savings? 3. Lower the dairy herd cull rate from 37% to 25% through better herd management, requiring fewer heifers to maintain herd size. While this is primarily a dairy herd management area, the quality of heifers being raised can impact the culling rate, especially in the first lactation. The result: The total number of heifers raised decreases from 140 to 95. The total replacement enterprise investment drops $61,968. Net enterprise income increases $29,788. Rate of return on investment at 4.6% moves into the black. With the dairy still budgeting $68,000 for replacement needed, the amount paid for the replacement has increased by $605 to $1,813, which is greater than the cost to raise the dairy replacement. Management question: Can you improve management and heifer quality enough to decrease the number of animals needed to maintain herd size while continuing to improve dairy performance?

4. Lower the heifer culling rate from 8% to 6%, thus cutting the costs attached to raising animals that never enter the milking herd.

The result:

The total number of animals raised decreases to 137.
Total investment in the replacement enterprise drops $4,230.
Net enterprise income improves by $2,294.
Rate of return improves slightly to –11.5%.

Management questions:

Can your heifer cull rate be lowered while maintaining or increasing heifer quality? Can the expense of this be less than the value of raising excess animals?

5. Dairy herd pays a premium of $100 per heifer for quality. Due to higher quality heifers being raised, the dairy is able to justify paying more for replacements.

The result:

No change in the number of heifers raised or the total heifer enterprise investment.
Net enterprise income increases by $5,550.
Return on assets is –9.58%.

Management questions:

Can you improve heifer quality enough to increase profitability so you can pay increased premiums for replacements?

6. Make the previous five changes – cost, calving age, dairy and heifer culling rates, and premium paid – while controlling the costs to raise heifers.

The result:

Net enterprise income increases $44,976 over the base of -$23,846.
Total investment decreases by $96,846.
Number of heifers raised is 76.
Return to investment at 22.4% leaps into the black.

7. Make all of the changes to improve the replacement enterprise so fewer heifers are needed, while investment in buildings remains fixed. This reflects the reality on many dairies: If fewer heifers are being raised, the barns are still there and have to be paid for.

The result:

The total investment decreases $62,467 from $191,069.
Net enterprise income is $42,323 higher than the base income of -$23,846.
Rate of return improves to 14.4%. (This is lower than the rate of return from the combined changes in Step 6 because the dairy must pay for the investment in buildings that aren’t fully used.)

By improving the replacement enterprise and making changes in the dairy herd, such as cull rate, a dairy’s bottom line can improve. Using the assumptions in the example, changes provided a swing of $42,323, or $282 per cow.
This model isn’t a study of actual performance on dairies, but it does illustrate what type of influence the heifer enterprise can have on dairy farm profitability.

FYI

Jason Karszes is a PRO-DAIRY farm management specialist in the Department of Applied Economics and Management at Cornell University.

Interested in how your dairy is doing with its replacement program? Dairy Farm Business Summary publications give some guidance. In New York, contact your local Cooperative Extension office or Faye Butts at the Department of Applied Economics, Cornell University.
Phone: (607) 254-7412. E-mail: fsb1@cornell.edu

For reprints of PRO-DAIRY’s The Manager, contact Robin Huzinga, 272 Morrison Hall,
Cornell University, Ithaca, NY 14853. Phone: (607) 255-4478. E-mail: rmh14@cornell.edu