Modeling the Financial Impact of the Replacement Program
Pre-fresh heifers and heifer calves typically make up about 7% of a dairy’s total assets. And operating costs -- such as feed, labor and health costs – associated with raising them is one of a dairy’s largest annual operating expenses.
Cornell University’s PRO-DAIRY Farm Management Specialist Jason Karszes uses a financial model that treats the heifer enterprise as a separate business to gauge the financial impact that the replacement program is having on the dairy. Karszes recently told the audience at the Dairy Calf and Heifer Association annual conference that the financial model structures the heifer operation as a wholly owned subsidiary of the dairy, with its own set of books.
“This approach helps to determine the true cost of raising a dairy’s replacements,” said Karszes. “The heifer business buys the newborn calves from the dairy; covers all expenses and investments associated with raising the replacements, and sells the heifers back to the dairy as springers.”
In addition to providing a clearer financial picture of the true cost of raising heifers, Karszes said other benefits of the model include:
Greater incentive to grow heifers efficiently – Delivering pregnant heifers to the milking herd in fewer days generally reduces the cost of feed, labor and housing for heifers. Calving age impacts the total number of heifers being raised, which impacts many different aspects of the replacement program. Plus, Karszes cited research indicating that for every month decrease in calving age, the productive life of a heifer goes up by 50 to 150 days (Cooke et al., 2013; Hutchison et al., 2017; Van Amburgh and Everett, unpublished).
Increased focus on animal quality and labor efficiency – Medication and labor for treating sick calves is costly, so increased management focus on preventing disease is going to continue. Labor is the second largest cost to raise replacements. If dairies can improve labor efficiency, they can lower costs to raise the replacement. The result: not just lower cost, but a more productive set of replacements. Karszes noted a recent study that showed a decrease in just one antibiotic treatment per calf resulted in 500 to 900 pounds more milk in the first lactation (Soberon et al. 2012).
Increased motivation to sell heifers – Many dairies have a tendency to carry all of their heifers to adulthood, even if they won’t need all of them for herd replacements. Selling heifers earlier in life can both save on expenses and reap additional revenue for the heifer enterprise. It also can help with nutrient management and CAFO animal-unit compliance. And you might just get better-quality replacements in the animals you retain, because the sale of their herd mates may allow remaining heifers to grow up in a less-crowded environment.
The farm management specialist noted that by utilizing the financial model -- depending on what assumptions are made for the starting point -- the replacement enterprise can potentially be improved enough to the change the results from a loss in the model to a profit within the model. An actual replacement program on a dairy farm is a cost center that supports the dairy. But by improving the replacement program, a higher quality, lower cost animal can be provided to the dairy.
Karszes noted the most exciting aspect of such a targeted focus on efficient heifer management is that the strategies to increase profitability often concurrently improve the health, productivity and quality of the heifers raised. He cautioned, however, that cutting corners in nutrition or housing – no matter how much it may save in the short term – is never a good idea. “If, in the end, you don’t have a quality heifer, the cost never can get low enough,” he stated.