The U.S. dairy herd has been trending lower since March. One explanation that I continue to hear for the decline is that record-high slaughter prices are pulling more dairy cows toward the slaughterhouse. But what seems to be getting less press is the high cost of replacement cows. There can be big differences in regional replacement cow prices, and USDA doesn’t always do a great job of picking up on market prices for replacements. However, their numbers put replacements at $1,760 per head in July, the highest they have been since 2016.
When I try to model replacement cow prices, there are three things that drive the price: milk price, feed costs, and slaughter prices, all with a six-month lag. Record-high milk prices in the first half of 2022 have helped push replacement cow prices up to their current level, and the relatively good milk prices in early 2023 were still supportive for replacement costs into the third quarter of this year.
Feed costs are negatively correlated with replacement prices, so the high feed costs have helped hold back replacement prices. Slaughter prices, on the other hand, are positively correlated and have been helping support the replacement price. Still, the market has been extra strong this year, running $200 to $400 per head higher than the model says prices should be.
Nate Donnay
Sept. 25, 2023
hoards.com
