By Steve Bodart, Senior AgriBusiness Dairy Industry Expert, Lookout Ridge Consulting
The largest three expenses of producing milk on most dairies are feed cost, replacement cost and labor cost. Dairy producers historically have done well at evaluating and making adjustments to control their feed expense and their labor expense. Replacement cost has historically not been closely evaluated. Instead of looking at replacement cost, dairies tended to focus on cull rate and death rate as a percentage of the rolling herd size.
Replacement cost is the cost of maintaining your herd size and structure. The formula for calculating replacement cost is:
Number of cows leaving the herd (culls + deaths) * balance sheet value
Minus value of cows removed
Divided by cwt milk sold
By focusing on the replacement cost instead of a percentage cull and death, the dairy has the ability to see how its management practices can influence the impact replacement cost has on the overall cost of production. The goal of a successful herd replacement program is having a replacement cost of less than $1.50/cwt.
The following factors will have an impact on your herd's replacement cost:
› The balance sheet value of the dairy herd should be standardized from year-to-year and should represent on average what it costs to raise heifers. The value would include all raising costs plus the value of a newborn calf.
› The cow value at removal can change significantly from herd to herd. The value can be influenced by the type of animals being culled and will include cows sold for dairy purposes. Typically as the percentage of voluntary culls increases, the average cull cow value will increase as these culls are of higher quality. The average cow value at removal will be reduced as the percentage death loss in the herd increases.
› Since milk is the primary source of income on a dairy, the cost of herd replacements should be evaluated relative to the amount of milk sold.
The results of management changes can have a significant impact on the herd replacement cost and a corresponding effect on the cost of production. To remain competitive in today's dairy environment your dairy must understand this impact and know the steps it will take to maintain its replacement cost at $1.50/cwt.