Evaluating the True Cost of Raising Quality Heifers
When we look at heifer raising costs, there typically are two scenarios: we either raise our heifers ourselves or we outsource them to a custom grower. Weighing that decision, and evaluating how much we can pay a custom grower, really need to focus on the value of the heifer that we’re building, rather than looking at the heifer as a cost or a commodity.
“What does it cost to raise a heifer?” This is a question I get from a lot of producers I work with. Sometimes it’s a little difficult to break out all the expenses that we have in our accounting books, but generally, this is the breakout:
Feed and labor are generally our largest expenses. Feed comprises about 60% to 70% of the total cost. Labor is about 10% to 15%.
Additional production costs: animal health, breeding, bedding, supplies, so on and so forth.
Capital expense and overhead.
Typically, we see anywhere from $2.35 all the way up to $3.20 per day. It’s a broad range, as far as heifer-raising expenses go. Generally speaking, we see close to $1,500 to $2,000 for the total cost to raise a replacement heifer, and that’s before the value of the heifer calf that she’s carrying.
When we look at heifer raising, one scenario we also pose is, “Which is a better deal?” In Case A, we have 705 days at the heifer grower versus 678. We would think a shorter term would be a better situation as far as cost goes, but what if we alter the rate per head per day? Going from $2.50 to $2.60, that’s maybe not quite as clear. Are we willing to pay $0.10 more per head per day to get the number of days lower?
It’s actually kind of a trick question because, by adjusting the rates, the cost comes out to be exactly the same. A lot of times we focus on the cost per head per day, but that’s not necessarily the true cost. It’s actually a combination of the cost and the duration that those heifers are at the grower.
Obviously, the point that we’re trying to make is that it’s not just the cost per head per day that really matters. There are a lot of other factors that come into play: the duration that the heifer is at the grower, as well as potentially the value that we’re getting of that heifer. What quality is she?
In a second scenario, we’re looking at a custom-heifer-raising situation where the heifer is at the grower for, again, 705 days for both growers. But what if the one grower is charging us $2.75 versus $2.60 per head per day? Are we willing to pay $0.15 more per head per day? The difference at the end of the 705 days is $1,940 versus almost $1,840, so we’re paying just over $100 more to have that heifer raised over that same period of time.
But what if we said there’s the potential that she’s going to give us five more pounds of peak milk in that first lactation? What is that value to us? Is it worth the additional cost?
When we run the analysis, in this case we’re using $20 milk. Given the situation right now, that’s not the case. But certainly we can use it as a guide. In this case, the increased milk would add $225 of value, by having the additional peak milk of five pounds. Obviously, there’s added feed cost to get her to produce that much milk. We subtract off about $65 for that relative feed cost, and we come, basically, to a cost of just over $0.22 per head per day on which we could effectively have a margin in terms of our heifer-growing situation.
Now, we said we would be paying $0.15 more per head per day, but yet our margin is actually just over $0.22. In this particular scenario, it actually proves that we might be better off paying more to get a better-quality heifer producing more milk.
Looking at it another way, what could a producer afford to pay a heifer grower for about 450 pounds more milk in that first lactation? Using a milk price of about $17.00 per hundredweight, that’s an extra gross profit of about $76.00. In the calculation, we used a 2.25 feed efficiency on those heifers with the feed cost right around 10.5 cents per pound of dry matter. With that cost, we’re looking at about $56.00 in that first lactation that we gain just based on that scenario, with feed factored in.
We used 705 days at the grower in the previous scenarios, so if we take that $56.00 divided over the entire time that heifer is at our grower, we could actually pay the grower $0.08 more per head per day. That may be an opportunity to negotiate with a grower to raise our heifers for more ultimate value and productivity.
Obviously, this calculation is a constantly moving target. The outcome can change over time, based on fluctuations in feed costs, milk price, and other factors. But the upshot is to work with your nutritionist and your heifer grower or potential heifer grower to evaluate really looking at your heifers more from a value and margin proposition, rather than just a pure cost per head per day.
Heifer-raising expense is more important now than ever before, with current market and industry conditions. The real opportunity to purchase heifers and springers for less than what it costs to raise them does exist. While there are certain considerations one has to make in purchasing versus raising a heifer, there are ample reasons for producers to truly assess their heifer-raising performance and investment.
For more discussion of agricultural financial scenarios and services, visit www.compeerfinancial.com.
Mon, 08/13/2018 – 09:43
Matthew Lange, dairy consultant with Compeer Financial, walks through heifer-raising considerations to help make solid decisions, for today as well as into the future.
Source: Dairy Herd