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Equipment Turn-Over in the Dairy Industry Is a Major Problem

Farm Business Management Update, December-January 2002/2003

By Tom Stanley

Almost any manufacturing process requires specialized equipment that over time will wear-out and need replacing. Dairy farmers have very specialized milk manufacturing equipment: their cows. And the dairy industry has a problem: wearing-out the cows faster than the replacement "equipment" can be developed. As a result, many dairy farmers find themselves in a very tenuous situation where cows need to be replaced but they do not have young females of their own with which to replace them. Since this situation is an industry-wide problem, the demand for dairy heifers has outstripped the supply, and prices for dairy heifers continue to reach all-time highs.

This past summer milk prices declined dramatically. From a national perspective, anytime milk prices drop below breakeven levels a certain percentage of dairy farmers will sell their herds. In the late summer and fall of this year, a slight decrease in the price of replacement heifers has been seen as a result of this milk-price-related increase in the supply of replacement females and decrease in dairy farm gross income. The fundamentals have not changed though. The dairy industry is still not reproducing replacements as quickly as it is wearing-out its females.

For years, the dairy industry has increased milk production through selective breeding. In the pursuit of higher milk production, it appears that other traits that impact cow longevity have not gotten necessary attention. This animal selection decision is now having huge impacts on the economics of the dairy industry.

On Virginia dairy farms, it currently takes approximately three years from conception until a heifer begins producing milk. The average time from when a dairy cow first begins producing milk until she is culled currently encompasses about three lactations. In her lifetime as a producing milk cow, she will produce three calves. Fifty percent of these calves will be bulls. Of the 50 percent that are heifers, only 85 percent will successfully join the milk-producing herd. The result is that the dairy herd is just barely replacing itself.

In economic terms, this dearth of productive milking cows has erected a very high barrier to entry for anyone wanting to start a dairy farm and extremely difficult for existing dairies to expand. Like so many other industries dependent on natural resources, dairy farmers must balance between short-term productivity and the long-term sustainability.

The shortage of dairy replacement heifers is sure to be a problem for the next several years, baring the dispersal of a significant number of the herds currently in production. It takes three years for selection and breeding decisions to have an effect in the dairy herd. Most dairy scientists would agree that they are more than one generation away from correcting the reproductive and soundness problems many dairy herds now have. Therefore, the market fundamentals indicate that high relative prices for replacement heifers and milk cows of serviceable age are almost sure to be with us for some years to come.

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