The first time around, lack of space forced Russell and Marilyn Bartell to find a heifer grower in 1991 while they expanded their herd. After about 70 calves went to the grower's facility, they had room for heifers again, so they raised the next 29 head on the farm.
Seeing their home-raised heifers stand next to the ones raised by the contractor was an eye-opener for the Foley, Minn., producers.
"They were so different in size," Marilyn says. "Ours were shorter than the custom-raised heifers." That prompted them to locate another grower, since the facilities of the first one they worked with were full. Now they sell their weaned, 60-day-old calves to their grower for $125 each. About two months before calving, they buy their A.I.-bred heifers back for $1,150 a piece. The heifers calf at 24 months and weigh about 1,235 lb.
"The heifers are getting all-round better care," Russell says. "Vaccinations are kept up, they're bred on time, and they have the size to get in the milk line at 24 months." Another plus: Contract-reared heifers are averaging 80-lb. milk peaks in their first lactation. Home-grown heifers had a 65-lb. peak average. They now milk 175 cows 2X in a flat barn. With new facilities, they'll have room for a 300-cow herd. They're currently building a double-six parallel parlor and a 224-stall barn.
The Bartells are one of a growing number of dairy producers who are examining the pros and cons of contract heifer raising. Popularity of the practice varies across the country.
Usually, it's the larger herd operators who are doing it. In the West, estimates place about 25% of the area's heifers raised under contract. In the Northeast, about 10% are raised this way. Less than that are contracted in the Midwest.
If you're thinking about having someone else raise your heifers, first you need to know your true cost for raising them to calving. Studies throughout the U.S. indicate the average costs range from $1,150 to $1,250 per heifer, or $1.25 to $1.60 per day. In efficiently managed herds and for smaller dairy breeds such as Jerseys, cost per heifer may be as low as $900. In poorly managed herds, it may average above $1,300.
Roger Cady, Washington State University, says heifers should be required to cover their own costs. Usually, a traditional enterprise analysis relies on the assumption that milking cows are paying rearing costs for heifers.
"In a real sense, they are," Cady says. "However, this approach may hide some of the cost of poor heifer management if the herd can show a positive bottom line." The assumption that an older heifer gives more milk in her first lactation and offsets increased heifer-raising costs is also setting up a false sense of security, Cady says.
"Producers should think of the heifer in the same manner as one would consider the purchase of a new piece of equipment," he says. "Consider the payback period required for a heifer to recoup her own rearing costs instead of the milking herd paying for the heifer."
To help you analyze heifer raising alternatives, Gayle Willett and Herbert Hinman, agricultural economists at Washington State University, developed manual and computerized worksheets that compare raising your own versus contract-raising (see box) and raising versus buying. Both versions will be ready for distribution in about two months. To order a copy of the dairy heifer replacement microcomputer program ($20), contact WSU's Department of Agricultural Economics, Hulbert Hall, Pullman, Wash., 99164-6210. The manual version will be available from the Bulletins Office, WSU, Cooper Publications Building, Pullman, Wash., 99164-5912, (509) 335-2857.
Sidebar: How to calculate heifer costs
To help you use this worksheet, Gayle Willett, Washington State University, plugged in estimates (shown in italics) from Washington dairy producer and contract grower records. In the example, he also assumed that a 300-cow herd needed 100 replacements annually, and that calves would be transferred to the grower at six months of age and returned at 22 months.
The worksheet begins with estimating the positive effects when using contract grower services (lines 1-20). There is no reduction in ownership costs since the buildings, facilities and equipment formerly used in the heifer enterprise will be kept.
The negative effects of contracting, such as transportation and grower cost, follow (lines 21-30). Next, a summary appears on lines 31 and 32. If 100 heifers are transferred into the milking herd each year, the annual increase in farm net income you could attribute to the use of the grower is $4,012.50.
Willett points out that a market price is assumed for surplus silage, $10/hour for labor and management, and no return on investment in buildings, facilities and equipment no longer used by the raised heifers.
Break-even values (lines 33-40) are computed for the contract fee, on-farm hay price and the change in first-year milk production from the home-grown heifer. The break-even contract fee for the 16-month growing period is $680 or about 76¢/lb. for a 900-lb. gain. If the contract fee averages 76¢/lb. and all other variables remain unchanged, contracting heifers out will not change your net income relative to raising your own heifers, Willett says. A fee higher than 76¢ means that raising your own heifers will increase net income, while a fee below 76¢ means a reduction in net income.
The same goes for the hay break-even price and first-lactation production. A hay price below $105.08 shifts the advantage to home-grown heifers while a higher price implies contracting is less costly. If the example producer's home-grown heifers out-produce contract-raised heifers by 465 lb. over the first lactation, net income will be unchanged. If that advantage is greater, home-grown heifers are more economical than contract-raised heifers. But if the advantage is less than 465 lb., net income is improved by using a contract grower.
Table: Contract-raising versus home-growing heifers
Changes in Net Income
POSITIVE EFFECTS
Reduced costs:
Operating costs (for home-grown heifer)
Item Example Your
$/head $/head
1. Cost of hay [2 (a) tons x $130 (b)/ton] $260.00 $
2. Cost of silage (5.9 tons x $28/ton) $165.20 $
3. Cost of pasture 0 $
4. Cost of grain 1 (1.836 lb. x 8¢/lb.) $146.88 $
5. Cost of grain 2 (___lb. x $___/lb.) 0 $
6. Cost of other feed 0 $
7. Cost of salt, minerals (97 lb. x 8¢/lb) $7.76 $
8. Cost of labor/mgmt. (9 hr. x $10/hr.) $90.00 $
9. Vet/medicine cost (if different than contract-raised heifer costs) 0 $
10. Breeding cost (if different than contract-raised cost) 0 $
11. Bedding cost $15.00 $
12. Other costs (supplies, power, repairs, etc.) $25.00 $
13. Interest on above [11%; heifers with grower for 16 months) $52.06 $
14. Total reduced operating costs (add lines 1-13) $761.90 $
Ownership Costs (if applicable, for home-grown heifer)
15. Building/facility ownership costs
(depreciation, interest, property taxes, insurance) $0 $
16. Equipment ownership costs
(depreciation, interest, property taxes, insurance) $0 $
17. Other ownership costs $0 $
18. Total reduced ownership costs $0 $
Added Returns
19. Added returns if heifer is contract raised $0 $
20. TOTAL POSITIVE EFFECTS (line 14 + line 18 + line 19) $761.90 $
NEGATIVE EFFECTS
Added Costs (for contract-raised heifer):
21. Cost of transporting heifer to contract grower $10.00 $
22. Enter contract fees
a) Daily fee (___days with contract grower x $___ cost /day) = $____
b) Weight gain fee (1,250 lb. ending weight - 350 lb. beginning
weight x 70¢ fee/lb.) = $630.00
c) Total contract fee (sum of above) $630.00 $
23. Vet/medicine costs (if different
than home-grown heifer costs) $0 $
24. Breeding cost (if different than home-grown costs) $0 $
25. Cost of transporting heifer from grower to dairy $20.00 $
26. Other costs (if different than home-grown heifer cost) $0 $
27. Interest on above:
[($660.00 (a) add lines 21, 22, 23-26
÷ 2) x (0.11 (b) interest rate) x
(16 (c) months ÷ 12)] $48.40 $
28. TOTAL ADDED COSTS (lines 21-27) $708.40 $
Reduced Returns:
29. Reduced returns if heifer is contract raised $0 $
30. TOTAL NEGATIVE EFFECTS (line 28 + line 29) $708.40 $
FINANCIAL ANALYSIS
31. Change in net income/heifer if contract raised (line 20 - line 30) $53.50 $
32. Change in annual farm net income($53.50 [line 31] x 100 [number of
replacement heifers required/year] x 12 ÷ 16 months) $4,012.50 $
BREAK-EVEN ANALYSIS
33. Enter [1 + (line 27b 0.11 x line 27c 1.33 ÷ 12 x 0.50)] 1.0733 ______
34. Enter line 22c ($630) x line 33 (1.0733) $676.18 $
35. Enter [line 20 ($761.90) - line 28 ($708.40) ÷ line 34 ($676.18)] $729.68 $
36. BREAK-EVEN CONTRACT FEE (line 35 ÷ line 33) $679.85 $
37. Enter [line 20 $761.90 - (line 1 $260 x line 33 1.0733)] $482.84 $
38. Enter [(line 28 $708.40 - line 37 $482.84) ÷ line 33 1.0733] $210.16 $
39. BREAK-EVEN HAY PRICE/TON (line 38 ÷ line 1a 2) $105.08 $
40. BREAK-EVEN ADVANTAGE IN FIRST-
YEAR MILK PRODUCTION FROM HOME-
GROWN HEIFER (line 31 ÷ $0.115/lb. milk price) 465 lb. lb.
Sidebar: Before you sign on the bottom line
You've heard the point hammer again and again: Don't turn over your heifer-rearing chores to someone else without first preparing a detailed, written contract signed by both parties.
Most people assume the motivation for this advice is the desire for some protection in case of a court dispute. But that's only one reason. "The real reason for having a contract is to establish a starting point for communication between the heifer owner and the grower," says University of Wisconsin dairy specialist Pat Hoffman.
"A contract is a way to level the different expectations that dairy producers and growers might have," adds Tom Anderson, Extension dairy agent in Shawano County, Wis.
Things Hoffman and Anderson suggest be included in a contract between dairy producers and their heifer raisers:
Payment. A major consideration is method of payment—like a fee for pound of gain per day or a charge per head per day. You'll want to detail when the grower is going to be paid—monthly, quarterly, at the end of the growing period, etc. Growers might want to include an interest or penalty clause to cover late payments. Buyers might want to negotiate a discount for timely or early payment. "There are probably as many different kinds of payment plans as there are people in the business," says Anderson.
Performance standards. Spell out expectations for the age of heifers to be delivered and the weight and body condition score at time of return to the owner. While some experts recommend regular sessions between producers and heifer growers to evaluate the performance of animals through the growing period, Hoffman says that's overkill. "It can relay the message that these are competing enterprises rather than sister enterprises," he says. "There has to be some level of trust." You'll also want to include details about transportation. Who will be responsible for delivering heifers to the grower at the start of the growing period? Who will return them to the producer at the end?
Health. Hoffman recommends growers provide in the contract details about a health care plan they've worked up with their veterinarian. The grower will want to include information about what kinds of vaccinations animals will receive, who will give those vaccinations and when. Details about dehorning, breeding and treatment of sick animals should be included. Death loss can be more ticklish. In most contracts, the dairy producer accepts responsibility for a certain percentage of animals lost and the grower accepts responsibility for losses above that level. "The idea is that there will be some death loss no matter who is raising the animals," explains Anderson.
Nutrition. Contracts should include detailed information about the grower's plan for feeding throughout the growing period. Growers and producers need to agree about what to do with nonperforming animals. Says Hoffman: "It might just be a matter of the grower calling the producer and saying 'I don't think she's going to make it. How about we cut our losses now, sell her and split the money?' "
Insurance. Both parties need to determine whose insurance company will cover losses due to a catastrophe like fire, lightning strike, or theft. "If you wait until something happens, both insurance companies could claim it's the other guy's problem," Hoffman says. Anderson suggests including a legal description of where animals will be kept during the growing period, too. "Something as simple as a statement of township, section, range should keep your insurance agent happy," he says. —Rick Mooney
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