Economics and Risks of Raising Non-Replacement Calves

Recently a farmer reference group was formed in the Mid Coast region of NSW to provide information and guidance on an economic and risk analysis of rearing non-replacement calves. 

The project was led by Dan Armstrong, Senior Consultant with the RM Consulting Group. 

In the analysis, Dan and his team used two of the farms as case studies where the goal was to sell the non-replacement calves as dairy beef and investigate whether it would be economically practical to hold onto these calves and pursue this alternative pathway.

This was the second phase of a Dairy UP project looking at Sustainable Pathways for Surplus calves, led by Dairy Australia. The first phase involved a variety of consultation activities in the Nowra region with consumers, farmers, milk and meat processors and other supply chain stakeholders looking at alternative management pathways.

Useful resources related to this podcast:

DairyUP website - further information on this project and others www.dairyup.com.au 

Dairy Australia’s “Surplus Calves” and the Growing Beef from Dairy Project 

This podcast is an initiative of the NSW DPI Dairy Business Advisory Unit

It is brought to you in partnership the Hunter Local Land Services

Please share this podcast with your fellow farmers and colleagues and feel free to contact us with suggestions or comments via this email address thebusinessofdairy@gmail.com

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NSW DPI Dairy Newsletter

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The information discussed in this podcast are for informative and educational purposes only and do not constitute advice. 

Transcript

The Business of Dairy 

Episode #28 Transcript – “Economics and Risks of Raising Non-Replacement Calves”

Sheena Carter: Welcome to the Business of Dairy Podcast. I'm Sheena Carter, Development Officer with the New South Wales Department of Primary Industries dairy Team. Recently, a farmer reference group was formed in the Mid Coast region of New South Wales to provide information and guidance on an economic and risk analysis of rearing non-replacement calves. The project was led by Dan Armstrong, senior consultant with the RM Consulting Group, who is my guest today. In the analysis, Dan and his team used two of the farms as case studies where the goal was to sell the non-replacement calves as dairy beef and investigate whether it would be economically viable to hold on to these calves and pursue this alternative pathway. This was the second phase of a DairyUp project looking at sustainable pathways for surplus calves led by Dairy Australia. The first phase involved a variety of consultation activities in the Nowra region, with stakeholders involved in the whole supply chain, looking at alternative calf management pathways. 

Welcome to The Business of Dairy podcast, Dan. You're familiar to many in the dairy industry through your consultancy work, delivery of farm business management workshops through Dairy Australia and other dairy related research projects. Can you just tell our listeners a bit more about yourself, please? 

Dan Armstrong: Yeah, thanks, Sheena. Yeah, I'm a consultant based in Gippsland area. I’ve worked in the dairy industry for about 25 years in a number of roles and with a focus on farm business management and dairy farm systems. My work now tends to be a mixture of projects looking like this, looking at analysing issues for the dairy industry and yeah, farm business management work with individual farmers. 

Sheena Carter: Excellent. So you've got a lot of experience behind you, which is great to be able to bring to projects like this one. So the broad aim of this project, which was looking at the economics and risk of replacing… rearing sorry, non-replacement dairy calves. And the idea was to help farmers in their decision making around the viability of setting up a system on farm where non-replacement calves are consistently raised for sale into different beef markets as opposed to selling them at that 1 to 3 weeks of age, as happens in a lot of cases. So if we just start at the basic level, can you explain what we mean by non-replacement calves in a dairy business and what some of the non-financial challenges are for the industry and farmers in this regard? 

Dan Armstrong: So yeah, we've talked broadly about them as non-replacement calves – traditionally that was all the bull calves and any heifers that weren't wanting to be retained as replacements. The make-up of those surplus calves has probably changed a little bit with the introduction of sexed semen and the potential to target the replacement heifers with that. The scenarios we were looking at was moving from situations of conventional dairy breed semen and mop up with dairy bulls. So assuming that 50% of the calves would be male calves and then there'd be some surplus female dairy calves as well. And the change we were looking at was using sexed semen for replacement dairy heifers and then using either beef semen or beef bulls for the remainder of the herd where you weren't wanting to target replacements. 

Sheena Carter: Excellent. So there's a number of things that farmers are having to consider. It's the number of replacements that they're normally going to retain in their system. And if you're retaining more calves, there's more labour, all those sorts of things and you've got to have a market to target as well if you are retaining those animals. So before we dive too deeply into the analysis that you've done, can you explain what some of the financial challenges are for farmers looking at rearing the non-replacement calves in terms of costs and infrastructure, etcetera? 

Dan Armstrong: There's a lot of the operational costs that occur in that pre weaning period. We’re assuming that replacement heifers would probably use any of the non-saleable milk in their rearing, so we're assuming that the surplus calves would be predominantly reared on milk replacer – so significant costs in that pre weaning period and significant labour requirements. And post weaning, significant amounts of grain in the ration and some good quality hay required, and then assuming that they were kept on to 450 kilos or beyond, that grass might then make up a significant component of the diet, which we were wanting to analyse it in a way where we ensured that it wasn't going to be compromising the dairy operation. 

Sheena Carter: So, one of the challenges in doing the analysis is the beef market prices as well, and we know there can be a lot of variation in that market. I think we've seen in 2022, we had some very strong market prices which all of a sudden has pretty much disappeared coming into the 2023 year. So, I guess, that's where a lot of the risk probably is in these systems? 

Dan Armstrong: Yeah, that's exactly right. I think when this project was initially conceived it was in extremely buoyant beef markets and when the project was finalised, it was a very different scenario in terms of beef prices and demand for beef animals, and so, it was a good period to be conducting the project over. I don't think it's a surprise to anyone in the dairy industry that there will be times when you can make good money out of this and there'll be times when there won't. I think what we were trying to do was to quantify how often those two different scenarios would occur and start to stimulate thinking about how we avoid the scenarios where there isn't any additional profit made from rearing those surplus calves. 

Sheena Carter: Yeah, it is a real challenge, and like you say, it's not a surprise to dairy farmers. They've lived through these cycles many times before, so everyone's acutely aware of the challenges in that space. But I think the work that you've done is really good in that it is quantified. In this example we had two case study farms in New South Wales, in the Kempsey and Taree area of New South Wales, which were operating two different, or do operate, two different systems. Can you expand on that a bit? 

Dan Armstrong: Yeah, so these two farms were chosen because they did represent slightly different case studies, one being a year-round calving system where the need for additional infrastructure, if the surplus calves were reared, wasn't too substantial; and the second being more of a batch calving system where the more intense rearing of the calves meant that there were periods where the current infrastructure would have been quite inadequate and required more significant investment to enable those surplus calves to be reared on the dairy farm. 

Sheena Carter: Okay, great. So their normal practice on those two farms is predominantly selling their calves at that 1 to 3 weeks of age? 

Dan Armstrong: Yeah, that's right. So that had been the traditional practice and that's what we assumed as our base situation. 

Sheena Carter: And then from there you've changed that baseline system to a targeted breeding strategy with sexed semen over part of the herd and then the dairy beef AI or bull over the rest of the herd and then rearing those through to different weights. Obviously that incurred some additional costs, as we've already touched on, but can we talk about some of those costs in a bit more detail and some of the assumptions around the costs? 

Dan Armstrong: We'd assumed that it would be milk replacer that would be used to get them to weaning, that was probably the most significant cost in that pre weaning period, and we assumed with all of these costs that we looked at, we assumed a range that could occur, and we analysed the whole variety of price scenarios that could be expected. So, yeah, we assumed a range in milk replacer that could effectively be from between $0.60 and $0.95 per litre. 

The grain price had some impact and we assumed that grain could have been between about $300 and $550 per ton, depending on the year. We assumed some ranges in beef price, which were also very significant ranges. We were assuming that for most of the markets that it could be somewhere between $2.20 per kilo of live weight and up to $5 plus at the top end of the range for different beef markets. 

Sheena Carter: Okay, great. And I think you mentioned earlier, the additional labour required in this situation. Obviously, we're hanging on to these animals and feeding them a bit more. 

Dan Armstrong: Yeah, that's right. So we assumed that it was roughly an extra 4.5 hours a day of labour. Predominantly, most of that extra labour occurring in the pre weaning period, and then assuming a little bit more labour in the post weaning period to check the livestock and move and feed out hay or silage. 

Sheena Carter: Great. So from that, we need to look at the beef markets that you were targeting in this instance and you had effectively four different weight ranges and markets that you were targeting for the animals being reared. Can you talk about them as well? 

Dan Armstrong: In terms of the markets, we were thinking of the two main markets being the manufacturing beef market and the feeder steer market, and also looking at the costs incurred if you were to sell them just at weaning, where it wouldn't actually be a finished market, in most cases it would be moving them on to someone else who would take them to the next stage before slaughter. We predominantly broke it into four periods of, pre weaning period, the 100 to 150 kilo period, then the 350 to 400 kilo scenario, where we were targeting the feeder steer market, and then looking at up to 600 kilos where it could be a manufacturing market. 

Sheena Carter: So Dan, can you just explain for the listeners what is the difference between the manufacturing and the feeder market? 

Dan Armstrong: Yeah, in general terms, how we were thinking about it as some manufacturing market would be primarily just focused on the total liveweight of the animal, whereas the feeder steer market, the breeding and feeding of the animal to meet specifications for marbling and fat cover to target those premium beef products would be much more important. 

Sheena Carter: So we've used some assumptions that we were testing with the farmer group on the Mid-North Coast, some assumptions around the costs to rear the calves to different weights and taking into consideration the different markets that we're targeting for the animals, and then you've looked at the profitability of animals in each of these markets under a range of different beef prices. What did that reveal about the profitability and risk of these different markets? 

Dan Armstrong: Yeah thanks, Sheena. There was a huge range in the likely contribution that the dairy beef enterprise could make to the profitability. So we were seeing ranges between them adding up to $900 per head of extra profit to the enterprise, down to the worst case scenario of actually losing close to $600 per head in a bad case scenario. And approximately 50% of the time it was above the break-even scenario. The feeder steer market certainly did offer some potential to get some higher prices in the better scenarios and probably to lift the average profitability of it up overall. It didn't make a huge contribution in terms of eliminating the worst case scenarios when demand for beef is really low. 

Sheena Carter: So, Dan, looking at the numbers in your analysis, it seemed to be that it was that 450 kilo feeder market that was the more profitable scenario? 

Dan Armstrong: Good question, Sheena. On paper it did appear that keeping them on to somewhere beyond 400 kilos and targeting the feeder market was the most profitable. And in general, on paper, keeping them on for longer appeared to be more profitable, but I think we know in reality on dairy farms that it's going to be more likely that most dairy farms would be wanting to move them on earlier rather than keeping them on to 400 to 600 kilos and I think that's a legitimate risk management thing. In terms of the longer that they're kept on, the more likely that you're going to be going through a very dry period or a really wet winter where you’re really pinched for feed, and it's probably quite legitimate that the approach most dairy farmers are going to want to take is to be selling those animals on at an earlier stage rather than wearing the risk of taking them for a long period where you're more likely to encounter some very high feed costs. 

Sheena Carter: And the other thing to add to that, Dan, is land and land availability on the farm. Obviously you're going to need some reasonable acreages to be able to do this, which in some regions is going to be a big challenge, perhaps not so much the inland regions of New South Wales in particular, but coastal regions, a bit of a challenge there? 

Dan Armstrong: Yeah, absolutely, and we assumed a pasture grazed feed cost, which could have been either agistment, could have been an additional lease block, or it could have been growing more pasture on the existing area, depending on the resources of the different farms. I think we've allowed enough extra costs to cover those scenarios, but it doesn't really reflect the challenge of actually accessing that grazed feed within a reasonable vicinity of where the dairy farm is, which could be a challenge. 

Sheena Carter: Yes, well and truly. Now, another thing that we need to consider is the infrastructure needed on farm to raise more calves, which for some systems might be easier than others, but with the two case study farms, you've mentioned we had two different calving patterns in those, and you did some work looking at the cost of additional infrastructure. Can you talk about that? 

Dan Armstrong: Yeah, so we assumed for the year round calving farm, which was slightly larger, that a renovation, or extension, of their calf rearing facilities of approximately $35,000 would probably be adequate for that farm. Whereas the other farm with the batch farming calving system, even though it was a smaller herd size, we assumed that they'd need to be spending about $75,000 to build additional calf rearing facilities. 

And I think we're actually looking at two case studies in a region where that spend is probably going to be a lot less than it would be for a single calving farm in southern Australia, in southern Victoria or Tasmania. A lot of single calving patterns and probably climatic conditions that mean the control of temperature is a lot more important than it is in the region where these two case studies were. 

Sheena Carter: Sure, and did you look at the payback period on that investment? 

Dan Armstrong: Yes, so we did analyse the payback period for the two different farms. Given that year round calving pattern, it was a fairly small capital investment, it could potentially be paid back very quickly. For the batch calving farm, where it was a more significant capital investment, it could have been, in the worst case scenario, could have been upwards of 15 years before that additional capital investment was paid back. And I'd imagine there's a risk for farms with greater requirement for additional infrastructure that that payback period could be quite significant. 

Sheena Carter: Yeah, so there's a lot to consider. It's not just a simple decision of, I'm going to raise a few more calves and push them through to a certain market. There's a lot to consider before getting into these systems, and I think it leads on to some other points around farmers making business decisions for lots of different reasons and it's not always purely an economical reason. But can you touch on some of the other considerations regarding rearing non-replacement calves on farm? 

Dan Armstrong: It definitely is a complex decision and we've mentioned a couple of times that when these profitable dairy farm businesses that are looking to add this additional enterprise on, they wouldn't be wanting to see it detract from the underlying profitability of the dairy enterprise, and I think there's a risk that that could detract from, not just the calf rearing, but the whole business performance in terms of spreading the attention of the managers more thinly. It would be a risk that would need to be planned for and managed to ensure that the attention to detail for the dairy operation wouldn't be compromised at all by adding this additional enterprise in. That could have a financial impact, it could just be a lifestyle impact. The other aspect is, just in terms of the goals and motivation of the farmer, that there probably was quite a lot of farmers that we've talked to that said, I'm a dairy farmer and I'm motivated to breed good dairy animals, it just isn't something that I find rewarding and I'm not motivated to put a lot of extra attention into something that isn't something that gives me a lot of satisfaction. 

Sheena Carter: Yeah, not the core business. You've got to put your effort where you're going to get reward, is probably one way to put it. So, Dan, where to from here? I think as part of your farmer group on the Mid-North Coast, you started to develop a decision support calculator for farmers, for that group to trial, whereabouts is that at? 

Dan Armstrong: That tool's been developed in draft form and circulated to the farmers that were in the reference group, which we really value the feedback that they provided to this project, and they've been given the opportunity to test that and allow them to put in the unique costs and returns that they might expect for their individual situation. The next step is to collect their feedback and decide whether it's worth developing and distributing that calculator further. 

Sheena Carter: Right, yes. I think it would be a handy tool to aid people's decision making, and given their own unique variables and input costs, target markets, etcetera, so yeah. I've obviously had a cursory look at that calculator and it does look quite good, so it'll be good to get the farmer feedback and see their view on it as well. I think this non-replacement calves is an ongoing focus of the dairy industry and I know that Dairy Australia and MLA have partnered in another project called Growing Beef from Dairy. Can you touch on that, explain what that project is for the listeners? 

Dan Armstrong: So that project involves setting up producer demonstration sites and getting a group of farmers with a common interest around the beef from dairy issues and then doing some on farm monitoring of what different farmers are trying in that group and building learning activities around that, where learnings are shared between the farmers that are trialling different things on the farms. There's upcoming opportunities to get involved with that and there'll be a call for more producer demonstration sites and that'll be advertised on the website for the Beef From Dairy Project. 

Sheena Carter: Excellent, and I can put a link in this podcast's show notes if people are interested in looking into that further, if it's something that interests them. Any other thoughts on where to from here, Dan? 

Dan Armstrong: Yeah, there is a few things that we weren’t able to analyse within this project. It would be good to analyse a calving pattern where it was a very tight seasonal carving pattern, where the pressure on infrastructure and labour is greater in that intense period of calving. It could also be worthwhile to analyse a scenario where a lot more surplus heifers were raised. We've seen that market for surplus dairy heifers fluctuate a bit. The export market for dairy heifers wasn't an option for the case study farms in that area that we looked at, so we didn't analyse that in any detail, given it wasn't an option for them. The other good thing about having set up this detailed analysis of a couple of case studies is that as we gain better knowledge on what can be done in terms of feeding and breeding of these beef from dairy animals, we can update these results as we get better animals and better pathways for them to go down. 

Sheena Carter: Yes, I think that'll be an interesting space to keep watching as people target different markets and develop the end product that they're trying to sell into that market over time. 

Dan Armstrong: Yeah, that's right. 

Sheena Carter: Look, we'll have various links in the show notes, as I mentioned, to get access to further information on this project, on the DairyUp website, etcetera, but are there a few key points that you might like to leave with farmers considering a dairy beef pathway in their business? 

Dan Armstrong: Yeah, in terms of key messages, I think understanding the range of possible scenarios that could occur in terms of the profitability of adding dairy beef animals to the enterprise, and I think putting a lot of thought into managing the downside periods and avoiding the occurrence of those worst case scenarios, which can be challenging given that decisions have to be made well ahead of time in terms of joining decisions and when the animals are sold. Whatever decision is made, I think you've got to be putting a lot of attention into ensuring that it doesn't detract from the dairy business and probably making sure it's something that someone in the business really enjoys doing and get satisfaction out of doing it well. I think there could certainly be a role for a specialist calf rearer that may be operating in a partnership with a dairy farm business if it's not the core business of the dairy farmer to be raising those beef animals. 

Sheena Carter: Yes, I think that's a good suggestion to find someone with the interest and the expertise, and they can make their own business out of that component. Is that what you're saying? 

Dan Armstrong: Yeah, I think so. If there's someone with the passion to do that really well, it's a matter of finding pathways for that specialist calf rearer to ensure that they've got a reliable and profitable business. 

Sheena Carter: Okay thanks, Dan. It's been excellent chatting to you about this project and it's great to have some numbers to put to the various scenarios around dairy beef pathways to quantify it. And I think, we touched on it often, farmers have lived through a lot of the variability in seasonal conditions and pricing conditions to certainly have a gut sense on, you know, sometimes it's profitable, sometimes it's not profitable, but this really quantifies that gut sense to my mind. So, thank you very much for your time today, and yeah, we will look forward to potentially hearing more about what might happen with further investigations into the dairy beef markets. 

Dan Armstrong: Yeah, no worries, Sheena, that's no problem. I would also like to thank the study farmers for volunteering their information, and the group of farmers that provided input into this project, we wouldn't have got the quality of results that we did without them, and also, Sheena and Blake Carter, for pulling that group together. And also I’d like to thank Tristan Wardley and Lauren Jones, my colleagues that did a fair bit of the work involved in this project. So yeah, thanks everyone. 

Sheena Carter: Yes, indeed. It takes a team, doesn't it?

Dan Armstrong: Yeah, definitely. 

Sheena Carter: Lovely. All right. Thank you very much. 

Thank you for listening to this month's podcast, produced by the New South Wales DPI Dairy Business Advisory Unit. This series is brought to you with funding and support from the Hunter Local Land Services. The show notes to this episode include links to the DairyUp website, where you can find further information on this project, and Dairy Australia's surplus calves website, including information on the Growing Beef From Dairy Project. We'd love you to share this podcast with your networks and feel free to send any feedback or suggestions for future episodes to thebusinessofdairy@gmail.com