Dairy downturn reduces demand for young heifers

Issue Date: January 27, 2010
Ching Lee

Plagued by huge financial losses, dairy farmers looking to cut costs by scaling back their herds are dealing a hard blow to calf and heifer raisers who depend on the incoming flow of young cattle for continued business.

Gordon Aue, who runs Triple A Cattle and Farming in Merced County, said when the financial crisis hit, dairy producers he was working for were pulling out their animals because they couldn't afford the cost of raising them off site.

"Basically, we lost almost all of our customers," he said. "When dairymen are having trouble financially, then they don't pay us. A lot of them have had to sell their heifers just to keep their heads above water, so they're not putting heifers out for us to raise."

That is a familiar story to Diana Lujano-Gonzales, who manages Camerio Heifer Ranch in Imperial County and is southwest regional director for the Dairy Calf and Heifer Association. She said calf and heifer growers across the country are seeing their businesses shrink due to the downturn in the dairy economy.

In her own operation, she said some of her long-time customers had to cut their contracts short when milk prices collapsed and cash flow ran short.

"In talking to other heifer growers in the country, some of them have gone to raising a different type of animal besides dairy replacements," she said.

It's a stark contrast from just a short time ago, when robust milk prices in 2007 and 2008 meant dairy producers were ramping up production and milking more cows, and calf-and-heifer-raising operations were expanding right along with the steady growth in the dairy business.

"We were seeing more people interested in wanting to have their animals raised, and we had picked up customers, mostly due to expansion, because guys were adding to their herds, so that created this need," she said. "We saw people jump into the heifer-raising business and more operations starting up."

But by December 2008, Trey Ozenbaugh, who operates A&A Cattle Co. in Stanislaus County, said he started to feel the financial pain of his customers as their milk checks were severely cut and they struggled to pay their bills.

"I think the biggest challenge for us has been obviously the loss of some customers trying to raise their heifers at home more economically," he said.

Another challenge is working with cash-strapped clients who may be slow in paying their bills. At about $2 a day per animal, which is what calf ranches typically charge, debt can quickly add up for dairies that have several hundred animals being raised off site, Ozenbaugh said. That debt also goes up because delinquent payments are charged interest, he added.

Jim Reynolds, a veterinarian at the University of California, Davis, School of Veterinary Medicine in Tulare, said the rising popularity of California calf ranches could be traced to the Chino Valley, back when the region was a major milk-producing area.

Limited capacity on many Chino dairies forced producers to send their calves and heifers to other ranches so they could focus on milking more cows. The practice has now become more widespread, he said.

While there is no real data on the number of calf ranches in California, Reynolds said a survey conducted several years ago by a former UC dairy extension veterinarian indicates that about 70 percent of the dairies in Tulare County, the state's biggest dairy region, send their calves to calf ranches.

Dairies in northern and coastal regions are more likely to raise their own calves, he said.

With dairies now being squeezed for cash, Reynolds said some producers are definitely rethinking the option of raising their own calves on the dairy.

"There's no question that it costs more money to raise them on a calf ranch than it does on a dairy because the calf ranch has to make a profit," he said.

But it may not always be feasible for some dairies to switch back to raising their own heifers. With California's stringent air and water quality regulations, dairies can house only the number of animals that their permit allows, Lujano-Gonzales said.

As a veterinarian, Reynolds said he advises dairy farmers who are thinking about bringing their calves and heifers home to make those decisions based on their own operation's capacity, not purely on slashing costs.

"If a dairy has somebody who wants to manage the calf-raising and is truly interested in doing that, then they should do it because it's cheaper and they can control the quality of the calves and the whole process of raising them better," he said. "But if they don't do it well, it could cost them more money in the long run. So they either make a decision to do it well, or they're better off sending them out."

Margo Souza, a Stanislaus County dairy producer, said even though it costs her $8,000 to $10,000 a month to raise her 160 animals off site, she plans to keep her heifers at the calf ranch because she has an older dairy and no longer keeps calf housing there.

"You have to have a good facility to raise them, and you have to use at least two extra employees a day to raise them," she said. "It is a little more expensive to send calves to calf ranches, but the results are fabulous. The calves that come back are beautiful. They're healthy and strong because they were well taken care of."

Despite the negative financial impact that the dairy crisis has had on calf ranches, Ozenbaugh said his business actually has some advantages that dairy farmers don't have. One is that he's able to adjust his fees, such as when the cost of feed goes up. Another is that he has the dairy farmer's animals as collateral and a contract that allows him to sell them to recapture any money that may be owed to him.

The challenge is getting a good price for those heifers, said Todd Bamford, a heifer raiser in Fresno County. Unlike other calf ranches that raise the animals and later return them to the producer, Bamford strictly buys and raises heifers to sell to other dairy producers.

He said his business has mainly been affected by the dramatic drop in cattle prices. The lowest was in July, when the price of heifers was $1,200 a head, down from a more normal price of $2,000 a head and from a high of $2,500 a head.

While Bamford agrees that demand for heifers has weakened along with the economy, because dairies are not expanding their herds, he said there is still a need for replacement heifers.

"There's less demand because there's no money to buy any cattle, but you still have cows that are old. You still have cows that might get sick," he said. "There are a lot of different things that will affect a dairy to where they have to buy replacement heifers."

At current low prices, Bamford said he plans to buy as many cattle as he can "to bank on what the future brings." Dairy farmers who have the financial capability to increase their herd numbers are also in a great position, he added.

"Right now is the time to buy," he said. "When this thing turns around—and it will, we just don't know when—cattle prices are going to go up because the demand is going to be a lot greater."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.