The U.S. dairy herd has been trending lower since March. One explanation that I continue to hear for the decline is that record-high slaughter prices are pulling more dairy cows toward the slaughterhouse. But what seems to be getting less press is the high cost of replacement cows. There can be big differences in regional replacement cow prices, and USDA doesn’t always do a great job of picking up on market prices for replacements. However, their numbers put replacements at $1,760 per head in July, the highest they have been since 2016.

When I try to model replacement cow prices, there are three things that drive the price: milk price, feed costs, and slaughter prices, all with a six-month lag. Record-high milk prices in the first half of 2022 have helped push replacement cow prices up to their current level, and the relatively good milk prices in early 2023 were still supportive for replacement costs into the third quarter of this year.

Feed costs are negatively correlated with replacement prices, so the high feed costs have helped hold back replacement prices. Slaughter prices, on the other hand, are positively correlated and have been helping support the replacement price. Still, the market has been extra strong this year, running $200 to $400 per head higher than the model says prices should be.

My model says replacement prices should be coming down in the last quarter of this year due to the lower milk prices we saw this summer, but given how strong the market has been and the record-high slaughter prices in the third quarter, replacement prices could stay higher than the model thinks. The other issue is simply the physical availability of replacements. USDA estimates we only have 2.769 million heifers expected to calve this year, which is the second lowest on record (although the data only goes back to 2003).

Negative margins for dairy farmers this summer are pushing some dairy farms to exit the business, which will likely push some replacement cows that can go to other farms. The lower milk prices should also help bring down replacement cow prices, but the model is only expecting a 10% to 15% drop in replacement cow prices for the first half of 2024.