Why focus on replacements if it only averages 4% profitability?

As mentioned earlier, this "average" hides a wide degree of variation.   Any farm that has a high calf death loss or a low reproductive rate will likely be losing money on their replacement "profit center" (ie, they have to buy some of their needs from the external auction market to keep their milking barn full).   Likewise, a farm with good calf survivability and good cow reproduction can still lose money if their forage program is not producing feed on which heifers can grow at normal rates of frame gain and development to calving.   However, if you have quality feed, keep calves alive, and keep cows bred back on time, replacement raising becomes profitable-- because you will then produce a surplus of functional cows from effective reproduction.

We know many dairymen whose annual surplus cattle sales (separate from cull sales) is a third or more of their milk receipts.   In a majority of cases, these dairymen also happen to be breeding "purebreds".   These are the guys who can replace machinery without having to get mortgage refinancing to stay in business.   It is a great feeling.   It is also simple economics:   Cull Jerseys (900 pounds @ $.40) bring $360 today.   Grade Jerseys at local auctions bring anywhere from cull value to maybe $1000.   Purebred Jerseys bring $1200 from cattle dealers, and many JMS auction sales are making averages of $1500 or higher (the recent Butterfield Dispersal in Arkansas averaged $1810 on over 500 head all ages)!

If you raise heifers only to keep your barn full, avoiding herdsmanship to keep mature cows functional (which we call the 1970s dairy state of mind), and assume selling replacement cattle is more trouble than it is worth, registration papers may seem a waste of time and money.  But that locks you into the lower side of that 4% average, because every time you turn a $1000 commercial milking Jersey into a $360 cull, you only have $360 on hand to pay yourself back for the two years of rearing costs on the fresh heifer who replaces her.    This is the "purebred" state of mind, recognizing the opportunity cost of not managing (and breeding) (and registering) for a surplus of functional dairy replacements.   The "opportunity cost" of not thinking like a purebred Jersey breeder is currently over $800 per fresh heifer.     How many heifers are you raising per year?   Would it not pay to position yourself for the highest potential rate of return on such an investment?

Monocultural farming is not as "sustainable" in practice

More and more land-grant universities are developing "sustainable agriculture" programs, alongside traditional production research programs, which mirrors the two parallel realities existing in the dairy industry today (high external input, highly capitalized, commodity focused production; lower external input, more land/less equipment capital, biologically-focused, crop rotation production).   This is not just the result of consumer and environmental concerns over agricultural practices.   The long-term lesson we predict from having "sustainable" agriculture studied alongside "commodity" agriculture is a recognition that single-crop "monocultural" farming is no longer as profitable.  A farmer needs to be specialized to keep up with the explosion of new knowledge (and the downward price pressure in commodity buying), but it costs too much to focus all your capital and labor resources on one single "milk" crop.   ("You need more than one string to your fiddle if you're gonna make music".)   Monocultural thinking, in fact, is what prompted this Minnesota bankers' study of dairy economics; too many of their high-production loan accounts were struggling to meet their loan payments.

For specialized dairymen, what is increasingly clear is that commodity prices for milk will only cover direct operating costs (Labor, feed, veterinary, sanitation, utilities, etc).   His capital servicing (debt repayments, financing interest, depreciation) costs require another cashflow source.   This used to come from deacon bulls and cull cows, but the low prices these classes of animal generate is no longer significant compared to the impact of the industrial inflation rate upon farm and dairy equipment costs.

Why is this true?   Because commodity markets never pay the full industry cost of production, but only pay the price acceptable to the producer with the lowest cost of production.   In the global dairy business, the lowest-cost producer is that fellow milking water buffalo by hand in a river.   In North America, it is those many producers who are just coasting into a future retirement, with no debt, no expansion plans, milking in old barns with old equipment they can fix themselves, avoiding big feed supplement bills, milking cows of moderate productive ability that require no extra care, hiring no external source labor.  These dairymen, of course, often have small numbers of replacements to sell, which supports my point (they are not a "monoculturist").   They might also have a few steers in a back shed, and a pumpkin patch.   They call manure fertilizer.   They are not studied by many researchers, because they are not interested in testing new hormone therapies or wonder drugs, are not on test, do their own accounting, and use tractors that are decades old.   We tend to forget they are there until the price of commodity milk falls, then we want to buy them out of business to reduce the "surplus", which is the only time the industry acknowledges they have a lower production cost than the new mega-dairy around the corner.

Producing more than one "crop" from an integrated capital and labor base is how the multiple-income-stream farm is more profitable than the monocultural farm, in an economic sense, even before you argue differences in "organic" vs "chemical" husbandry, which enters the realm of the philosophical and metaphysical.   To be successful at generating net income from surplus cattle sales, you need to think like the sustainable agriculture guys.   You will start to focus on the sort of things purebred breeders have always known: all cows are not alike.   Healthy sells better than sickly.   Well-grown sells better than small and thin.   Typy sells at a higher price than functionally ugly.   And finally, purebred/identified accesses a wider market than grade/unidentified (you can turn a registered cow into a grade to sell in the commercial market, but you won't sell too many grades into the purebred market) .