Income Over Feed Costs 101: Back to Basics
By Rebecca White
The terms ‘income over feed cost (IOFC)’ and ‘milk margin’ are used frequently in articles, presentations and conversations regarding profitability, feed costs, and milk prices in the dairy industry. The Penn State Extension Dairy team utilizes the IOFC tool in education and assistance to dairy producers across the state. Dairy producers and agri-business professionals alike often ask for an explanation of what IOFC actually means and how it relates to making decisions on the farm. To help clear up any confusion (and make this tool useful) here is a basic introduction with some examples of how it can be used in a variety of situations.
Starting with the end goal in mind
There are endless financial and production numbers that can be tracked on a dairy operation. Information can be useful for a farm but if it can’t help make decisions why waste time collecting it? Income over feed cost (IOFC) is a monthly assessment that will estimate whether or not feed costs are in line for the milk production. Before starting to track IOFC or any information on your farm, ask yourself: what will this tell me about my farm and how can I use this information to make decisions to improve my farm’s profitability?
The basics: What is IOFC and how is it calculated?
Simply put – IOFC is milk income minus the feed cost of the lactating cows. For example, if a farm ships an average of 70 lbs per cow per day and receives a gross milk price of $20.00/cwt, the milk income is $14.00 per cow per day. Subtract a feed cost of $6.00 per cow per day and the IOFC equals $8.00 per cow per day. The milk margin is the same number but on a cwt basis: $11.43/cwt.
Is this a good or a bad IOFC? What are the benchmarks?
Feed is usually the largest and most variable expense on a dairy operation. The percentage of milk income that is spent on feed is a quick approximation of whether or not feed costs are in line with the milk production. For the example above, the percent of income that is going towards the lactating cow feed is 43%. The goal is to maintain an IOFC where feed cost is less than 40% of milk income. The less money that is spent on feed means more money that is available to pay for the remaining farm expenses.
*Feed costs should be determined for your home-raised feeds but Penn State has market values available if unknown.
Why not just focus on increasing milk production?
Analyzing milk production or feed costs independent of one another does not allow decisions to be made specific to a farm. For example, Farm A has a 10 lbs milk production advantage over Farm B which equals $2.20 greater milk income per cow per day. However, Farm A’s feed cost is $2.61 greater than Farm B’s. The more favorable IOFC ends up being on Farm B.
But when the milk price looks good, why worry?
When milk prices are up, getting feed costs in line will help when milk prices do eventually drop. For example if milk price decreased to $18.00/cwt, Farm A’s IOFC will decrease to $6.16 per cow per day, leaving less income to pay for the remaining farm expenses whereas Farm B’s IOFC only decreased to $6.97 per cow. Planning ahead and minimizing feed costs even during high milk prices increases resilience during low milk prices. By the time feed costs can be decreased on Farm A, significant amounts of income will have already been lost.
Next Step: calculating breakeven IOFC. What are the “remaining farm expenses”?
Calculating the current IOFC on a monthly basis is a good start but is it enough to cover the rest of the farm expenses? Simply put, the breakeven IOFC is the amount of milk income needed to pay the remaining farm expenses after feeding the lactating cows. The breakeven IOFC is calculated based off historical income and expenses and expected future expenses and borrowings. The Penn State Extension Dairy team has developed a comprehensive tool that determines breakeven IOFC that includes a calculation for the value of home raised feeds. For more information, please contact the Penn State Extension Dairy Team.
Below is an example based on a real Pennsylvania dairy farm that will be called Farm C. Farm C has a relatively low cost of production of $16.63 per cwt or $10.61 per cow per day. Cost of production is low partly due to high quality feeds grown on farm and minimal purchased feed. The cost of production minus the feed costs of lactating cows (purchased and home-raised) minus the non-milk income equals a $6.53 IOFC breakeven per cow per day. In other words, after feeding the lactating cows, Farm C needs $6.53 per cow per day of milk income to pay the rest of the farm expenses. With a milk price of $18.75/cwt, Farm C has a positive balance of $1.86 per cow per day over breakeven. **Please note that the breakeven IOFC is based off an annual average. Differences in cash flow expenses throughout the year will affect the monthly cost of production and cash flow.**
In example 2, Farm C has locked in purchased lactating cow feed costs; however, milk price has decreased to $16.20/cwt. The breakeven remains the same but the available IOFC has now decreased to $6.73 from $8.39 when milk price was $18.75/cwt. The balance is now only $0.20 per cow per day over breakeven.
In example 3, milk price has stayed the same at $16.20/cwt but cost of production increased to $11.18 per cow; purchased dry cow mineral and calf starter price has increased because Farm C did not lock in those feeds and a piece of machinery had unexpected repairs. Now the breakeven is $7.10 per cow, $0.57 higher than before. The IOFC balance is now a loss of -$0.37 per cow per day under breakeven.
Take Home Message: one number by itself (milk production, milk price or feed price), won’t provide enough information to make decisions that will positively improve farm profitability. Calculating breakeven IOFC will help determine if expenses need to be reduced, production needs to increase, the farm needs to expand, production or risk management practices should change or if the markets allow milk prices and or feed prices to be locked in.
For more information, please contact the Penn State Extension Dairy Team. Contact Rebecca White at (814) 863-3917 or firstname.lastname@example.org or visit this website: www.das.psu.edu/dairy-alliance/resources/income-over-feed-cost-tool