Dairy Profitability

by Rebecca White

During a recent meeting this question was raised: “When our dairy producers come to us and ask what they should  do about the feed costs and milk prices, what are we suppose to tell them? This seems impossible”.

My response: tell them to stop being victims to the market. Maybe my harsh answer came out because it was the end of the day or maybe I have been to countless meetings discussing cost of production and solutions to decrease farms’ breakeven milk price and keep getting asked the same question. At point are we putting to much blame on external factors?

I don’t question that we need milk price reform but until that happens, we must work with the system that is in place.

Some dairies today, and even through 2009, have been doing well. What makes them different than the dairies who “can’t seem to catch a break”? That is a pretty complex issue but part of it comes down to the mind set of the dairy operator: they don’t let themselves be victims of the markets.

3 keys to controlling your destiny:

1) Know you cost of production and breakeven margin, IOFC, and/ or Class III milk price at all times

Knowing and understanding you cost of production and everything that goes into will allow you to see where changes need to be made to decrease your costs or increase revenue.  If your breakeven is too high, figure out why – is your milk production not high enough? Is your current IOFC too low because of rising feed costs? Do something about it now.

2) Know your feed inventories

It frustrates me to no end when I hear “I’m running out of corn silage in a week” or even better “I ran out yesterday”. The best solution to this problem is probably a more expensive one than if you had planned on how much you could feed to certain groups to make it last as long as possible. And if you still needed to purchased additional feeds, you could have done  so when the markets are favorable instead of forced to buy whatever is available. In a resent article from Dairy Herd Management Magazine “What did we learn from this year’s drought?” a dairy operation knew that they had enough corn silage to last them the year but they would have to buy shelled corn. Their forward thinking and planning allowed them to set a plan in motion. Another dairy operation forward contracted land rent and purchased feed. It may be expensive but he know exactly what those costs are going to be and can now react to them.

3) Understand how to forward contract milk and feed prices and other risk management options

Even if you don’t contract your feed or milk, get set up to do so in  moments notice, you can react to changes in the markets more readily. Livestock Gross Margin (LGM) insurance is a contentious topic, not always available, and some have not been pleased with the outcomes. Regardless, you should still understand how it works, what your breakeven class III milk price, and corn and soy equivalents of purchased and total feed for your lactating cows at all times. Talk to a trusted insurance agent who has experience with LGM policies and know that if you call them the Friday morning of an open LGM period, they won’t have time for you. Call a few weeks before to get an account set up and give them a chance to understand your needs and what they can offer you.

These 3 things will help allow you to react to the markets immediately, not be victimized by them. Sitting back and choosing to not do any of these things is the riskiest way to dairy farm today. Drought, high feed costs, low milk prices, tight margins, and lack of resources is the new normal. The days of grin and bear the tough times are over. Now is the time to take control of your farm and its future.

 
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PSU Herd IOFC –April 2012   “Is there enough to get us through until first cutting?”

by Virginia Ishler

Forage inventory going into 2012, especially for corn silage has been a major concern. We were short approximately 500 tons. The strategy had been to remove all corn silage from the young-stock rations and reduce the amount going into the dry cow and springing heifer diets. For the lactating herd haylage dry matter had been increased three pounds to off-set some of the corn silage dry matter. The challenge currently is the inventory of haylage. Is there enough to get us through until first cutting?

To safe guard the corn silage until next harvest the entire herd has been getting a lot more haylage than typical. I continually check inventory coming out of all the structures and it appeared the upright silo of haylage was going to make it to the end of May. Then we got some crazy weather in April and it now appears that first cutting haylage may be extremely light and I am questioning when it might be ready to come off.  My strategy has changed to keep haylage viable until the middle of June so that when first cutting does come off the new haylage can ferment for two to three weeks. This has meant removing all the upright haylage from the heifer diets. The heifers’ diets switched to a partial TMR supplemented with half a round wet bale daily. The beef facility turned their animals out on pasture and had several tons of bagged grass silage left over. This got incorporated into the dry cow and springing heifer diets. By making these changes, we added several weeks to our upright haylage.

The additional quandary for the herd was changing corn silage quality. We moved from bagged silage that had been testing 45-50% starch to bunk silage testing 28% starch. So the limiting factor in April has been energy. In order to compensate for the low starch and the limited haylage inventory the milk cow ration was adjusted to increase the corn silage by a few pounds and the cottonseed hulls were completely removed. The ration protein was moved down to 15% and based on dry matter intakes still met the cows’ requirement for metabolizable protein. This change was made so cows could continue on a high forage based ration but still keep the total dietary starch at 23 percent. As soon as this dietary change was implemented the MUNs dropped from 8.0 mg/dl to 5.0-6.0 mg/dl. At the same time, milk fat percent started sliding from 3.60% to 3.38%.  I altered the corn grain particle size from finely ground to coarsely ground. This simple particle size change increased the milk fat back up to 3.55-3.60% and the MUNs to 7.0 mg/dl. The main goal over the next couple of weeks is to monitor forage inventory closely and to monitor animals, lactating and non-lactating to ensure the ration adjustments are not compromising animal performance in any way.

For the month of April the herd averaged 89 pounds with a 3.55% fat, 3.00% protein, 226,000 SCC and 6.9 mg/dl MUN. Feed prices took another big jump this month and milk price really dropped. Based on herds that the Extension Dairy Team has worked with over the last several months, many herds are in the negative $1.00 to $2.00 per cow based on their breakeven income over feed costs. This year is turning out to be comparable to 2009.

For the full report and past updates, go to www.das.psu.edu/dairy-alliance/resources/income-over-feed-cost-tool

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 raw43@psu.edu or visit this website: www.das.psu.edu/dairy-alliance/resources/income-over-feed-cost-tool

Cows, Cash, and Communities: What Do Dairy Farms Mean to You?

By Rebecca White

(EDITOR’S NOTE: The following originally appeared in the October 7, 2011 issue of Farmshine newspaper)

For some, the only interaction with dairy farming is the trip to the grocery store for a gallon of milk. For others, it is a daily interaction with dairy farming whether it’s milking cows, making cheese or delivering milk. But even for those who haven’t ever been on a dairy farm, their lives are influenced by Pennsylvania’s largest industry – agriculture. Within agriculture, dairy represents the greatest share of total receipts at about 40%.

During this year’s Ag Progress Days in Rock Springs, PA, the Penn State Extension Dairy Team gave a series of presentations to the attendees. One of these presentations included a talk about how dairy farming affects all citizens in the Commonwealth. Dairy producers and city dwellers alike attended the presentation to learn about the positive effects dairy farming has on the economics of the Commonwealth.

One of the positive benefits dairy farming has on the state is job creation. There are over a half million dairy cows in the Commonwealth and for every nine cows, one job is created for a total of 60,000 jobs statewide. Not all of those workers are employed at the farm; many make their careers in the sales and service sectors of the industry that support farm operation. Those half million dairy cows produce over 1.2 billion gallons of milk every year in PA. It takes a lot of time, money and resources to produce a gallon of milk. For instance, before a mature cow produces milk, it has to grow and be cared for over two years.

The average retail milk price in Philadelphia and Pittsburgh from 2007 through 2010 was $3.60 per gallon. Dairy producers get paid for every 100 pounds of raw milk or hundredweight (cwt). If a gallon of milk cost $3.60 that equals to $41.86 per cwt. From 2007 through 2010, Pennsylvania dairy producers received an average of $18.39 per cwt or $1.65 per gallon of milk. Milk prices can vary quite a bit. During that same time period the lowest price was $12.90 and the highest was $23.90 per cwt.  However, the percentage of the retail milk price dairy producers receives remains relatively consistent (35 to 55%; based on USDA Agricultural Marketing Service data).

On average, a dairy producer is paid $1.65 per gallon of milk, but how much does it cost to produce that gallon? Keeping the cost of production low is essential to maintain profitability for the dairy producer but also helps maintain the low cost of food for the consumer. The Pennsylvania State Extension Dairy Team helps dairy producers determine their cost of production and pinpoint areas that can be improved to increase financial sustainability.
When cost of production on dairy operations is discussed, it usually only refers to the total operating costs per cwt. In PA, the operating costs ranged from less than $14.00 per cwt to over $21.00 per cwt during 2007 through 2010 based on USDA’s Agricultural Resource Management Survey of milk producers (http://www.ers.usda.gov/Data/CostsAndReturns/monthlymilkcosts.htm).

In 2009, the average PA dairy operating cost of production was higher than the US average and just slightly below in 2010. The average cost of production during that time was $16.78 per cwt or $1.44 per gallon. That leaves $0.21 per gallon for a dairy producer to pay himself, his labor, and other overhead costs.

Total Operating Costs

Total operating costs include total feed costs (including purchased, home-raised, and grazed), veterinary and medicine, bedding, marketing, custom services, fuel and utilities, repairs, and interest on operating capital. Allocated overhead (hired labor, rent, taxes, owner draw, etc) is not included in the operating costs. On the chart below, the blue line represents the gross milk price in PA during 2007-2010 and the red line is the total operating costs on PA dairy operations.  The difference between those lines is what is left over to pay for those allocated overhead costs. During low milk price cycles, overhead costs may not be covered on many farms. Milk prices dropped in 2006 and 2009; what is in store for 2012?

Feed is usually the biggest expense on a dairy and can be variable like milk prices. On the graph the purchased feed costs are in green. With rising fuel prices and energy costs, all these expenses can quickly add up and influence other costs. When the cost of fuel increases, fuel costs on farm increase, delivered purchased feed prices can increase, custom crop work prices can increase, and other services will all be affected.

What can dairy producers do to control their costs?

Determining the cost of production for a dairy operation is essential for two main reasons: 1) assessing how financially efficient the operation is at producing milk currently and historically, and 2) determining the break-even margin or milk price so decisions such as contracting milk prices or feed costs can be made effectively.

Beginning in mid 2008 and continuing through November of 2009, the gross milk price was not enough to pay for just the operating costs. These numbers are based on a sample of dairy operations and some assumptions were made. However, the message still stays the same: if a dairy has a high cost of production, when milk prices drop, so does profit.

There are many costs associated with dairy farming so figuring out a place to start analyzing can feel overwhelming. The Penn State Extension Dairy team has multiple resources and programs that can start dairy producers on the journey to cutting costs and increasing profitability. The Profitability Assessment Dairy Tool (PA Dairy Tool) is a comprehensive financial and production analysis that pinpoints areas of economic loss on a dairy. The follow-up drill down tools further focus in on the cause of the economic loss. Working with a profit team, a consultant, or a member of the Extension Dairy Team, dairy producers can utilize these resources to cut costs.

Beginning in January of 2012, the Penn State Extension Dairy Team will host a series of one-day workshops called “Managing Your Milk Margin to Improve Your Dairy’s Cash Flow”  where dairy producers will determine their own farm’s breakeven class III price and discuss their areas of cost of production that could be improved. A series of conference calls will also be offered starting in January called “Show me the Money; Strategies for Dairy Farm Profitability”. A summary of PA dairy farm data will be discussed with Extension team specialist and agribusiness professionals.

Producers interested in using these valuable tools on their dairy or attending the workshops or conference calls are invited to contact the Penn State Extension Dairy Team for more information. Contact Rebecca White at (814) 863-3917 or raw43@psu.edu or visit this website: http://www.das.psu.edu/research-extension/dairy/dairy-science/pa-tool

PSU Herd IOFC – August 2011

by Virginia Ishler

There have been some interesting dynamics in August coming off of July’s record temperatures. This time of year we are usually in between a lot of late lactation animals and fresh cows. This month we had 33 animals freshening with 36% being first calf heifers. Forty animals are in the low group, 54 cows are on various research projects, which leave 73 animals at about 115 days in milk. Production remained steady but components suffered. The beginning of the month fat test was 3.30% and was consistent even after adjusting the ration protein to 16.5%. In the past as soon as the protein was increased an immediate response in both fat and protein occurred. This did not happen. The TMR was sent out for analysis and came back 16.3% protein, 35% NDF and 23% starch. This matched very closely to what was formulated.

The high and 2-year old groups have remained on a 65%-forage based diet for the entire summer. Reviewing the dry matter intakes for August, it was striking the difference in intakes for the first half of the month compared to the second half. Even though the ration was the same for the entire month the high group and 2 year olds showed a difference of 6-10 pounds in dry matter intakes. When examining intakes along with components there was a correlation. From August 1-16 milk fat averaged 3.30% and milk protein 2.95%. From August 16-31 milk fat averaged 3.41% and milk protein 3.02%. It appears the cows needed time to adjust coming off July’s heat. It also shows that sometimes there are outside stressors that may impact components and may not necessarily correlate to the amount of fiber or starch consumed. Even at the lowest intakes at the beginning of the month, cows were consuming 17-21 pounds of NDF and 11 to 14 pounds of starch.

Using BMR corn silage during the latter part of the summer has paid off, so far. Last year we ran out of BMR the end of July. Considering last summer was relatively mild, the herd dropped 28,000 pounds in August 2010 with 6 additional cows compared to July. This summer, coming off July’s sweltering heat and humidity, we shipped 55,000 pounds more milk in August with eleven additional cows (compared to July). In a perfect world it would be ideal if we could store enough BMR to feed for the entire summer. However, research requirements and storage limitations do not allow for this. Our strategy to prolong BMR usage is to feed it only to the groups that benefit the most, fresh and early lactation cows.

Our feed costs went up this month compared to July due to some increases in commodity prices as well as cows coming up in dry matter intake. Keeping the late lactation cows on a low group diet has really helped control feed costs and has kept body condition in check. The fresh cows have remained in the free stall barn with the fans and sprinklers, which have really allowed cows to start off extremely well.  Income over feed costs remained the same as July, $10.76/cow. For the month of August the herd averaged 75.6 lbs. with a 3.35% fat, 2.98% protein, 243,000 SCC and MUN of 7.7 mg/dl.

More information about the Penn State Dairy herd’s IOFC can be found here http://www.das.psu.edu/dairy-alliance/resources/income-over-feed-cost-tool

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Wordless Wednesday: The Cost of Milk

Visual used at this year's Ag Progress Days in Rock Springs, PA

Cost to Produce Milk does not include labor, value of owner management, or overhead (ie taxes)

$1.80 / gallon = $20.93 / cwt

 
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 How much does it cost to produce milk?

by Rebecca White

Below is a graph based on USDA’s Agricultural Resource Management Survey of milk producers illustrating the cost of production for PA dairies from 2007 through 2010.

Determining your cost of production is essential for two main reasons:

1. Assess how financially efficient you are at producing milk currently and historically
2. Determining your break-even

When most people talk about the cost of production ($/cwt) they usually refer to the Total Operating Costs (red line). In PA, the operating costs ranged from from less than $14.00/ cwt to over $21.00/ cwt during 2007 through 2010.  In 2009, the average PA dairy operating cost of production was higher than the US average and just slightly below in 2010.

Why does the cost of production vary so much?

Looking at the short list below of what is considered an operating costs, there are many variables that can change.  Feed is usually the biggest expense on a dairy.  Feed costs can be just as variable as milk prices (purple line).  And with rising fuel prices and energy costs, all these expenses can quickly add up and influence other costs. When the cost of fuel increases, fuel costs on farm increase, purchased feed prices can increase, custom crop work prices can increase, and other services will all be affected. 

“Operating Costs” includes:

Total feed costs (including purchased, home-raised, and grazed), Veterinary and medicine, Bedding, Marketing, Custom services, Fuel and utilities, Repairs, Other operating costs, Interest on operating capital

“Allocated Overhead” includes:

Hired labor, Opportunity costs of unpaid labor, Capital recovery of machinery and equipment, Cost of land, Taxes and insurance, General farm overhead

“Total Operating Costs” the the total of operating and allocated overhead.

How do I know if my cost of production is out of line?

Creating an income and expense report with all revenues and expenses listed for a year is a good place to start. The next step is to separate all your costs by overhead and operating costs AND in an accrual basis of accounting system, not cash.  The next blog post will go into more detail of accrual versus cash basis of accounting but quickly, cash basis records expenses when they are paid, not when the service or product is received.  In accrual, expenses and revenues are recorded when they are received, not necessarily when they are paid for.

After each area of your dairy operation’s expenses are separated out like below, you can see where there may be particular areas of concern. We have been working with PA dairy producers to develop these annual summaries.  The chart below is a excerpt from a summary of 22 PA dairies from across the state, with different sized herds.

One area in particular we noticed as “flying under the radar” for most operators, was the dry cow and heifer feed costs. It easy to focus on the lactating cows because that is where the majority of your time is spent but the other animals on the operation can incur a big chink of the expenses.

Excerpt from expense summary for 22 PA dairy herds ($/cwt)

Knowing you Cost of Production is the first step

Now that you have this information, you can calculate your breakeven for milk price or the class III price.  A lot of dairymen can be wary about contracting milk or feed prices but knowing your breakeven a head of time can ensure that you are locking in a price that can guarantee cash flow.

Bottom Line: Just because you can’t control the price of milk, doesn’t mean you can’t control how much it costs you to make it.