Controlling The Uncontrollable

Virginia A. Ishler
 Extension Dairy Specialist

Dairy profitability seems to be a constantly moving target. Producers are dealing with the highs and lows of milk prices and feed costs. Some fixed and variable costs stay about the same regardless of what is happening in the markets. Producers are working with biological units (crops and cows), which are subject to external forces making crop yields and milk production unpredictable. Can dairy producers control what appears to be uncontrollable?

Production Perspective

Working with several hundred producers over the past years, the extension dairy business management team has observed the same formula for producers that maintain very low breakeven costs compared to their counterparts focusing solely on the dairy enterprise. The profitable dairy operations deal with the same external forces that everyone else contends with except they implement some key management practices and plan ahead for the worst case scenario.
The one common theme that keeps showing up on profitable dairy herds is attention to forage inventory and quality. Regardless of the challenges Mother Nature may dish out, they have all the pieces in place with equipment and labor to get crops harvested in the timeliest manner, optimizing yields and quality. Even though one or both may be compromised during challenging times, they have a plan in place so they don’t get behind. This entails maintaining equipment and having ample labor when needed. The profitable dairies have total feed costs per cow, including home raised and purchased feeds, several hundred dollars per cow less versus the unprofitable dairies. In 2015 the profitable dairies showed 39% of their income going to total feed cost compared to 48% for their counterparts.

The general assumption that higher milk production equates to higher profitability is not always the case. From the Penn State work, if the most and least profitable dairy operations are removed from the data set, milk income is very similar across breakeven costs ranging from $16 to $22/cwt.

Herds that have good cost control rise to the top for profitability. Dairy direct costs are often in the range of $700 to $850/cow and this is fairly consistent over the years. Operating expenses (minus hired labor) are also consistent around $500 to $700/cow. When evaluating herds for bottlenecks to profit, dairy direct costs and overheads usually don’t identify the problem.

Hired labor and loan payments are the other areas that create a huge gap between the least and most profitable dairies. This is a difficult bottleneck to overcome. There are a multitude of reasons that lead to these excessive costs. One observed scenario is cows performing very well however multiple families living off milk income that is not sustainable in providing adequate cash flow. This goes well above what a nutritionist, veterinarian or consultant can do to help improve the situation. Even when the whole farm is evaluated, the same trend shows up, similar income but very different expenses.
When working with producers what are the controllables? From a production standpoint, forage inventory and quality are the primary influencers to cash flow and this is a tangible goal for consultants and producers to improve. The expenses related to hired labor and loan payments are an area where the producer needs to make fundamental changes in spending and to the overall business model. All of these require knowing the big picture and having all the facts before making recommendations or changes.

Action plan for sustaining the dairy enterprise

Goals

Meet with a financial planner to complete a cash flow plan.

Steps

• Step 1: Implement an accounting system to track income and expenses in the appropriate categories. Make sure the system provides sufficient detail to enterprise crop direct expenses.
• Step 2: Develop a cash flow plan for both the dairy and whole farm enterprise.
• Step 3: Meet with the appropriate consultants to review bottlenecks to a  sustainable breakeven cost of production. Prioritize the problem areas.
• Step 4: Develop and implement a plan to correct problem areas on the farm.  

Economic perspective

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows income over feed costs is a good way to check that feed costs are in line for the level of milk production. Starting with July's milk price, income over feed costs was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen (Alltech product) and a mineral vitamin mix. All market prices were used.

Also included are the feed costs for dry cows, springing heifers, pregnant heifers and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.

Income over feed cost using standardized rations and production data from the Penn State dairy herd.

Note: September's Penn State milk price: $17.82/cwt; feed cost/cow: $5.44; average milk production: 80 lbs.

Feed cost/non-lactating animal/day.

Source: psu.edu