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Dairy Sense: Pricing Feed from Field – Moving Past Thumb Rules

Dairy Sense: Pricing Feed from Field – Moving Past Thumb Rules

By Virginia A. Ishler

Production perspective:

Extreme weather events can negatively impact forage and grain inventories leaving producers struggling to find alternative sources. For forage crops, such as haylage and corn silage, this can mean pricing feeds from the field. Over the years there have been several thumb rules to determine a “fair” price. However, as precision is integrated into the dairy operation whether as feeding management or new technologies, this concept can also apply to pricing feed.

A common rule of thumb used in pricing corn silage is taking the current bushel corn price times eight. Pennsylvania’s August’s price averaged $6.77/bu., which means corn silage is around $54/ton. This compares to $59/ton for 2021 (year to date) using the Penn State Feed Price List (V. Ishler), which uses the grass hay price adjusted for the corn grain component. These prices usually reflect the feed coming out of a storage structure. What would a fair price be if the buyer is able to harvest the feed from the field? Incorporating precision pricing requires knowing the cost of production on home raised feeds and adjusting price based on yields and overheads.

The Extension dairy business management team has been assessing the cropping enterprise on dairy operations for almost a decade. In addition to the direct costs, overheads, owner draw and loan payments are included. Table 1 lists the cost to produce corn silage split out by yield, which is the main factor affecting the unit cost per ton.  Consider the following scenario: Producer A wants to buy silage out of the field from Producer B who typically exceeds 22 T/A. Assume half of the overheads, owner draw and loan payments would be split between planting and harvesting. A starting point for Producer B to negotiate with Producer A would be $15 + $1.50 + $0.52 + $1.04 = $18/ton plus a mark-up. Even adding $10/ton to the cost would generate a profit for Producer B and a reasonable purchase price for Producer A.  However, using the same approach for the low yielding producer (<18 T/A), the starting point in negotiation would be $27/ton. In this scenario, the mark-up could be a deterrent to the buyer, or the seller may not come out ahead if the unit cost is not realized. Knowing the numbers beyond just the direct costs and the typical yields for the farm will influence the bargaining price.

Table 1. Corn silage cost per ton (2018-2020). 

Yield group (as-fed)< 18 T/A18-22 T/A> 22 T/A
    
Yield average per acre14.620.025.1
Total average acres23111483
Farm numbers3166123
    
Total direct costs per ton1$22.00$18.00$15.00
    
Total overhead costs per ton2$6.00$4.00$3.00
Owner draw per ton$1.20$1.25$1.04
Loan payments per ton$3.08$2.25$2.07
    
Total costs per ton$32.28$25.50$21.11

1Direct costs include seed, fertilizer, chemical, custom hire, and land rent.
2Overheads include fuel, hired labor, equipment repair and other miscellaneous expenses.
Source: Penn State Extension Dairy Business Management Team.

Hay-crop silage is another forage that producers inquire on pricing out of the field. This is more complex since the cost of production includes multiple cuttings. Overheads, owner draw, and loan payments are higher compared to a crop that is harvested once. The Penn State Feed Price List has mixed legume silage at 43 percent dry matter averaging $111/ton. This is based on the hay markets and with 2021 being a very high feed price year, this is reflected in the market price. Table 2 shows the differences between low, medium, and high yielding haylage. Adjustments to the overheads, owner draw and loan payments would need to account for the number of cuttings. If four cuttings are typical and a potential buyer is harvesting just one cutting, the seller is still covering seventy-five percent of the total. Using the middle yield group as an example, the starting point would be $22 + $8.25 + $2.90 +$6.25 = $39/ton. Considering a mark-up and potential quality metrics, the final bargaining price would be more palatable than $111/ton.

Table 2. Alfalfa haylage cost per ton (2018-2020). 

Yield group (as-fed)< 11 T/A11-14 T/A> 14 T/A
    
Yield average per acre8.112.218.6
Total average acres374040
Farm numbers778121
    
Total direct costs per ton1$32.00$22.00$19.00
    
Total overhead costs per ton2$15.00$11.00$8.00
Owner draw per ton$6.07$3.86$2.74
Loan payments per ton$10.01$8.33$3.79
    
Total costs per ton$63.08$45.19$33.53

1Direct costs include seed, fertilizer, chemical, custom hire, and land rent.
2Overheads include fuel, hired labor, equipment repair and other miscellaneous expenses.
Source: Penn State Extension Dairy Business Management Team.

Pricing forage and grain out of the field is a common question during years of extreme weather conditions. There are several approaches to determining a price, however, with all the information available to producers, a precision pricing approach can benefit the seller and buyer. The seller wants to make a profit and the buyer wants a quality feed that is reasonably priced. Knowing the cost of production for home-raised feeds is an important component of any livestock or cropping enterprise. Determining the cost of production on home raised feeds helps with selling the feed as well as assessing the strengths or weaknesses of the cropping system.

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 cost is a good way to check that feed costs are in line for the level of milk production. Starting with July 2014’s milk price, income over feed cost 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 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.

August’s Penn State milk price: $18.50/cwt

Feed cost/non-lactating animal/day

Map

Source : psu.edu

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