Find the Sweet Spot
What's the optimal and most profitable level of milk production for a dairy farm? Should we be pushing the cows for higher herd averages, which usually involves more inputs such as higher feed costs, or is a lower-producing herd of cows more profitable? Does a lower net cost of production equate to a profitable dairy business?
For many years the Farm Credit financial organization in the Northeast has published a financial and production summary of several hundred dairy farms in the New England states as well as New York. Two charts that I find absolutely fascinating year after year are the Profit versus Milk Sold Per Cow and Profit versus Net Cost of Production. If you've never looked at these two charts, take a little time to study them and get an idea of what they are telling us.
Essentially, there is little correlation of herd milk averages with profitability. The "r2 = .15" found in the bottom left corner of Figure 14A tells us that only 15 percent of the profitability on a dairy can be explained by or attributed to the amount of milk the cows produce. Profitability on a dairy farm is due to many more things than just milk per cow.
In Figure 14B, the r2 = .62 means that 62 percent of the profit per hundredweight on a dairy is explained by or attributed to the net cost of production - that's getting close to two-thirds. This tells us that controlling costs on a dairy has a much greater effect on profitability than does how much milk your cows produce.
As you can see, there's a tremendous range in the data put forth on these graphs. Figure 14A shows that some dairies made $1,000 per cow for the year with less than 20,000 pounds of milk per cow, while others produced much more milk to get that same $1,000 per cow. Some dairies lost many hundreds of dollars per cow and others made many hundreds of dollars per cow even though the milk production was similar.
The trend in Figure 14B shows that, by and large, the lower your cost of production, the greater the chance of realizing a profit. The trend in this data set was that once a dairy's cost of production climbed over $18 per hundredweight profits disappeared.
While there are many dairy farms that can make money with lower milk production (higher milk components come into play here), more dairies had to produce over 20,000 pounds of milk to make a profit, and many dairies had to keep production costs below $18 per hundredweight, and, as you can see, there are many dairies that were not able to do that in 2010. Once production costs climbed over $18, the majority of dairies found themselves losing money. Amazingly, there were dairies in 2010 that kept production costs below $10 per hundredweight and had superb profits.
As we all know, for the vast majority of dairies, feed costs are the single largest production expense. So it behooves a dairy farmer to closely monitor feed costs, but at the same time not compromise milk production. One of the more valuable metrics that can be incorporated on a dairy farm to evaluate if you're getting the desired bang for the feed buck is income over feed cost (IOFC).
With this level of variability on dairy farms, it's always a challenge to instruct or advise dairy farmers as to what's the optimal level of milk production. Even though we produce a homogenous product there are about as many ways to manage a dairy farm as there are dairy farmers to manage them. Every dairy farm must discover that "sweet spot" of what level of milk production works the best for that dairy, and then tailor a feeding program to arrive at that milk production goal as efficiently as possible.
Another trend that comes to light in this dairy summary is that the net cost of production was lower for larger dairy herds. In other words, there are certain economies of scale that can be realized, giving larger herds an advantage. Dairies milking over 300 cows had a more than ten-fold advantage than herds milking less than 90 cows, according to the summary. For instance, in the case of feed costs, larger dairies can purchase and mix ingredients on the farm with mixer wagons and trucks, potentially saving money over the long run on mixing charges from a feed mill. Also, larger farms tend to produce more milk per cow and thus have an advantage of more units over which to spread out costs.
Every heifer and cow on a dairy farm must be considered a profit center or a future profit center. Once the heifer has freshened she must start paying her way and contribute to the revenue stream on the dairy. Even though the profit margin varies from dairy to dairy, one of the things besides evaluating IOFC is knowing what the feed efficiency (FE) rate is for the herd. Most nutritionists will aim for a minimum of 1.5 FE. This means that for every pound of feed dry matter a cow consumes, she should be producing at least 1.5 pounds of milk (3.5 percent fat corrected).
Research has shown that, regardless of which breed of cow you prefer, higher producing cows have a greater FE; they produce more milk relative to the amount of feed they consume. Cows at the peak of their lactations should have FE in the neighborhood of 1.6 to 1.8 or more.
Dairy farmers today fight a continuing battle of increasing costs, and not just feed costs. While every dairy farm has its own unique sets of goals, and the data suggests that many dairies can manage around low milk production, keeping a close watch on both IOFC and FE will become more critical in the future if dairies are to remain profitable. In the long run, improving FE in dairy herds will help drive down net cost of production while also improving the herd's average.
The author is a dairy nutritional consultant and works for Central Connecticut Farmer's Cooperative in Manchester, Conn.