Managing Through the Milk Price Downturn

Improving feed-to-milk efficiency is critical to maintaining profitability on a dairy farm.

Again, the dairy industry finds itself in another “down cycle” with low prices because there’s too much milk for the markets to absorb. It looks like it’s going to last a while – maybe well into 2017 before milk production starts to decrease enough for the extra powder, cheese, and butter to clear out of storage.

It’s a pity that dairy farmers who pour their heart and soul into their businesses for decades must find themselves struggling every few years to make ends meet by taking out loans or selling off assets to stay in business when the price of milk is on the skids. When milk checks don’t cover production costs, there’s no easy way to keep the cows healthy and productive.

With feed costs being the single largest production expense on dairy farms it always becomes a challenge for dairy farmers to decide how to manage feed inventories and how much to spend on feeding the herd. There’s always another concern, too: whether it’s wise to sacrifice a certain amount of milk production if lower quality and less expensive feedstuffs are substituted into the diets.

The single most valuable and meaningful metric to be used in evaluating a dairy feed program is income-over-feed-cost (IOFC) – the amount of the milk check that’s left over after the milk cows have been fed. This measurement may also be referred to as “income-after-feed-cost” or “milk-feed-margin.”

The blended milk price paid for standardized milk components (Boston Blend Price w/3.5% BF) will most likely average less than $16/cwt for 2016. For most dairy farms today, when the milk price drops below $20/cwt and feed costs take up more than half of the milk check – meaning IOFC is less than $10/cwt, dairy farmers usually start to experience challenges paying the rest of the bills.

Milk-feed margin data prepared for the Northeast US by Agri-Mark, Inc, predicts the IOFC for 2016 will be a little over $7 per cwt with some individual months falling below $6 per cwt. Maintaining IOFC above $10/cwt is preferable and this year looks to be a train wreck for most dairy farmers with IOFC well below $10/cwt.

Remember, these data are predicted averages. Many dairy farmers spend much more on feed costs resulting in an even slimmer IOFC. For 2016, milk cow feed costs will take up more than 50% of milk checks.

The key to getting through the tough financial times is to increase the IOFC whenever possible. Improving the IOFC essentially means that 1) more milk must be produced per cow relative to the feed cost associated with producing that milk or 2) IOFC can be increased by purchasing less expensive feedstuffs without sacrificing milk production or 3) a combination of one and two. What increasing IOFC really amounts to is improving feed-to-milk efficiency.

Managing and improving feed-to-milk efficiency and reducing the impact of negative cash flow requires:

  • Determining a level of milk production for the herd that will result in a consistent positive cash flow
  • Balancing milk cow diets for specific levels of milk production and the optimal cost
  • Grouping cows according to stages of lactation and milk production
  • Maintaining a high percentage of fresh-cow flow and low days-in-milk (DIM)
  • Culling the cows that are not making any money.

Many dairy farmers do not have a specific goal for what level of milk production per cow should be maintained throughout the year. An all-important aspect of running any business is having a target revenue level and developing a business and management plan that will meet that target as best as possible. Most dairy farmers know that a certain volume of milk must be in the tank every day to ensure that bills can be paid every month. However, when the price of milk drops, say 20 percent, it means that the milk in the tank is worthless and more milk must be produced every day to bring the daily revenue back up to where it belongs. A dairy herd that is normally producing a 60-pounds- per -cow average must increase the average to over 70 pounds per cow per day to maintain revenue when the price drops 20 percent.

As cows progress through their lactations, their nutritional requirements change. Fresh cows need the most feed with the highest nutrient densities. These diets are the most expensive to feed but will also result in the most milk production and highest levels of revenue. A cow is the most profitable during the first 100 days of her lactation. Cows in mid lactation do not require the high nutrient densities and, often, feed-to-milk efficiencies can be maintained or improved with lower-cost diets. However, those cows must be grouped separately from the higher producing cows.

Whether milk prices are high or low, or feed prices are high or low, improving feed-to-milk efficiency is critical to maintaining profitability on a dairy farm. The most profitable herds have low DIM with a higher proportion of the herd in early lactation all year long. Not getting cows bred in a timely matter – average days to conception should be 100 DIM – will result in longer DIM for the herd and ultimately a lower producing herd and average milk per cow. This may not be a big concern when the milk price is high but will become a serious tug on revenue when the milk price is low. Cows that are long in lactation and producing only enough revenue to meet their feed costs should be removed from the milk herd – they are costing the dairy money.

Maintaining milk components – butterfat and protein – is critical to getting through a low cycle of milk prices. The vast majority of the milk checks in this country are based on the pounds of butterfat and protein that are present in milk. Just measuring the gallons in the tank each day doesn’t tell the entire story of how much the milk is worth. Even though milk protein is at its lowest price in many years, it’s still important to maintain optimal levels. Again, diets must be balanced to improve and maximize both butterfat and protein in milk.