Ugh. It’s the first Monday of the month and you log onto your milk processor website to look at your projected payments for the month. It’s not looking good. So what do you do? Kick something? Yell at someone? Go fishing?
Or maybe there is something you can do to increase the size of your milk check. If that’s possible, how do you evaluate this “intervention” in order to decide whether it makes sense financially?
Before we get to this question, we need to understand two critical factors:
- The key drivers that affect how milk is currently being priced
- The seasonal pattern of these key drivers
Milk price drivers
First, let’s look at the historic prices of butter and non-fat dry milk (Figure 1). A quick glance tells us what’s been happening.
For the seven years between 2007 and 2014, butter and non-fat dry milk prices generally paralleled each other. However, since early 2014, there has been a steady decline in non-fat dry milk and a somewhat volatile but increasing butter price.
From Figure 1, we can see that the key driver of milk price currently is the price of butter. Based on that observation, we need to focus our effort on increasing milkfat.
There are nutritional technologies that have the potential to raise milkfat percent while keeping milk yield, dry matter intake and other milk components the same. So let’s do some calculations to see if it is worth it to make this kind of intervention.
Here’s our situation: We milk 1,000 cows that average 89 pounds of milk with 3.5 percent fat. So let’s examine the impact of raising milkfat to 3.7 percent. For this example, we can assume that the other drivers of revenue (milk yield, dry matter intake, milk protein, other solids, producer price differentials and somatic cell counts) all stay the same.
Our example dairy is in the federal Pacific Northwest (PNW) order. We can pull the estimated milk component prices from the USDA’s Milk Market Administrators Office website. Then we can organize the data needed to evaluate whether it pays to change our milkfat percent in order to alter our milk check (Table 1).
Table 1’s first column contains the relevant current information. Since we are assuming the only change will be an increase in milkfat percent, the only information we need is the milkfat percent and butterfat price. We’re including all other relevant data so you can use this example to evaluate other scenarios.
Note again, for simplicity’s sake, that we’re assuming nothing else changes in the yield or composition of our daily milk or feed intake. Obviously though, when evaluating any technology that affects milkfat, we would need to know whether that technology also affects the other drivers of the milk price (milk per cow, milk protein, other solids, SCC, etc.).
Also, we would need to know the cost of the intervention and any change in feed intake. Running the calculations with changes in the other milk components and their yield would only require these projected changes and their individual prices. For our example, however, we’re going to keep it simple.
The estimated March 2016 price for butterfat is $2.2201. This means the value of the butterfat on our dairy is:
89 pounds milk x 3.5 percent fat / 100 x $2.2201 = $6,916 per day
In the table’s second column (“Adjusted”), the calculations are driven by an increase in milkfat of 0.2 percent units. We now have an increase in the value of the butterfat from our dairy that equals:
89 pounds milk x 3.7 percent fat / 100 x $2.2201 = $7,311 per day
Assuming all other components stay the same, this increases our daily milk revenue by $395 per day. If our theoretical intervention costs us $0.15 per cow per day, then our milk revenue increases by $0.25 per day and our effective milk price increases from $13.69 to $13.97. Therefore, we net $0.10 income over feed costs.
So if our assumptions are correct, the intervention makes sense. But before we decide to implement it, we need to understand the second critical factor.
Seasonal patterns in milk components
Before making the milkfat intervention decision, we need to know the “normal” seasonal patterns for milk components and milk yield for this time of year.
We can get an idea of the normal seasonal patterns in milk components from the “DV Monitors” article our company publishes in a monthly newsletter. For our example, we can see that in the PNW, a milkfat concentration of 3.7 percent is achievable at this time of year (Figure 2).
Because milk components are still a long way from their seasonal lows, we may want to revise our estimate of the effect of a milkfat intervention. Now our revised estimate can focus on reducing the normal seasonal decline in milkfat rather trying to increase it, which would be an uphill battle.
We also may want to estimate an increase in milk per cow rather than keeping that value fixed. We can adjust this estimate based on typical spring flush increases in milk in the PNW region.
Data-driven decisions
Well, it’s still Monday. But we’ve got a fresh, new data-driven perspective. The end of the month looks brighter now that we have a plan that can actually increase our milk check. With just a few pieces of data accessible online, we can assemble the tools to confidently evaluate whether or not to start a potentially profitable intervention or stop one that may be costly. PD
-
Bill Sanchez
- Dairy Technical Service Director
- Diamond V
- Email Bill Sanchez
