The dairy industry has entered a time of unprecedented economic volatility. In 2011, there were dairies that made enormous profits; at the same time, their neighbors were declaring bankruptcy.

The economic disparity has never been greater between the top 10 percent and the bottom 10 percent. As we move toward the future, it seems there is no end in sight for the changes we have encountered over the last four years.

An internal study done by Ghost Hollow Consulting examined the key elements needed for profitability in this new dairy economy.

Six traits emerged from the 18-month study that separated the top herds from their counterparts. The study did not look at debt; rather it measured the difference between the top 1 percent and the top 25 percent.

The most important facets of management discovered were reproduction, transition, forage quality, employee training, milk quality and price management.

These six factors accounted for more than 90 percent of the variation in performance of the top herds.

Reproduction
The repro program on a dairy is one of the most important, if not the most important, keys to survivability and profitability of the dairy. A top-notch reproductive program keeps days in milk (DIM) low, lowers culling rate, increases number of calves born and increases feed efficiency.

By keeping DIM low, there are a higher percentage of cows in early lactation and at peak, therefore increasing milk production per cow. The ideal range for DIM in a herd is between 150 and 170 DIM.

It is estimated for every one-day increase in average DIM, you will lose 0.17 pounds of milk per cow, which means a herd at 180 DIM will produce 1.7 pounds of milk per cow per day less in comparison with a herd at 170 DIM.

Culling for reproductive reasons is the single-highest reason cows leave the herd. Improving the reproductive program will reduce the amount of cows culled for reproductive reasons, will reduce the need for replacements and will increase the average age of cows in the herd.

By lowering the need for replacements, there will be fewer first-calf heifers milking, which will increase the average milk per cow per day.

First-calf heifers produce 75 to 80 percent of the milk of older cows, and therefore milking fewer first-calf heifers will increase milk production per cow. A herd consisting of 40 percent first-calf heifers versus a herd of 30 percent first-calf heifers will average 5 percent less milk.

Increasing the number of calves born on a dairy augments the dairy’s flexibility. Increasing bull calves improves income, as increasing heifer calves allows management greater flexibility in culling decisions.

With more heifers available, the dairy has the option of selling open heifers for export, selling bred heifers, selling springing heifers or doing more voluntary culling of the herd. This can be an income opportunity or an opportunity to increase the quality of the milking herd.

By keeping DIM at a minimum, keeping more cows at peak and keeping higher-producing cows in the herd, feed efficiency is increased. With a ration cost of $8.50, increasing from 1.5 to 1.6 in feed efficiency lowers feed cost per hundredweight (cwt) by $0.61.

The repro numbers achieved by the top herds were a preg rate greater than 25 percent, a conception rate greater than 35 percent, a heat-detection rate greater than 70 percent and less than 5 percent of the herd being culled for repro reasons.

Transition
The transition program and the reproductive program are equal in importance to highly profitable herds. They are also intertwined since poor transition affects repro, and subpar breeding can affect the length of the dry period and the subsequent transition to the next lactation.

We only have one shot at a great transition. There is no single factor that has more impact on peak milk, and therefore lactation performance, than the quality of the transition program.

With a perfect transition, body condition loss, vet expense and transition culling are minimized. Peak milk, feed efficiency and reproductive performance are all maximized.

Poor transition or even average transition has a huge impact on opportunity cost. Opportunity costs are hidden costs that chip away at the overall profitability of the dairy.

For example, early culling is not a cost you write a check for, but a cow sold in early lactation (less than 60 DIM) isn’t given the opportunity to make a profit for the dairy. With today’s costs, it takes about $1,500 to get a heifer to her first freshening.

It takes a minimum of $150 in feed to take a cow through the dry period, not to mention vaccinations and hoof trimming. With these scenarios, a dairy owner has no chance to recover these investments if a cow is culled in the first 30 days of lactation.

The average dairy culls more than 5 percent of the cows that calve in the first 30 days of lactation. For every 1 percent increase in early culling rate above 2 percent, the loss is more than $10,000 per 1,000 cows in the herd.

There is direct loss on the replacement costs, loss of milk and treatment costs. There are also costs associated with higher DIM for the milking herd, lower milk per cow because of higher percent heifers in the herd and lower feed efficiency.

In addition, herds with a high early culling rate typically have lower peaks and poorer reproduction due to subpar transition on the cows that remain in the herd.

The top herds achieve less than 2 percent culled in the first 30 days of lactation and less than 3 percent for the first 60 days. These numbers are less than half the national average. With today’s costs, cutting the early culling rate in half can lower cost per cwt by more than $0.50.

Forage quality
With more than 40 percent of our milking rations made up of forage, and an even higher percentage of it for heifers and dry cows, everyone understands the values of forage quality. Or do we?

Typically, only alfalfa is sold on a nutrient value, relative feed value (RFV), and the formula for RFV doesn’t even include protein. With today’s protein prices, alfalfa that tests at 22 percent protein instead of 20 percent is worth $13.08 more per ton.

Corn silage is priced in relation to corn grain price, but very few pay on starch levels in the silage. The extra starch in a corn silage sample that tests 30 percent starch versus 25 percent starch is worth $11.25 more on a dry basis.

In an era with record-high commodity prices, the nutrients brought to the table by forages will be a major factor in the profitability of the dairy.

Of all the forages we feed in the dairy industry, we have the best handle on the quality of alfalfa. There have been numerous studies on proper cutting interval, and we have accepted quality guidelines, first with RFV and now with relative forage quality (RFQ).

Almost all alfalfa hay is sold on quality, while other forages are usually lacking in high quality. Small-grain hays are almost never sold on a quality basis, and silages are sold mainly with a moisture adjustment.

In our study, the most profitable dairies focused on forage quality, specifically high fiber digestibility. The use of BMR corn and sorghum varieties has increased dramatically.

There are inoculants touting improved digestibility. We put in a fermentation lab to study different feeds and are looking for ways to improve rumen fermentation.

One of the things we learned in last year’s drought was the value of fiber digestibility. While the starch levels in last year’s corn were extremely low, the drought stress caused fiber digestibility to skyrocket.

In one instance, corn that was only 14 percent starch had a net energy for lactation of 0.81 because of super-digestible neutral-detergent fiber.

We need to learn how to grow and manage corn that is both digestible and high in starch. Another drought lesson was the value of small-grain hay. The reason: high neutral-detergent fiber digestibility.

The other factor that stood out in the top dairies was their attention to harvest – whether it was making sure that haylage and small-grain silage weren’t put up too wet or watching the processing of the corn silage to ensure none of the starch passed through the cow.

Growing the best forage in the world doesn’t matter if it is ruined during harvest. If you grow your own forage, putting up top-quality forage allows the dairy to maximize production with less purchased feed. If you buy forage, the quality is even more critical.

Milk quality
Evaluating milk quality is a little different than some of the other elements. Milk quality numbers – somatic cell count (SCC), percentage of clinical cases per month and percentage of herd culled for mastitis – are affected by a very diverse group of somewhat unrelated factors.

Milking equipment function, milking procedure, environment, immune function and trace mineral status all play a role in what we call milk quality.

Nevertheless, milk quality plays a huge role in profitability. Think about it, the milking center is generally the largest capital outlay on the dairy and consumes the most repair and maintenance cost.

The most labor, in terms of both sheer numbers and wages, is consumed by the milking center. All of the money we spend on feed to produce milk depends on how that milk is harvested.

Culling for mastitis is equal to reproductive culling for the highest percentage of culls on most dairies. About 10 percent of the herd is culled for mastitis every year. Cows with a mastitis event have poorer reproduction than cows without mastitis.

Loss of milk and antibiotic costs are a big expense. It goes without saying that cows with a clinical mastitis event or even higher SCC produce less milk. Most processors give bonuses for higher-quality milk.

The elite herds in our study had an SCC of less than 120,000. Many were lower than 100,000, with some as low as 40,000.

Clinical mastitis was less than 2 percent per month, and the percentage of the herd culled for mastitis averaged 7 percent. Bonuses received for milk quality averaged about $0.40 per cwt.

Employee training
This finding may or may not surprise people, but it shouldn’t. Today’s dairies are run by employees with non-dairy backgrounds.

We found that pre-eminent dairies had extensive training programs for their employees, and the most important facet of their training programs was constant monitoring and retraining.

Monitoring was accomplished using tools readily available to all dairies. Milkers can be monitored with SCC, laboratory pasteurization count and the number of new mastitis cases.

Feeders can be monitored with computer feeding programs and TMR samples. Reproduction can be monitored with heat detection and preg rate information.

The dairies with the best training had no set training schedule other than for new employees. Retraining was implemented when the monitoring program indicated it was needed, usually on a monthly basis.

If you analyze the six elements of success, four of them involve huge amounts of labor. Reproduction, transition, forage quality and milk quality are all largely put in the hands of a labor force that had never worked with a cow until you hired them.

The top elite producers understand this and realize the future of their dairy is in the hands of their employees.

A well-trained, motivated workforce is a huge asset in contrast to a workforce only there for a paycheck. Constant training is needed to maximize the ability of employees to do their job at the highest level.

Everyone has employees they feel they could not do without. What if, with the proper training and motivation, you could say that about all of your employees?

Price management
The last of our six elements is a little different. It involves the ownership team of the dairy, with no involvement in the labor force.

We call it price management. It involves forward contracting both feed and milk to lock in a profit or a smaller loss for a short time. The most profitable dairies use this tool better than the comparison dairies.

The absolute key to making this work is to know your exact costs and be able to predict your future costs. Locking in both feed and milk is critical. Leaving one at the mercy of today’s volatile markets has ruined more than a few dairies over the last three years.

Realizing that you may not hit the top milk price or the lowest feed price and being comfortable with a smaller but confident profit is not an easy mindset to have, but it is critical.

The elite dairies locked in both milk and feed on a regular basis. Most locked a percentage as prices of either feed or milk were headed in the right direction.

You will never go broke making a small profit.

Conclusion
There are many numbers used by consultants, accountants, bankers and dairy owners to assess the profitability and sustainability of the dairy.

Income over feed cost, cull rate, cost per cwt to produce milk, feed cost per cow per day and many more that all involved in this industry could recite.

What this study shows is that the six elements uncovered as being most important drive the numbers that have become the standard for assessing profitability.

By focusing on improving these key factors, the other numbers will fall in line and the dairy’s profitability will improve dramatically. PD

Kevin Jones is a dairy nutritionist and owner of Ghost Hollow Consulting with his wife, Tammy. The company provides nutritional consulting, feed testing, whole-farm record analysis and employee training. He can be reached by email .