Dairy producers are usually not professional economists, yet every dairy operation has to understand and work within today’s economic realities. To some, current conditions are a “perfect storm.” Others, however, see an era of opportunity.

The big-picture macroeconomic situation is complicated. The fact is, you need to respond to macroeconomic signals with the appropriate microeconomic decisions – actions specific to your dairy.

What’s your microeconomic reality?
Generally speaking, dairymen are either “low-cost producers” or “high-revenue producers.” A select few seem to be both, which are the most profitable operations in both good and bad times. Reviewing some of the areas that both types of producer have in common can suggest microeconomic practices that every operation would be smart to follow.

Both low-cost dairymen and high-revenue dairymen seem to be equally successful at making a profit and growing their businesses most of the time. Some enjoy the challenge of driving down the cost of doing business, while others relish in the ability to maximize production. But when times are extraordinarily tight, like now, maintaining high production and controlling costs is pivotal to survival.

Consider the concept of “marginal milk:” Each additional pound of milk over and above costs dilutes cost of production. Therefore, most cost cuts from a system that cause a drop in milk production or components are detrimental to the bottom line. Not only have you lost marginal milk, you’ve now also reduced cash flow even further than the economy of price has dictated – and if there’s one thing you need right now, it’s cash.

Note that not all cost-cuts are detrimental; only those that result in a net loss drop of milk production, components, or any other measurable, economically significant revenue source. Among these would be reproduction (pregnancies which lead to new lactations,) milk quality (SCC premiums) and genetics (getting paid more for excess or superior cattle).

What do you get paid for?
Most Midwestern U.S. dairies get paid for milk fat, milk protein, other milk solids, milk quality, genetics (in the form of heifers, springers, bulls, embryos or semen), and cull cows. Yet the one thing that most operations measure is milk pounds – bulk tank average.

A first step for setting priorities into the next year and beyond may be to look at what items you get paid for, and what contributions they make to your bottom line. Obviously, butterfat and milk protein should lead the list of revenue for most dairies, but what if there was a way to make more of it? Capture higher quality premiums for it? Sell extra heifers? Improve cull cow values?

Most of those improvements come at a cost, assuming you have to buy something to improve statistically in that area. Sometimes, you have to weigh that cost against the reward.

This is an area where the best business managers rise above their peers: To get something out of nothing, you have to work smarter and with more ingenuity. A great example of this is forage quality and shrink. All dairies go through the same basic steps to harvest and store their forage and grain supply. Yet there are such vast differences in quality, consistency and shrink – it’s mind-boggling.

With shrink being directly linked to forage quality losses, that means it is directly linked to cow performance losses. So, taking steps to reduce shrink is always cost-effective. You get to feed more of the commodities you worked so hard to procure, and they produce more milk per pound of dry matter because they’re higher quality with far fewer defects such as molds and mycotoxins.

This makes all decisions that improve forage quality first priority for a feeding program. The better the forage, the less supplemental feeds are needed. Assessing forage procurement and storage, then laying out a plan to reduce shrink and improve quality and consistency, can create positive returns to profit and cash flow for your dairy with minimal extra investment.

What are your systems?
The forage program is an example of one of the many “systems” within a dairy farm that make it run and perform its goals. Other systems include ration balancing, feeding, parlor and milking, cow housing and comfort, cow health and transition management, reproduction, and replacement heifer programs.

All of these systems should be reviewed for opportunities to both control costs and improve performance. The lowest-cost producers spend much more time managing important details more thoroughly and ensuring that basic needs are always met. By doing so, they spend less money on quick fixes or reacting to problems.

High production cannot be met without meeting basic needs as well, but without consistency in the detail work, it may come at added costs from time to time. So, in order to achieve both, a detailed systems approach seems to be another hallmark of these dual-achievers.

Whether they know it or not, they tend to be systematic thinkers and understand that one system depends on the other. Feeding and ration systems are another example of creating a low-cost/high-output synergy. Using available professional technology for balancing rations more efficiently gives you a range of options.

You can balance for microbial protein (MP) and metabolizable energy (ME) to attempt to feed lower crude protein diets with the same or better production. Or you can feed more group-specific rations based on production requirements without sacrificing (or perhaps improving) milk component production or animal health.

What are the big deals?
Reproduction is mentioned most often as the most critical system to retain at all costs during tough times, and rightly so. Failure in this area leaves the dairy unable to rebound and make up for lost time when positive milk prices return. Yet, ironically, it’s often the feed ingredients commonly associated with reproduction (like trace and macro-mineral nutrition) that are most closely scrutinized for cost, while in most cases they contribute the smallest true cost to the ration.

Yes, dairy cows require these ingredients for good reproduction and animal health, but the response to adding or subtracting them to the diet occurs over time. All too often, dairymen and feed people alike forget that cows respond reproductively to energy status in the presence of adequate protein first and foremost.

Cows in optimal body condition have better reproduction than overly thin or obese cows. This reinforces the importance of ensuring that basic needs are consistently met. Scrutinizing a 4-to-5-cent per cow per day item in a ration, like trace minerals, often leads to overlooking the 15-cent ones – like a couple pounds of corn. In like manner, forage quality and consistency directly impacts this reproduction discussion as well.

The basic premise of cost management is to focus on the big- ticket items first, and prioritize them the same way within each system. This is how successful high-output producers think: They focus on their largest revenue sources and figure out how to make more revenue. Many less successful producers review cost and revenue in reverse order. They start with the small items that seem to annoy them the most without putting critical data to the test.

Don’t chase pennies to lose dollars when looking at both expenses and revenues. Every dairy has its own microeconomy. The answers are not all the same when dairies respond to the macroeconomic signals they’re presented with.

Each dairy has the opportunity to assess their own situation and, with the help of professional advisers and team members, make decisions that can positively impact the microeconomics of the dairy. The times that we’re in require creative thinking – a desire to find a better way to do things – and lead to improved technologies and increased profits during higher price levels.

Instead of looking for silver bullets, pay attention to details with the right priorities. No operation is perfect, but making more good decisions than bad ones is what generates progress.

Evaluating your systems for improvements in efficiency and prudent cost-control, while simultaneously enhancing and growing revenue opportunities, will ensure a more profitable future for your dairy. PD

Nutritionist Dan Kohls is on staff at the Form-A-Feed and TechMix companies, headquartered in Stewart, Minnesota. Contact him at articleinfo@formafeed.com or call (800) 422-3649.

How do you define the difference between microeconomics and macroeconomics?
According to Wikipedia, microeconomics (small/little) is a branch of economics that studies how households, firms (and dairy farms) make decisions to allocate limited resources. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services.

Macroeconomics, on the other hand, involves the “sum total” of economic activity, dealing with issues of growth, inflation and unemployment and with the economic policies related to these issues. Macroeconomics deals with the performance, structure and behavior of a national or regional economy as a whole.