The dairy industry has entered unprecedented economic times with milk prices dropping to levels that – a mere year ago – were forecast never to be experienced again, while feed prices remain at all-time record highs.

For the first time in memory, dairy producers are stating they cannot even cover feed costs with their anticipated milk checks, let alone labor and fixed costs.

The milk and feed price history graph (Figure 1) reveals how unique this period is. Over the past 15 years, milk price generally varied between $12 and $18 per hundredweight (cwt). In the past three years, however, milk price hit a record low near $10 and a recent record high of $22. Through this same period, feed prices have also been volatile, although not to the same extreme as milk until January 2007. That’s when feed price began its meteoric rise to a level almost twice the previous record-high.

Until 2008, the primary driver of income over feed cost per cwt of milk (IOFC) has typically been milk price. Stratospheric feed prices have kept IOFC within the range established in the past 15 years, despite record-high milk prices. Now that milk price is dropping, average IOFC could result in unprecedented lows and even reach zero for some producers.

Retreating to survival mode is the instinctive response in this environment: cut costs, hunker down and hope that this too shall pass in time to survive. Cutting some costs, however, can actually make matters worse. Two rules from Dr. John Fetrow, University of Minnesota professor, apply now more than ever:

1. Make as much milk per cow as you can.

2. Cut all costs as long as doing so does not break Rule No. 1.

Productivity, or productive efficiency, is most simply defined as the number of units of output per unit of input. The more units of output per unit of input, the higher the productive efficiency.

Milk is the primary money-making output on a dairy farm, but given its many inputs, many measures of productive efficiency, such as milk produced per worker or pounds of milk produced per pound of feed consumed, must be tracked to determine efficiency on the dairy. Putting these measures on a financial basis, such as IOFC, helps define which cost-cutting measures are effective versus those that violate Dr. Fetrow’s rules.

Feed is the major input for making milk, accounting for 45 to 60 percent of the cost of milk production. Given the current dairy economy, examining the dynamics of IOFC can be a guide to wise cost-cutting decisions.

Five different scenarios in Table 1 demonstrate that productivity counts. Scenario 4 provides the baseline for comparison, representing a typical U.S. dairy producing an average of 70 pounds of milk daily in an economic environment of $11 milk price with an average feed price of $0.12 per pound of dry matter.

An average-sized Holstein cow will require approximately 22 pounds of dry matter daily simply to stay alive, regardless of the amount of milk being produced. Milk production requires another two-fifths of a pound of dry matter per pound of milk. So a cow producing 70 pounds of milk requires 50 pounds of dry matter. At $0.12 per pound, feed cost per cow per day is $6. To convert to cost per cwt of milk produced, it takes one cow plus three-sevenths of another cow to produce 100 pounds of milk. Therefore feed cost per cwt is $8.57. At $11 milk, the resulting IOFC is $2.43.

The second scenario, comparing a late-lactation cow producing only 45 pounds of milk, shows the impact of lower production on IOFC. Using the above calculations, this cow requires 10 pounds less feed daily, reducing her daily feed cost to $4.80. But now 2.22 such cows are required to produce 100 pounds of milk, at a cost of $10.67 daily, reducing IOFC to only $0.33. This demonstrates the impact of “dilution of maintenance.” As milk production declines, less feed is needed per cow; however, the maintenance requirement for that cow does not change. Thus a larger portion of feed is used to keep cows alive as opposed to producing milk, reducing productive efficiency and profit. But how does this apply to trying to save money when feed costs are high?

The natural reaction to high feed costs is to search for the “least cost” solution. Unfortunately, it is very difficult to save your way to prosperity, especially in tough economic times. Scenarios 1 and 3 demonstrate what happens when cheaper feed ingredients are substituted or key ingredients are removed from the diet and how Dr. Fetrow’s Rule 2 comes into play.

Cheaper rations often have reduced quality or digestibility. This increases the amount of dry matter required for maintenance and milk production. For the typical cow producing 70 pounds, a $0.01 savings in cost per pound of feed actually costs $0.27 in net income. The impact is even more dramatic for a late-lactation cow when the cost of feed per cwt milk increases by $0.60, resulting in a negative IOFC. It is more effective to absorb a higher cost per pound of feed and cull the low- producing late-lactation cow (if she is open) rather than cheapen the diet.

Although it may seem counterintuitive, turning this concept around by spending more money on effective technologies and practices can increase productive efficiency, cut cost of production and therefore increase IOFC. In scenario 5, the producer has chosen to spend an extra $0.10 per cow per day on a technology that increases daily milk production by five pounds. Not only is the producer incurring this extra dime, but he must also feed cows an additional two pounds of feed, increasing overall cost per cow by $0.34 daily. This seems like the exact wrong way to go. In this scenario, however, it takes only 1.33 cows to make 100 pounds of milk, thus reducing the cost per cwt of milk by $0.25 and increasing IOFC by the same amount.

The takeaway here is that detailed financial investigation is required to effectively measure the impact of cost-cutting strategies. In this economy, cost cutting is vital and unnecessary costs must be avoided. But when cost cutting results in less milk produced per cow, the effort may actually make matters worse. The concept of increased productive efficiency through dilution of maintenance is a powerful strategy for reducing costs of production and utilizing fewer resources per unit of output.

This concept, by the way, delivers another added benefit. Using fewer resources per unit of production lessens the demand on the environment and on our natural resources. PD

References omitted but are available upon request at editor@progressivedairy.com

Chel Moore
Technical Consultant
Elanco Animal Health
moorece@lilly.com

Roger A. Cady