As a dairy producer in Canada, your quota is not just an asset; it is the backbone of your business. It ensures the consistency of your sales, stabilizes prices and is one of the few assets that can directly generate new cash flow. However, acquiring quota can be a challenge. High bid prices and limited availability often stand in the way.
In Ontario, the DFO periodically issues incentive days, a unique opportunity for producers to ship an extra day. These "use or lose" days allow the board to fill short-term increases in demand without longer-term implications. Producers have a complex relationship with these incentives – they appreciate the chance to boost revenue, but they may be announced suddenly. Some complain they can't simply "turn on the milk tap," but is it even worth the effort?
Many of you might have heard a neighbour say, "Last fall, I tried to fill three days of incentives per month by delaying culling and dry-offs. When they were over, I sold 10 percent of my cows and dried off a bunch, and the milk in the tank didn't drop." This anecdote raises an important question: How much value should we place on trying to fill extra days? Let's break it down.
More revenue is a good thing. But it is not just about how much money you make, it is about how much you keep. Think of your revenue as your pie and your profit as the slice you get to keep after all the bills are paid. Different strategies exist to fill extra quota days, so let's see how these would impact your pie and your slice size.
If given three incentive days in a month, you can sell approximately 10% more (three days over 30) and increase your revenue by 10%. What would it cost you to produce that milk? Assuming you would not add stalls for short-term growth, most of the expenses would be variable – more feed required for more milk per cow or to support more cows. We can split your expenses into different columns on your income statement to help you understand where to concentrate improvements. The expenses we are interested in here (i.e., feed, bedding, breeding, veterinary) can be called the cost of goods sold (COGS). For quick math, if you could increase your revenue by 10% and your costs by 5%, your pie would be bigger, and so would your slice left. So, how much do your costs increase when filling extra days? This depends on how you approach it.
Here are some scenarios based on examples I have encountered. These are not meant to be perfect, but hopefully they will help you think about the concepts of revenue and COGS. Please don't quote these as definitive.
Scenario assumptions:
- 100 kilograms of quota
- Current production is 36 kilograms of milk, 4.2% butterfat, 3.3% protein, 5.95% other solids
- Feed cost is $0.36 per kilogram of DM
- 150 DIM
The herd is milking 66 cows in January, and the board has announced three extra days for the last six months of the year. Five neighbours each chose a different response to the announcement:
- Steady Eddie: He decides not to fill the extra days. His numbers will be used as our baseline for comparison.
- Dumping Dan: Dan is always worried he may miss out on filling extra days, so he "tries not to push" his cows most of the year so he can try to ramp up production in the fall. This means he must keep a few extra cows around (milking 73) and must dump some production in the spring.
- Milk More Marie: Marie delays dry-offs, culls and calves in a few more cows. She overcrowds her barn, and her days in milk (DIM) go from 150 to 180.
- Calving Carl: Carl planned to calve seven extra cows in advance. He plans to cull the extra cows in January after the incentives are over.
- Balanced Betty: Betty plans to calve four extra cows during the fall and supplement her ration with 200 grams of palm fat.
First, let's discuss the similarities across scenarios 2 to 5. These farms all filled the extra days, increasing their pie. Dumping Dan overproduced in the spring so he could keep extra cows for the fall, but this increases his costs and shrinks his slice. Milking extra cows in the fall comes with costs to feed and care for those cows, but at least there is increased revenue here to help offset these costs. Dumping overproduction reduces your gross margin (how much you keep). In this case, Dan still had a bigger slice left than Eddie, but is there a better way?
Milk More Marie is based on our example from the second paragraph. Milking more cows and stretching DIM can help fill extra days, but again, it shrinks the margins. So how can we grow the pie without hurting margins?
Carl and Betty both gambled on needing more milk in the fall and bred for more cows calving. Betty used a feed additive that can be added or subtracted as incentive days are announced. Both scenarios maintain (or increase) margins.
None of these scenarios are perfect, and the differences in extra dollars generated may not seem significant. Still, the concepts of revenue and margins may help you make your decision. It is important to note that one of the fastest ways to decrease your gross margin is to overproduce milk. In our example, discarding milk costs Dan $13,718 for six months.
We were very optimistic using three incentive days for a full six months. If you tend to overproduce, please do this simple exercise: How many days (or kilograms) do you discard in a year? Now compare that with how many extra you may fill. Are you further ahead or behind?
In conclusion, filling your base quota is always essential. This is your pie. Filling extra quota days will increase your revenue, but not all plans for short-term production are equal. Considering the changes in your expenses between different scenarios can help you increase the size of your pie and manage your expenses to maximize the size of your slice.
