Dairy Sense: Income Over Feed Cost Recap

June 2023

Production Perspective

The extension dairy business management team has focused its efforts on tying together production and financial metrics for almost two decades. Using income over feed cost (IOFC) was the approach taken since it is a simple measure. It reflects milk income (milk price and milk pounds) and the feed cost per lactating cow. This evolved from using market prices for feed costs to calculating the dairy's cost of home-raised feeds and capturing the true cost of feeding cows. This led to benchmarking against the farm's breakeven IOFC. This has proven to be an invaluable metric since it captures two major components on the farm on a per-cow basis: milk income and feed cost. The latter is usually the highest expense item for dairies.

Using data compiled monthly for "Dairy Sense," Figure 1 shows the trends for the past 15.5 years for IOFC. Prior to 2015, there was a cyclic trend of IOFC that ranged from high, medium, low, and repeat. After the boom in 2014, IOFC has been flat for about 8 years with 2022 coming close to matching those unprecedented high milk prices. The main issue impacting the margin has been high feed costs, which continue to hamper achieving a stellar IOFC today. This data coupled with a dairy's production metrics is the best approach for keeping farms in business. There have been numerous take-home points learned over the years where IOFC was instrumental in creating change on how farms do business.

A major benchmark obtained from all the farms worked with over the years was the minimum level of production to be competitive. Herds milking 2x need a minimum of 75 pounds of milk and 3x herds need 85 pounds of milk.  Monthly monitoring of production and IOFC was instrumental in operations making changes in their cropping strategy or feed purchases. This helped illustrate how fluctuating milk or feed prices were affecting the bottom line. Between 2015 and 2021, there was not a lot of variability in milk price, so producers focused on optimizing production while keeping feed costs in line. Operations not achieving the minimum production benchmarks tended to have costs of production that were not competitive.

A change that occurred during the past decade has been the implementation of using a double crop for additional feed. There has been a growing trend, regardless of herd size, where the cropping acreage is not sufficient to support the whole farm. Double cropping a small grain on corn acres has proven successful for animal and financial performance. The one-and-done harvest approach for double crops like corn silage has provided cows with a more consistent forage ration compared to the multiple cuttings for alfalfa or mixtures. Farms implementing this cropping strategy have observed improvements in IOFC over time. Double cropping is also an effective management practice for handling manure applications.

Another benefit of monitoring IOFC monthly was the value of locking in both milk and feed prices. Using the margin to make decisions provides a more accurate accounting of money needed for cash flow. This approach was extremely valuable to farms utilizing commodities. Having the breakeven IOFC to track with the monthly IOFC empowered producers to consider making changes sooner versus later, especially if milk price was dropping or feed costs were rising.

The volatility of the milk and feed markets (Figure 1) over the years validates the usefulness of IOFC. In the past, it was always about the milk price or just the feed costs, never about the margin. Developing educational programs and working one-on-one with producers to calculate their IOFC to show how it can be used has improved decision-making skills. This is one metric that will never lose its value.

Figure 1. Income Over Feed Cost for the Past 15.5 Years

This is the last Dairy Sense article as the author is retiring June 30, 2023, after 36 years at Penn State.