Managing Tighter Margins

Forage inventory, cropping strategies, and alternative energy sources are management areas affecting cost of production.
Managing Tighter Margins - Articles


Production perspective

The Extension Dairy Team over the past several years has seen a substantial increase in requests for cash flow plans. The emphasis has been to determine the breakeven cost of production and strategies to help manage margins. The team just finished 2014 plans with producer's actual numbers and is now focusing on 2015 projections. Producers working with the dairy team for several years have implemented cropping and feeding strategies that have helped prepare them for 2015.

There are some commonalities with the producers that generated positive cash flows in excess of $3.00/cow in 2014. The first is paying close attention to forage inventory. This has allowed more consistent rations to be fed over the year. Producers are examining cropping strategies and forage allocations that are appropriate for the lactating cows and non-lactating animals. Many of these producers are feeding very basic rations and are feeding alternative energy sources in addition to corn grain. The result was high milk income because of both good milk production and high milk price/cwt.

Because 2013 corn silage tested low in fiber digestibility and in many cases low in starch content, nutritionists had to think outside the box to compensate for this in 2014. Feed cost, both purchased and home-raised combined, was higher per cwt on the herds feeding the low quality corn silage compared to farms feeding higher quality corn silage. However, farms generated a higher cash surplus per cow on the lower quality forage. The feeding and nutritional strategies on the low quality forage resulted in higher milk production, which in turn resulted in a lower breakeven cost of production. This illustrates why you can't focus on just one side of the equation: only milk income/cow or only feed cost/cow. It is the margin that determines if the feeding strategy is working properly.

Forage inventories have a major influence on cash flow. The farms with the highest quality corn silage were also feeding the lowest amount compared to the herds with the lowest quality corn silage. There was a missed opportunity on the herds with the better quality forage. Did they limit the amount fed because they did not have the inventory or was that the feeding strategy of the producer or nutritionist? This opens the door for discussion on how to utilize good quality forage or the opportunities available to produce and store more forage.

As we work to project cash flows in 2015, these same farms that made changes over the past years related to cropping strategies, or feeding management or nutrition are better positioned to have a positive cash flow. A positive cash flow of $0.50 per cow may be the best they can achieve but at least it is positive. There are still too many farms that have not addressed issues related to the pounds of milk shipped and do not have adequate milk income. Others have not improved forage quality or quantity and they have to purchase a lot of supplemental feeds. These farms are showing a negative cash flow in 2015 of over $2.00/cow.

It is not enough to know a farm's breakeven cost of production. It is how the farm makes decisions based on knowing their margin and if strategies implemented are keeping the operation sustainable. An operation's margin will change every year depending on the dynamics of the milk and feed markets. This makes it essential to combine both finances and production together when evaluating management changes.

Action plan for monitoring cost of production

Goal- Annually complete a cash flow plan with the previous year's actual numbers for income and expenses and project income and expenses for the current year. Review quarterly that the cash flow plan is in line with projections.

Step 1: Collect all pertinent financial and feeding information for developing a cash flow plan. Meet with the appropriate consultant to review projections and to discuss any necessary strategies for implementation.

Step 2: Review costs and income on a quarterly basis to ensure the cash flow plan is on track.

Step 3: Present breakeven margin numbers to the farm's profit team or appropriate advisors on a quarterly basis.

Economic perspective:

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows income over feed costs is a good way to check that feed costs are in line for the level of milk production. Starting with July's milk price, income over feed costs will be calculated using average intake and production for the last six years from the Penn State dairy herd. The ration will contain 63% forage consisting of corn silage, haylage and hay. The concentrate portion will include corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen and a mineral vitamin mix. All market prices will be used.

Also included are the feed costs for dry cows, springing heifers, pregnant heifers and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd for the past 6 years. All market prices will be used.

Standardized IOFC starting July 2014

Note: March's Penn State milk price: $18.01/cwt; feed cost/cow: $6.84; average milk production: 84 lbs.

Standardized feed cost/non-lactating animal/day starting July 2014