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High milk peaks ultimately mean more revenue

John Hibma Published on 18 May 2012

One of the things dairy farmers have had endlessly drummed into their consciousness in recent decades is the importance of getting their cows to reach maximum milk peaks at the onset of lactation.

Nutritionists, feed salesmen, extension agents, veterinarians, accountants, bankers, semen salesmen and even hoof trimmers all get on the bandwagon of encouraging high milk peaks – because, theoretically, the more milk your cows give, the better your chances of staying in business tend to be.

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Of course, all those aforementioned professionals have a very biased financial stake in a dairy farm’s financial health.

But we must be careful here, that we also understand that what’s really at play is not so much the milk itself but the revenue the milk generates – and, more importantly, how much money is left after all the bills are paid – especially that ugly feed bill.

Every dairy farm has its own unique financial structuring – cash flow, capitalization and leveraging of debt. Some dairies have mountains of equity stored up and plenty of cash on hand while others don’t have a bit of either and are 60 to 90 days or more behind on every bill.

Unfortunately, for the past few years, many dairy farmers have spent much more of their time crawling out from under the bills as opposed to building equity.

Every dairy farm must maintain a certain level of production to sustain an acceptable cash flow. Much of what makes a dairy profitable is predicated on how much and how quickly the cows can generate income. Regardless of what level of production a herd is at, the more quickly cows can reach their peak milk production, the more profitable they can be.

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Financial analysts are advocating that your cows should be generating a minimum of $4,000 gross revenue per lactation. The question is, of course: How much milk does a cow have to produce to make that kind of money? Naturally the price of milk will have a major influence on that answer.

It’s a whole lot easier to get $4,000 out of a cow when milk is bringing $20 than when it’s at $15. Recent pricing forecasts for 2012 are predicting a drop in milk price of nearly $3 per hundredweight (cwt) compared to 2011. As I prepare this article, it appears that much of the U.S. will average less than $18 in 2012 for standardized butterfat and protein.

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Table 1 illustrates the differences of gross milk revenue between two herds of cows milking 300 days. One herd produces more than 21,000 pounds of milk and the other produces more than 25,000 pounds of milk.

It should be obvious that in order to get high-production lactations, cows must peak high and sustain higher levels of milk production throughout the course of the lactation.

With the price of milk at $18 per cwt, a cow producing 21,000 pounds of milk will not generate $4,000 of gross revenue. The dairy farm will have to have $19 per cwt for its milk before it tops $4,000.

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On the other hand, the 25,000-pound herd has no problem generating well over $4,000 when milk is only $18 per cwt. In fact, the milk price can fall below $16 per cwt before the 25,000-pound herd can’t generate $4,000 per cow.

A valid question that arises when trying for higher milk production is whether feed costs will stay in line. After all, even if you can generate a couple more hundred dollars per year in milk revenue and it costs that much to feed the cow to get that milk, you have gained nothing. There’s no argument that to get cows to produce more milk they have to eat more feed.

In this example, the difference in income between the two herds is $762 per cow per year. That increase in revenue, broken down on a per-cow per-day basis, is $2.54. One way to look at that money is that’s how much feed cost per cow per day would have to increase from the low-production to the high-production herd before the profit is eaten up.

Interestingly, as the price of milk increases (say from $18 to $20), the cushion increases – in this case to $2.82 – the dairy farmer has almost another 30 cents of marginal income to work with when the cows make more milk. Even if it costs a herd an additional $1 per day per cow in feed costs, there’s money left for other things.

Every dairy farmer must decide how they’re going to navigate through volatile times and what sort of profit margins are necessary to keep their business financially solvent. Cost-cutting can only go so far and eventually cows have to become more efficient and productive.

Certainly not every dairy needs a 25,000-pound herd average or has to generate $4,000 per cow to survive. However, expertly managed herds will find that there are more profits to be had in a higher-producing herd of cows. PD

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John Hibma
Nutritionist
Central Connecticut Co-operative
Farms Association

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