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‘Marginal’ milk can drive profitability

Melissa Hart for Progressive Dairyman Published on 17 May 2019

Dairy farmers struggling to remain profitable face a dilemma: What’s good for an individual operation may not be beneficial for the industry as a whole.

“The more milk we produce as an industry, the less profitable it is for the industry,” said Kevin Dhuyvetter, dairy technical consultant with Elanco Animal Health. “The problem is, as individual managers, you don’t make decisions for the industry, you make decisions for your business, so you have to do what’s best for your operation.” 

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Three ways to increase profits

Profit can be gained in three ways:

1. Increase revenue and/or decrease cost

2. Increase revenue by more than the cost increase

3. Decrease revenue by less than the cost decrease

On average, U.S. dairies have not been making money, evidenced by the number of dairy farms going out of business. When times are tight, producers frequently try to increase profit by cutting costs.

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“When we start saying, ‘I’ve got to increase profit, and the way I’m going to do it is by cutting costs and, hopefully, income won’t go down very much,' it very seldom works,” Dhuyvetter said.

For individual operations, one way to become more profitable is to sell incrementally more milk, Dhuyvetter said during a presentation at the Great Lakes Regional Dairy Conference held in Frankenmuth, Michigan. In general, the value of increasing milk output surpasses the incremental or marginal costs to produce it.

“Incremental milk is the most profitable milk made on the dairy,” he said.

Factors impacting milk output

Dhuyvetter listed several factors impacting incremental milk: feed quality, feed additives, milking frequency, housing, cow comfort, stocking density, reproduction, genetics, reduced transition issues, a heifer raising program and the “P-Factor” – people, protocols, processes and procedures. In most cases, it takes additional attention – and/or potentially additional investment – in those areas.

What is the cost of incremental milk? The simple costs to identify are feed and water, hauling, marketing and promotion. After that, it depends on what is driving the increase.  

 “It could be from improved adherence to protocols, increasing from two times a day milking to three times a day, technology, or heat abatement and cow comfort,” Dhuyvetter explained.

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“It really depends on where the opportunity is on each individual dairy,” he said. “If we are trying to improve profitability, it’s proven that you may have to spend more money to produce at a lower cost.”

There is a wide range in profitability across dairies because everyone’s management style is different. Cutting expenses are always a good thing until it starts cutting milk production. “Cutting production is always the worst thing,” Dhuyvetter said.

Partial budgets can be a powerful tool to help producers make good economic decisions, but they are only as good as the assumptions and math used. 

When evaluating the impact of incremental milk, consider the costs relevant to the decision, Dhuyvetter suggested. Conduct a marginal analysis using a partial budget approach. This is done by identifying income and costs and differentiating which are variable or fixed. 

“There is not one set of answers that is correct in all situations as [to] what is variable versus fixed,” he said. “This will depend upon each dairy’s unique set of constraints and situation.”

Maximize facilities

A full facility is one of the best ways to produce incremental milk. “We all know this: your facilities better be full, and that’s hard when times are tight,” Dhuyvetter said. “The last thing we want are facilities that are not being used.  And ideally, we need to be using them with the most productive cows.”

Achieving incremental milk growth may depend on your milk market, facilities and individual situation. One way may be to add cows, another is to increase production from each existing cow or a combination of both. 

“If I am in southwest Kansas, the answer is to add more cows,” Dhuyvetter said. “But if I’m in Michigan or Wisconsin, it’s to get more milk from each cow because of the difference in climate, housing and waste management. The systems are completely different.”

“Farm programs, in general, have been used to try to save the family farm,” Dhuyvetter said, noting those programs have not always been effective. “We do know they have not kept farms from getting bigger and bigger. The market is a very strong factor in that, and when the market says there are big gains in getting larger and larger, that’s a pretty strong economic force that’s hard to stop. And programs that try to stop it, usually, are not successful.”

Larger farms have the advantage of spreading fixed costs over more cows. They generally have higher output per cow, further diluting their costs of production. 

 “This industry dictates there are benefits to being larger – not because we want everyone to be large – but because there are so many fixed costs in this business, and we have to figure out a way to lower them or dilute them,” Dhuyvetter concluded.  end mark

As a consultant for Elanco Animal Health, Kevin Dhuyvetter is responsible for providing technical support to U.S dairy and beef producers and key influencers on economic-related issues in the cattle industry. His primary focus is to analyze factors affecting profitability of dairy and beef operations, develop decision tools, and analyze herd health, production and economic data.

Melissa Hart is a freelance writer based in North Adams, Michigan.

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