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Surviving low milk prices

Greg Bethard Published on 18 September 2009
During tough economic times, it is prudent to evaluate the efficiency of your business. There are many measuring sticks for success, but the most useful during good and bad times is cost per hundredweight generated from accountant summaries.

It really doesn’t matter how many pounds of milk your cows produce or what your cull rate is, provided your economic model results in a low cost per hundredweight. This is a good time to consider key components to making cheap milk.

Top ten keys to making money in the dairy business:
1. Keep a full barn.
2. Keep fresh cows healthy.
3. Offer a career change to unprofitable cows.
4. Realize quality and component premiums.
5. Maximize income over feed cost.
6. Procure high quality forages.
7. Generate pregnancies (heifer and cow).
8. Minimize replacement costs.
9. Cut costs intelligently.
10. Control labor costs.

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Keep a full barn
Keeping a full barn means averaging 100 percent of capacity over a year’s time. Anything less is a lost opportunity, other than the rare circumstance where a marginal cow is not making money. The definition of “full” or “100 percent capacity” does not necessarily mean one cow per stall or one cow per headlock.

It could mean less or more depending on the facility, environment and management. Every dairy needs to figure out what “full” is for their facility and management, then strive to stay there all year round.

Keep fresh cows healthy
Trickledown economics relating to fresh cows are simple: poor fresh cow health leads to excessive fresh cow culling, poor reproduction, high replacement costs, high cost/cwt and eventually a dairy in financial trouble. The number one herd health priority should be healthy fresh cows. Healthy fresh cows trump high-milking fresh cows.

Offer a career change to unprofitable cows
Cows that are not covering variable costs need to be traded in for a new cow, or her spot should be left vacant. A breakeven level of production can be calculated to determine if variable costs are covered as follows: (variable costs)/(milk price per pound).

Variable costs are those that disappear if one cow is culled. These include feed, bST, chemical/teat dip, interest and antibiotic risk. If these costs are not covered by the income the cow generates every day, then the cow is not covering her variable costs.

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For example, suppose variable costs totaled $5.50 per day and milk is $12 per hundredweight; breakeven level of production is $5.50/$0.12 = 45 pounds. In this case any cow below 45 pounds should be culled. This calculation is independent of the cow being replaced.

Practical uses of this calculation involve adding some common sense to the equation. Pregnant cows (for sure those greater than 100 days carried calf) on most dairies would not be considered for culling.

Cows would need to have two test days below breakeven levels to be considered (some cows may have had a “bad“ test day), and the manager or herdsman should visually evaluate before culling to be sure the milk weights are real.

Pregnant cows may be eligible for early dry if it would be less costly to feed her in the dry pen compared to keeping her in the milking string. In this case, breakeven production would be: (variable costs – dry cow feed costs)/(milk price per pound).

For example, suppose variable costs are $5.50 per day, dry cow feed costs are $2.50 and milk is $12 per hundredweight; dry-off level of production is ($5.50 - $2.50)/$0.12 = 25 pounds. In this case any pregnant cow below 25 pounds should be early dried.

This logic works to a point – it doesn’t make a lot of sense to early dry a cow with a poor mature equivalent (ME) that is less than 100 days carried calf.

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How then is it justifiable to cull poor pregnant cows or open cows that are poor producers but above breakeven levels? Models have been generated to predict the Net Present Value of a cow relative to a heifer that could take her place. Inputs include value of sold cows, cost of replacement, feed costs, milk price and risk of pregnancy.

A Net Present Value model essentially moves all costs and revenues that are predicted to occur in the future back to present day dollars, making comparison simpler. These models, if followed implicitly, would indicate that any cow with a negative Present Value should be culled.

These models are valuable and useful, but can be limited if future economic conditions differ markedly from the present. They are dependent on the cow being replaced.

Realize quality and component premiums
Milk premiums in most markets are offered for high-quality milk (low bacteria and somatic cell counts), butterfat and protein. Milk quality is generally the most lucrative, followed by protein, then fat. Total premiums can exceed $1 per hundredweight on Holstein herds and more on Jersey and crossbred herds.

When milk was $20 per hundredweight, a $1 premium was nice, like icing on the cake. Today with $10 milk, it is monumental and potentially lifesaving for the dairy.

Maximize income over feed cost
Income over feed cost (IOFC) is calculated as (milk revenue per cow per day) minus (feed costs per cow per day). If cows are milking 70 pounds, milk is $12 per hundredweight, and feed costs are $5.50 per day, then IOFC = (70 × 0.12) – ($5.50) = $2.90. Any change that increases the $2.90 is likely good, provided it does not impact cow health.

The IOFC is driven by several factors. Obvious are feed price and milk price. Others include feed conversions, milk per cow and the value of milk (i.e. components and premiums). Day to day feeding and management decisions should be evaluated using income over feed costs.

Feed cost per hundredweight is a useful tool to gauge the entire feeding program (milking and dry) over a longer period of time, and is impacted by feed buying, shrinkage, waste and the factors influencing IOFC. Feed cost per hundredweight is not useful for short term feeding and management decisions; IOFC is more appropriate.

Procure high quality forages
The ultimate trickledown economics on a dairy begin and end with forage quality. Cows eating lots of high quality forage under good management will likely be healthy, productive and fertile. It is quite difficult to have healthy cows with poor forages.

Generate pregnancies (heifer and cow)
There are many calculations available to determine how valuable a pregnancy is to a dairy. Somewhere around $400 is typical, and in the dairy industry we are well aware of the benefits of getting cows pregnant.

Often the importance of heifer pregnancies is forgotten, but they generally make up about 35 percent of the pregnancies generated on a dairy. They are the easiest to get (particularly in summer), and are equally valuable to cow pregnancies in generating cow flow. The number one reason for culling on most dairies is reproduction (often called low milk).

Dairies that need to purchase springing heifers to maintain herd size are really buying pregnancies. It is much cheaper to generate them on the dairy. Pregnancy hard count estimates how many pregnancies a dairy needs to maintain cow flow. Several methods are utilized to compute a hard count.

The method described here is simple and relates to cow flow. Assume for this example that a herd has 1,000 milking cows (not including dry). This dairy should calve 100 animals per month or 10 percent of milking cows.

Pregnancy hard count would be computed as follows:
• Heifer calvings – 35 percent should be heifer calvings, or 35 per month – Inflate by 1 to 2 percent for abortions or about 36 pregnancies needed per month – 36 per month equates to about 25 pregnancies needed per 21 day cycle

• Cow calvings – 65 percent should be cow calvings, or 65 per month – Inflate by 15 percent (or whatever the abortion rate for the dairy is) for abortions or about 75 pregnancies needed per month – 75 per month equates to about 52 pregnancies needed per 21 day cycle

The most important question to answer reproductively on a dairy is, “Are there enough pregnancies being generated?” Pregnancy hard count is more useful than pregnancy rate or conception rate in answering this question.

Minimize replacement costs
Replacement costs are typically the second largest cost of producing milk, behind feed costs. Conceptually, replacement cost is the cost of maintaining herd size and structure.

Although genuine dairy accountants have various methods to determine replacement costs, all methods are similar to the following: (value of cows sold - cost of replacement) / hundredweight of milk sold.

The value of cows sold is impacted by the kind of cows that are sold (fat, late lactation culls that sell well or beat-up fresh cows that are thin and sell poorly) and the number that are actually sold (deads are generally not sold).

The cost of replacement is impacted by what you pay for a new heifer, or the money invested in the home-raised replacement (not including value at birth). In a situation where all heifers are purchased, the value of heifer calves sold is included in the value of cows sold.

Quantity of milk shipped plays greatly impacts the calculation. Our industry focuses on cull rate as a measure of herd turnover. Replacement cost/hundredweight, as described above, trumps any other measure of herd turnover.

It doesn’t matter what your cull rate is if your replacement costs/hundredweight are low. It doesn’t matter how much you pay for heifers if your replacement costs per hundredweight are low. The measuring stick is replacement cost per hundredweight, and a reasonable goal in most areas of the country is less than $1.50 per hundredweight.

Some quick cowboy math illustrates these points. The following three examples are for a herd of 1,000 cows with 850 producing saleable milk.

• Scenario A. ~70 lbs milk, 40 percent cull rate, 10 percent death loss, $500 average cull cow price, and $1,200 cost of rearing heifers.
– Milk sold = 220,000 hundredweight per year – Value of sold cows = 300 x $500 = $150,000 – Cost of replacements = $1,200 x 400 = $480,000 – Replacement cost = ($480,000 - $150,000) / (220,000) = $1.50 per hundredweight

• Scenario B. ~80 lbs milk, 50 percent cull rate, 5 percent death loss, $500 average cull cow price and $1,200 cost of rearing heifers.
– Milk sold = 250,000 hundredweight per year – Value of sold cows = 450 x $500 = $225,000 – Cost of replacements = $1,200 x 500 = $600,000 – Replacement cost = ($600,000 - $225,000) / (250,000) = $1.50 per hundredweight

• Scenario C. ~60 lbs milk, 25 percent cull rate, 2.5 percent death loss, $500 average cull cow price and $1,200 cost of rearing heifers.
– Milk sold = 185,000 hundredweight per year – Value of sold cows = 225 x $500 = $112,000 – Cost of replacements = $1,200 x 250 = $300,000 – Replacement cost = ($300,000 - $112,000) / (185,000) = $1.02 per hundredweight

Reducing heifer rearing costs is an important factor in lowering replacement costs. Many factors contribute, but paramount is getting heifers pregnant. We often mislead ourselves by using a biased number to evaluation heifer reproduction: conception rate.

While a useful number in some ways, the most important number is how many pregnancies are generated over a recent period of time such as a week, 21 day cycle, or month.

Cut costs intelligently
Cutting costs is necessary, and good dairyman can do this intelligently. Cost cutting is okay provided the following areas are not impacted: forage quality, cow health, fresh cows and pregnancies. Dairies that cut in these areas are signaling that they do not intend to be in the dairy business long term.

Control labor costs
There are many measures of labor efficiency. They include cows per employee and pounds of milk sold per employee. While some of these measures have some utility, the ultimate measure is labor cost per hundredweight.

It really doesn’t matter how many employees you have if labor costs per hundredweight are “good”. Several issues can skew this number, including contract labor (outside breeding services, outside maintenance services, etc) and if replacements are raised on or off the farm.

Ideally only labor involved in taking care of the milking herd should be included. Labor involved with replacements or farming should be considered separate.

Summary
Having a low cost per hundredweight trumps all other rules for making money. Those that make cheap milk will remain in business the longest if they choose. PD

References omitted but are available upon request at

—Excerpts from 46th Florida Dairy Production Conference Proceedings

Greg Bethard
DRMS
D&R Dairy Consulting

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