What drives financial success on a dairy?

Steve Bodart for Progressive Dairyman Published on 07 February 2018

Results of a large, ongoing study of Midwest dairy operations show six factors that separate top financial performance herds from their peers.

Compeer Financial’s dairy consulting team joined forces with Zoetis to statistically analyze financial and production data from dairies across the Midwest. The study set out to determine what distinguishes the most successful dairies from the rest when evaluated on net income per cow.

The study analyzed herds over a 10-year period beginning in 2006. The operations varied in size from 500 cows to 4,700 cows with an average of 1,071 lactating cows. There were 90 variables analyzed on 425 farm-year records from herds in Iowa, Michigan, Minnesota, Ohio, South Dakota and Wisconsin. On average, each farm had five year-end records.

As you may imagine, the study found net farm income – as expressed on a herd, cow or energy-corrected milk basis – is highly variable from year to year. Net income was evaluated on an accrual basis using standardized accounting processes.

In some years, profitability is good; other years it is poor – but in every year of the analysis, there were herds that made money and others that lost money. The study also pointed out there are farmers who are consistently better managers and have higher net income than their peers. The statisticians identified six factors accounting for 85 percent of the variation in profitability when calendar year is removed from the variables.

1. Somatic cell count

One of the largest drivers of profitability was milk quality and somatic cell count. The difference between the most profitable one-third and the least profitable one-third of the herds was a somatic cell count of 152,000 cells per milliliter (134 versus 286).

While quality premiums did make up a small portion of the difference in profitability between these two groups, the big differences were: Energy-corrected milk averaged 86.8 pounds per cow per day in the most profitable group, compared to 77.8 pounds per cow per day in the least profitable group, or a difference of 9 pounds of milk per cow per day.

Other differences between these two groups included a lower death loss and fewer days open in the low-somatic-cell herds with higher profitability. The annual difference in profitability between these two groups was $250 per lactating cow.

2. Energy-corrected milk

It is almost a given: Cows producing more milk have a higher profitability. However, it is also a given milk components need to come along with the milk to help ensure profitability. The difference between the top- and bottom-profitability groups was 19.9 pounds of energy-corrected milk (ECM) per cow per day (92 pounds versus 72.1 pounds).

To help ensure the dairy is maximizing its profitability potential, a Holstein herd should be producing over 6 pounds of combined butterfat and protein per cow per day; a Jersey herd should average over 5.25 combined pounds.

Other differences measured between the two groups included: The high-ECM herds also had an improved 21-day pregnancy rate, lower feed cost per hundredweight of milk, fewer days open, lower death loss and reduced somatic cell counts. The difference in profitability between these two groups was $462 per lactating cow annually.

3. Net herd replacement cost

The net herd replacement cost is defined as the number of cows removed from the herd (culled, died or sold as dairy replacements), multiplied by their replacement value, minus the salvage value of cull cows and dairy sales, divided by the amount of ECM milk shipped during this period. As net herd replacement cost increases, profits decrease.

The difference between the most profitable and least profitable groups was $1.14 per hundredweight of ECM (88 cents versus $2.02 per hundredweight). Part of this difference is due to the contrast in ECM production between these two groups, with the most profitable group at 88.5 pounds ECM and the less profitable group at 76.4 pounds, or 12.1 pounds ECM per cow per day.

Herds with the lower net herd replacement cost had lower cull and death rates, allowing them to have a higher proportion of the herd in third lactation and beyond.

This is important, as second-lactation animals produce 15 percent more milk than first-lactation heifers, and third-lactation cows produce 10 percent more milk than a second-lactation cow. When cows are culled with less productive days, they are less likely to be able to cover their rearing cost and unlikely to be able to add to herd profitability.

Every cow will eventually become a cull cow. The important factor is being able to voluntarily make this decision instead of having it forced on you. Herds with low net herd replacement cost also tend to have low somatic cell count. The difference in profitability between these two groups was $591 per lactating cow annually.

4. Death loss

Unfortunately, death loss is part of dairy farming. However, there was a 5.8 percent death loss difference between the most profitable (4.2 percent death loss) and least profitable (10 percent death loss) herds. Part of this is due to the difference in ECM production between these two groups, with the most profitable third at 85.1 pounds ECM and least profitable third at 77.8 pounds, or 7.3 pounds more ECM per cow per day.

A large majority of death loss occurs in early lactation. During the transition period, from dry-off until 60 days in milk, there is a significant amount of cash outlay with minimal revenue. Reducing early lactation death loss is crucial to improving herd profitability. The difference in profitability between the top and bottom groups when evaluating death loss was $185 per lactating cow annually.

5. Pregnancy rate

Every dairy has an opportunity to get their cows bred back on a timely basis, but there are consistent differences in pregnancy rates between the top third and bottom third of most profitable herds. The most profitable herds had pregnancy rates averaging 26.6 percent, whereas the least profitable herds had pregnancy rates of 18.4 percent.

The difference in profitability between the top third and the bottom third when evaluating pregnancy rate was $135 per lactating cow annually.

6. Heifer survival rate

All the herds within the analysis were doing a good job with heifer survival rates. However, the high-profit herds had average heifer survival rates at 95 percent, whereas the low-profitability herds averaged a heifer survival rate of 93 percent.

Regardless of whether you are looking to improve one of the factors or all six characteristics addressed above, the basics of excellent animal husbandry are needed to maximize dairy profitability.

Assessing health and production parameters allow the operation to maximize ECM, pregnancy and heifer survival rates, while minimizing net herd replacement cost, somatic cell count and death loss.  end mark

Steve Bodart is a senior dairy consultant with Compeer Financial. Email Steve Bodart.

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