Dairy cow feeding economics or; “When does a savings represent a sacrifice?”

Contact: Ken Bolton, 715-877-1420, kenneth.bolton@ces.uwex.edu

Financial stressors experienced in the dairy industry since late 2008 have sharpened dairy producer interest in maximizing income over fed cost (IOFC.) However, much confusion exists throughout the industry as to the relationship between reducing feed cost and net revenue generated. At the end of the day the only thing that matters is whether a business generates a loss or a profit. So, when does a savings, in fact, become a sacrifice?

We know from USDA survey data that dairy producers tend to pull back on the amount of feed offered to cows during tight economic times with the resulting reduction in milk production. However, a savings or reduction in expenses doesn’t automatically translate into an increased margin; the difference between income and expenses. To do so requires income level to remain at least equal or to not decline as quickly as the reduction in cost. This is rarely the case with milk production because a decrease in the quantity or quality of feed fed almost always results in lower milk production. Even when the result is only a one lb milk response per lb of feed fed, milk is typically worth 2-3 times the value of feed. Even when milk is priced at its lowest and feeds at their highest levels, milk is still worth 1.4 – 2.0 times that of feed. It therefore takes a lot more feed savings to offset even a minor decline in milk production!

Another challenge in determining feeding economic outcomes is that nothing about the dairy business is static. Although a person may be able to identify the rare situation where reduced feed expenses may increase net income; cow response, feed and milk prices continue to fluctuate. Even very expensive feed additives which rarely pay except under very high milk prices have their day in the sun! So what is feasible today may be totally different tomorrow. Ongoing vigilance is needed.

One strategy dairy producers have tried to increase returns from milk production is identifying or grouping lower producing cows and feeding them a lower nutrient density and therefore lower cost ration. This makes perfect sense as long as production is maintained or enhanced and the savings can be implemented at a cost lower than the benefit realized. Smaller herds may be in a better position to accomplish this goal as larger herds may experience implementation expenses high enough to render positive returns a mute point.

The economic evaluation of grouping strategies is further complicated with milk loss associated with cow moves due to social interactions, added expenses for pen establishment and extra batches of feed to mix, body condition score changes, reproduction and udder health status along with age of the animal. Any of the previous reasons to group cows may very well offer a significantly higher rate of return than saving a few cents/cow/day in feed cost. Fine tuning feed waste and misallocation, purchased vs. home raised and the timeliness of management functions typically offers greater dividends than feed cost savings. Simply because feed cost is one of our highest variable expenses, and is therefore so obvious, doesn’t mean it represents our single greatest economic opportunity to effect profit.

Two relatively new decision tools from UW-Extension Dairy Management Specialist, Victor Cabrera offer insight into this elusive and dynamic issue. The “Wisconsin Dairy Feed Cost Evaluator” and “Income over Fed Supplement Cost” (IOFSC) spread sheets are available at http://dairymgt.uwex.edu/tools.php. The “evaluator” allows you to determine your feed cost per cow per day. You may then compare your cost to peers to identify options to possibly lower the cost of feeding. Please keep in mind that lowering feed cost may not result in increased economic returns. This is where the IOFSC tools plays a key role as it maximizes both the source and amounts of energy and protein supplements based on their competitive cost AND on the volume and value of the milk produced. Most financial gains are realized from increased milk production.

A recent comparison using the above tools using feed prices and milk values from February and December 2009 and February 2010 reveals that while an approximate $0.90/cow/day may have been saved by separately grouping the lower producing one-third of cows from a 500 cow herd the overall IOFC advantage based on all cows improved by only $0.22/cow/day. Assuming no loss in milk production by implementing this strategy but also assuming one additional batch of feed would be required to implement the same nearly wipes out any economic gain as would a reduction in milk yield of 5-7 lbs/cow/day only from the lower producing cows. You may access another new tool titled the “Analysis of TMR Mixer Cost” on the Center for Dairy Profitability webpage at http://cdp.wisc.edu/DecisionMakingTools.htm to determine the cost to operate your TMR mixer system.

Alternatively, approaching the feeding economics issue from the standpoint of maximizing economic returns by OPTIMIZING the ration shows much greater potential. For the same prices and time periods used in the first analysis, actually lowering the energy portion of the ration and increasing the amounts of protein fed to lower producing cows results in improved IOFSC of $2.00 per cow per day. The improved return is primarily due to an increase in milk production as feed cost did not change appreciably. This level of improved returns could justify a certain level of increased cost to implement a grouping strategy versus one yielding a reduction in feed cost only. A paper on “The Economics of Lactating Dairy Cow Grouping Strategies” is available at http://cdp.wisc.edu/Management.htm.

The issue of improving milk production margins is more complicated than only lowering feed cost per cow per day. Not only is the value of reduced milk production a major issue but don’t forget about any added cost that may be realized in order to garner the “savings.” Utilize the tools mentioned above to make sure the next feed savings opportunity you identify isn’t in fact a profit sacrifice.

Contact your County Agent and access the Center for Dairy Profitability website at http://cdp.wisc.edu/Welcome.htm for more information on this and a variety of other farm management topics including decision making tools, papers and the AgFA dairy farm financial performance database of over 500 farm businesses.

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