Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.
Whatever You Do, Don’t Give Up Milk
Feb 28, 2011
In calculating what it takes to make a respectable dairy margin when both feed costs and milk prices are high, three things are clear.
On first blush, a $17.22/cwt. Class III average for the rest of the year (last Thursday’s prices) seems like a respectable price. Tack on another $1.50 basis here in the Midwest, and you have a very respectable price—and one you’d think leaves ample room for margin.
At least you’d think that was the case. But $7 corn and $350 soybean meal can eat up margin very quickly. To get an idea how quickly, I used a spreadsheet made available by Robert Tigner, a Nebraska Extension specialist. The spreadsheet is geared toward the Midwest, and looks at 300-cow freestall herds producing 20,000 lb./cow and 24,000 lb./cow annually.
I went on to AgWeb and plugged in March through December Class III + $1.50/cwt. basis. I also plugged in corn and soybean meal prices for each of those months as well. Keep in mind that last Thursday’s prices took a dive—Class III, corn and soybeans were all lower. But relatively speaking, the previous price relationships of high milk prices and high feed prices held up.
What I found was surprising, to say the least. The 20,000-lb. herd is spending about $205 per month in feed costs. The 24,000 lb. is spending roughly $20 more than that each month. You’d expect that—more milk takes more feed—but not on one-to-one ratio because you’re diluting out maintenance feed costs with more milk. (Ten percent more feed yields 20% more milk.)
Both the 20,000 lb. herd and the 24,000 lb. herd had respectable income over feed costs. The 20,000 lb. herd averaged $6.41 IOFC for the remainder of 2011; the 24,000 lb. herd, $7.41.
But then things got dicey. Total breakeven cost for the 20,000-lb. herd came in at $19.56/cwt. For the 24,000 lb. herd, the total breakeven was $17.64/cwt.—almost $2/cwt. less. (Not only are higher producing herds diluting out maintenance feed costs, they’re spreading their labor and other fixed costs over more hundredweights of milk.)
And with the milk price averaging $18.72 for the year, the 20,000 lb. herd only had one month in the black—March, with income over total cost of just 40¢/cwt. For March through December, the 20,000 lb. herd lost an average of 84¢/cwt.
In contrast, the 24,000 lb. herd saw $1.08/cwt. profit March through December, even though it was spending $20 more per cow per month for feed.
That $1.08/cwt. profit translates into $260 net per cow on an annual basis. The 20,000-lb. herd was losing $168/cow—or a swing of $428.
The bottom line is simply this: Pounds of milk shipped matters. And to make money, you have to spend money. Spending $250/cow/year more on feed actually nets a profit. Not spending it pretty much guarantees a loss. The third lesson is that you have to lock in prices—milk and feed—when they offer a margin. Even a 24,000-lb. herd average won’t guarantee black ink if milk prices drop a $1 and feed remains high.