Dairy Today: Fiscal Fitness
Financial management experts, lenders and accountants share ways for dairy producers to improve money and credit management. Look for help on budgets, taxes, loans, financial performance and even bankruptcy.
Use the Correct Ratio to Evaluate Your Feeding Program
Jul 23, 2012
Avoid making a management decision that may ultimately decrease your dairy’s profits because you were told “your feed costs are too high.”
By Steve Bodart, Lookout Ridge Consulting
In times of rising feed prices and shrinking dairy margins, dairymen often critically review their feed rations and make adjustments to try can cut costs. There are a number of different ratios that are available to evaluate, and each has its own strengths and weaknesses. I’ll start by evaluating a couple of the more common ones used.
By using this ratio exclusively, you can focus on trying to produce or purchase ingredients at a lower cost, i.e. least-cost rations. However, the weakness of this ratio is that it does not look at milk production. Although you may be able to reduce your feed cost, you may also end up reducing your milk income.
Feed Cost/Cwt. Milk Sold
This ratio allows you to determine how efficient your feed cost is relative to your milk production. While this ratio does combine feed cost with milk production and helps you determine a large percentage of your cost of production, it does not help you evaluate earnings after feed costs are considered.
Using the above ratios let’s consider an example that compares feed cost between two dairies with the above ratios and see what conclusions can be drawn:
|Milk to feed ratio
What is interesting is these two dairies were buying the same finished TMR, and they were paying exactly the same amount for forages, grains and additives. Their feed costs differ so widely because of milk production. Every cow has a certain amount of feed it needs to eat for maintenance, and as milk production increases, the maintenance feed needs are spread over more pounds of milk allowing feed cost to decrease.
My point is this: While prices paid for ingredients are important, they are not the major driver of overall profitability. If you want to determine your ability to buy feed “properly,” compare prices that you pay for specific ration ingredients. If you want to compare the ability to generate cash from feed, then evaluate income over feed cost.
Income Over Feed Cost/Cow/Day
This ratio is the one to evaluate if you are looking at your herd’s ability to generate cash to pay fixed expenses. It has the advantage in that it is able to combine the cost of feed ingredients, feed efficiency, milk production and milk component value. Its weakness is that it can be influenced by swings in milk price and percent components in the milk. However, this weakness can be compensated for if a standardized milk value is used and the milk production is corrected for butterfat and protein.
If we use an example of a dairy that implemented a management change which cost an additional $.25/cow/day but resulted in a five pound milk production response, we end up with the following ratios:
|Milk to feed ratio
|Income over feed cost
*The $.56/cow/day difference is the result of a $.25/cow/day increase in ingredient cost and a $.31/cow/day increase as a result of an increase in dry matter intake resulting from additional milk production.
If you would have finished evaluating this management change once the feed cost/cwt. was determined to be higher, you would have missed the opportunity to improve your earns/cow by $.34/cow/day.
In summary, the key to understanding financial ratios associated with feed is that no one ratio contains all the answers. Avoid making a management decision that may ultimately decrease your dairy’s profits because you were told that “your feed costs are too high.” You need to understand that increasing energy corrected milk production dilutes the maintenance feed cost and increases profits, and this is why using income over feed cost/cow/day is a good ratio when evaluating rations. For any ration to mean anything, though, also understand that having a system to manage feed usage, inventory control, feed efficiency and reducing shrink is crucial to having valid numbers for your ratio analysis.
In 2001 Steve joined Lookout Ridge Consulting (formerly AgStar Family Business Consulting) as a Senior Business Analyst, and in 2004 became a Senior Agribusiness Consultant and Dairy Industry Leader. Steve has a deep understanding of the family dairy business and large producer operations. Contact him at: Office: 715-688-6364; Cell: 715-928-2946 or email@example.com.