* Extended comments are highlighted in blue.
While milk prices are improving for the new year, feed costs continue to be higher than previous averages. This will limit the return to historic profit levels.
In an effort to manage profitability for 2010, it is not only critical to identify manageable risks to profitability, but also to prioritize factors that will maximize profitability.
The tables below show some of the relationships that drive income over feed cost (IOFC). Table 1 illustrates the calculation of IOFC from milk revenue of $12 per day based on 80 lb./cow/day of milk and $15/cwt. of milk sold. The assumed daily feed cost of $4.80 is based on a dry matter efficiency (DME) of 1.5 and an ingredient cost of 9¢/lb. of dry matter.
The key drivers of IOFC are pounds of milk produced, the value of the milk, feed efficiency and the feed cost per pound of dry matter.
Table 2 summarizes the calculated changes to IOFC that result by changing DME and milk price with a fixed milk production of 80 lb. and a feed cost per pound of dry matter of 9¢/lb.
Note that the total changes to IOFC are constant at $1.60 and $1.30 for changes in milk price and feed efficiency, respectively, in this example. This seems obvious enough, since we expect to increase IOFC with increasing milk price or increased feed efficiency.
Table 3 illustrates the relationship between changes in feed cost and feed efficiency. Note that the changes in IOFC are not constant for various efficiencies and feed costs. Improvements in DME can have a sparing effect on IOFC in the face of increased feed costs.
In this example, for instance, the decrease in IOFC due to increased feed cost at a DME of 1.3 is $3.69/cow/day. That compares to a decrease of only $2.82 at a DME of 1.7. This equates to a potential financial impact of nearly $318/cow/year.
Note that the financial impact of decreased feed efficiency is much less at lower feed costs than it is at higher feed costs. In the example, the range in DME impacts IOFC by only 87¢/cow/day at a feed cost of 6¢/lb. of dry matter. However, this effect is doubled ($1.74/ cow/day) at a feed cost of 12¢/lb. of dry matter.
Based on these examples, it is not sufficient to only evaluate feed cost and milk price changes when making marketing decisions. It is critical to understand the current feed efficiency for the herd and to anticipate the effect of feed ingredients on projected feed efficiency in order to fully evaluate changes in income over feed cost.