While we tend to recoil from the current high feed prices, this is no time to skimp on rations. Considering recent milk price hikes, any loss of milk production would result in lower net income.
“Cheap feed makes cheap milk.” I’ve heard this for years from dairy producers who have been in the business for awhile. It sounds simplistic, but it’s generally true. In other words, my “experienced” clients have tended to make more money when feed prices were high, because milk prices were typically better in those markets.
Milk price is the driving force for margins, more than feed cost. While we tend to recoil from the current high feed prices, this is no time to skimp on rations. Considering recent milk price hikes, any loss of milk production would result in lower net income.
For example, a typical feed cost for a milking ration a few months ago was about $5.50/cow/day. With a 75-pound average and $15.00 milk, the income over feed cost would be $5.75/cow/day (75 x .15 = $11.25 - $5.50 = $5.75). If you were to price the same ration at current ingredient prices, it would be about $7.00. At $19.00 milk, the same herd would net an additional $1.50/cow/day (75 x .19 = $14.25 - $7.00 = $7.25).
Of course, the bottom could drop out of milk prices like it did in 2009, leaving dairy producers upside down on feed contracts. This nervousness about the market has prompted most of my clients to hedge some of their milk and lock in a margin. I think this is going to be the “M.O.” for successful dairy operations, considering the volatility in the market.
The world demand for grain will continue to put pressure on feed prices. A Wall Street Journal article (Feb. 24, 2011) stated that the International Grain Council predicts that Chinese corn imports could increase fourfold in 2011. On a recent visit to the Middle East, the dairies were buying everything from corn to hay from the U.S. to feed their cows. The events in Egypt have disrupted local feed distribution and put added demand on U.S. feed sources.
The good news is that the world demand for dairy products continues to increase too. Exports of U.S. dairy products accounted for 12.8% of total U.S. milk production last year, as reported on Agweb.com last week. Hopefully, the export market will stay ahead of our domestic production, so we can continue to supply this robust demand.
The bottom line is to look at the margin between milk income and feed cost. Even with record high feed costs, maximizing milk production is the key to profitability in the current market.