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.