Dairy Talk Marginal thinkings

May 15, 2009 07:00 PM
Jim Dickrell
As the screws tighten down on cash flow, every dairy producer I talk to is scrambling to find ways to cut costs.

One of the best ways to do that, suggests Dan Little, Profit in the Details columnist, is to gather up your team, head to a local hotel and brainstorm ideas.

The key to evaluating all ideas should be the concept of marginality. What is the marginal cost of producing one more pound of milk? Even if you're getting only $10/cwt., that one more pound returns 10¢. So if it costs less than 10¢ to generate that pound, it's worth considering.

Most Holsteins will convert 1 lb. of dry matter into 2½ lb. of milk. Jerseys and crossbreds are even more efficient. So if a pound of feed, on a dry matter basis, costs 10¢/lb. it could generate 25¢ in milk income.

And the reverse is true as well. Removing feed that costs less than 10¢/lb. could cost you dearly in milk income. Feed additives should be evaluated in a similar manner.

Remember that the feed component itself is divided into two parts: One is needed simply to keep the cow alive (maintenance), while the other is used to make milk, says David Galligan, a veterinarian and professor of animal health economics at the University of Pennsylvania.

A quick way to estimate maintenance cost, he says, is to look at the cost of your far-off dry cow diet. If your lactating cow diet is $5.30/day and your far-off dry diet is $1.80/cow, your feed cost to produce milk is closer to $3.50/cow/day. If your tank average is 70 lb., that puts the marginal cost of feed at about $5/cwt. of milk.

When you're in that hotel room evaluating options, you need your lender there as well. Bankers are good at understanding asset/liability ratios, Galligan says. But the microeconomics of marginality often escapes them.

There are no easy ways to save $4 or $5/cwt. In many cases, it simply can't be done by cutting costs. Often, it requires burning up cash reserves and/or borrowing more.

And that's another reason you need your lender in the room. The decisions you make to survive the next six months will have implications for your business for years to come. Make sure those decisions are the right ones.

Bonus content:

More cost cutting ideas from the Michigan Dairy Review

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