Managing Your Margins through Reduced Feed Costs and Increased Milk Prices

October 7, 2011 12:46 PM

Ohio professor offers practical ways to boost net margins.

The increase in feed prices is permanent, but dairy producers are not defenseless, Normand St-Pierre of The Ohio State University said Friday at World Dairy Expo.
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“Increasing milk component yields  is one of the most effective ways that producers can affect their net margins,” Norman St-Pierre said Friday during a World Dairy Expo educational seminar.
Speaking at an education seminar, “Managing Your Margins: Practical Ways to Reduce Feed Costs and Increase Milk Prices,” St-Pierre described what dairy producers can do to improve net margins.
What’s happened in the corn market has created a new reality for dairies, St-Pierre said. In the 192 months between July 1991 and August 2006, U.S. corn traded under $3 per bu. in 171 of those months, peaking for only a short time at over $5 per bu. in May 1996. Since September 2006, U.S. corn has not traded under $3 per bu. ever again.
“Chances are good we will never see corn under $3 per bu. again,” St-Pierre said. “Meanwhile, milk prices have played yo-yo like never before.”
Because a net margin from milk production now depends on the difference between milk sales and feed costs, a focus on milk and feed prices serves as a good proxy to net margins.
St-Pierre offered this advice for producers to manage feed costs:
1. Shop better.
• Find the same feed but cheaper somewhere else. “Make sure, however, that you’re comparing apples with apples,” he said. “Commodities can have the same name but different specifications.”
• Make use of cash discounts. Make sure you have sufficient cash flows, but some suppliers are offering very attractive cash discounts.
• Don’t carry a balance on your credit cards. “Even your obnoxious brother-in-law can lend you money at a lower rate than most credit cards,” St-Pierre said.
• Make sure you get what you pay for. Hidden fees are sometimes added to feed prices. Ask what the ‘super-duper premix’ is supposed to contain.
2. Shop wiser. The idea is to find underpriced feeds and to avoid overprices ones. “This is very different than finding cheap feed and avoiding expensive ones,” St-Pierre said. The software Sesame can help, he said.
3. Avoid the black holes. It’s common to experience  5% shrinkage during commodity storage. Likewise, the dry matter shrinkage of silages, such as corn or hay, can be considerable, averaging 15% on most farms.
With $7 per bu. corn, the plants standing in the field ready to be chopped are worth approximately $49 per short ton, said St-Pierre. Once costs of harvesting, transportation from the field, packing, inoculant and cover are added, the chopped corn silage as it begins fermentation has a cost of about $61 per ton. Thus, the cost of a 15% fermentation loss amounts to $9.15 per ton. Reducing fermentation losses to 10% of the dry matter lower the fermentation losses to $6.10 per ton, which translates into net savings of $25 per cow per year. “This can be achieved by rapid and aggressive packing and covering of the silage with an effective air barrier, such as a plastic cover, and an effective silage inoculant,” he said.
4. Don’t cut corners. With cheap corn, the cost of feeding a single TMR to the lactating herd was small. Management of the single TMR was so much easier than managing multiple lactating rations.
“But simple TMR programs are very hard to justify in an era of expensive feeds,” St-Pierre said. He recommends one lactation ration for herds of less than 100 cows, two rations for herds of 100-300 cows, and three lactation rations for herds of more than 300 cows.
5. Stop using feed additives to cover up your management flaws. Most feed additives can make sense at least sometimes but maybe not all the time.
6. Minimize the welfare check. “Dry cows and replacement heifers are welfare recipients,” said St-Pierre. “The lactating cows have to pay to support them.” In a 100-cow herd, net margins per cwt. of milk drop by 30% if the number of replacements per 100 lactating cows rises from 80 to 100.
Managing Milk Prices
“On the revenue side of the equation, little progress will be made until producers realize that they make money on only about 7 lb. out of each 100 lb. of milk shipped,” said St-Pierre.
Over the last five years, nearly 55% of the average income over feed costs has been from milk protein yield (around 3% of the milk in Holstein), and 40% from milk fat yield (around 3.7% of the milk in Holstein). That leaves only about 5% from all of the lactose (around 4.8% of the milk), ash (around 0.9% of the milk) and water (around 87.5% of the milk) combined.
“Increasing milk component yields (fat and protein) is one of the most effective ways that producers can affect their net margins,” St-Pierre said.

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