Parting the Red Sea Damming the flood of red ink won''t be easy

February 1, 2009 06:00 PM
 

Open, late-lactation cows will become cull candidates much sooner when feed prices are high and milk prices are low.

The coming onslaught of red ink is going to be difficult to stop. But a clear head and a sharp pencil, and maybe a little understanding from your lender, will take you a lot further than sheer panic.

First, understand what you're dealing with. For perhaps the first time, producers across the country are faced with the prospect that milk prices in the spring will not cover the variable costs of feed, labor and electricity.

"How we used to cull cows was based on fixed costs, and the theory was to always run the dairy full,” says Mike McCloskey, co-owner of Fair Oaks Farms in Fair Oaks, Ind., which milks 15,000 cows.

"Now we can't cover our variable costs,” he says. With current milk prices, "a cow milking 50 or 60 lb. will actually be losing us money.”

How dire things have gotten is illus-trated by a spreadsheet put together by Albert De Vries, a dairy specialist with the University of Florida (see page 10).

When milk prices were at $15/cwt. and feed costs were 8¢/lb. of dry matter, break-even milk production was 27 lb./cow/day. When milk drops 30% to $10/cwt. and feed jumps 25% to 10¢/lb., however, break-even milk production climbs to 50 lb./cow/day.

"If milk prices per hundredweight are less than feed prices per hundredweight, you really have to look at which cows are still generating a profit,” De Vries says.

"Some cows will still pay for themselves, especially those in early lactation with feed efficiencies at 1.8 or 1.9,” he says. "But there will be more open, late-lactation cows which will be candidates to cull faster.”

These cows, with feed efficiencies of 1.1 or 1.2, will be barely covering feed costs. The dilemma is whether you should cull these cows even if you don't have fresh heifers to replace them, De Vries says.

When economics get this tight, conventional thinking has to be set aside, adds John Fetrow, a University of Minnesota veterinarian who also holds an MBA. If, for example, the forages in your bunkers are bought and paid for, they almost become fixed costs.

If your goal is to stay in business long-term, your short-term variable costs are really only those feed costs you still have to purchase to balance rations properly. "In that sense, I'm not sure rations should change a lot,” Fetrow says.

You need to maintain milk production in order to maintain the cow's normal lactation curve, produce saleable milk and keep cash flowing, he says.

If you have a lot of good-quality forage on hand, you might want to go to higher-forage rations, especially later in lactation. That reduces cash outlays for purchased feed while maintaining lactation curves.

Other ideas include:
  • Defer all nonessential maintenance. You still need to change oil in skid steers and replace milker inflations in the parlor. But you can probably get by without fixing buildings or replacing bad concrete.
  • Shop for bargains—feed, chemicals, detergents, semen and any other consumables.
  • If your employees are on hourly wages, try to negotiate with them to work for a set salary and ask them to work more hours. Be sure that you don't violate minimum wage law requirements.
  • Talk to your lenders as soon as possible. Restructure loans over longer terms to reduce your principal payments. If cash flow is really tight, ask to go interest-only until milk prices rebound.
  • Use risk management tools when they make business sense and when markets provide the opportunity.
  • Don't panic. Keep your long-term strategic goals in mind when making any short-term tactical adjustments.

Above all, stay positive. Today's low milk prices will eventually translate into tomorrow's lower fluid milk, cheese and butter retail prices. And with consumers eating out less and eating at home more, that means demand will rebound.



MORE MILK STILL PAYS

Dairy Today adapted a University of Florida spreadsheet (below) to track income over feed costs (IOFC) when milk price falls from $20/cwt. to $10/cwt. IOFC obviously drops dramatically. But if you can achieve higher milk production with slightly higher feed costs, IOFC is still better with higher feed costs that generate more milk.

The example assumed an early-lactation diet cost of 12¢/lb. could support 80 lb. of milk/cow with 48.8 lb./cow of dry matter intake (DMI). With a slightly better ration costing 13¢/lb., dry matter would jump to 53.1 lb./cow to support 90 lb. of milk/cow.

This results in a $6.91/cow feed cost per day, or $7.68/cwt. at 90 lb. of milk—a $1.05/cow/day increase in feed costs. But translated to feed costs/cwt. of milk produced, the jump is just 36¢. IOFC climbs from $8.68/cwt. for the 80-lb. cow to $10.32 for the 90-lb. cow, nearly a 20% increase.

When milk prices drop to $10/cwt., IOFC plummets to 68¢/cwt. for the 80-lb. cow. IOFC still drops precipitously for the 90-lb. cow to $1.32/cwt. Yet that's nearly double the IOFC for the 80-lb. cow.

Although the actual feed cost and feed cost/cwt. is higher to support milk production at 90 lb., the better choice is the 90 lb. of production because of higher IOFC—even at $10 milk.

Bonus content:


Click here for a slideshow on Cow Management Decisions with the New Cost of Production by Albert De Vries of the University of Florida.

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