Price Hikes

03:52PM Jun 16, 2008
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If you buy feed, fuel or fertilizer, you are painfully aware of how much prices are rising. But the $64,000 question is: Do you know what impact those price hikes are having on your cost of production?

Bruce Jones, a University of Wisconsin Extension farm management specialist, with a little help from his friends, has run the numbers through a spreadsheet to give you some rules of thumb in the table below.

His calculations show that for every 50¢/bu jump in corn prices, your cost of producing 100 lb. of milk jumps about 25¢. For every $1/cwt increase in soybean meal prices ($20/ton), your COP jumps 9¢/cwt. And for every $20/ton increase in hay prices, your COP jumps anywhere from 40¢ to 60¢/cwt, depending on you're herd's level of production.

Increasing corn silage prices have a similar affect. In a one-half corn silage, one-half hay diet, every $5 increase in corn silage cost pushes COP up about 15¢/cwt in a herd averaging 75 lb./cow/day. If you're on a two-thirds corn silage, one-third hay diet, a $5 increase in corn silage will cause about a 19¢/cwt jump in COP.

"Hopefully, this information will help dairy producers gain a perspective of the profits that are currently at risk," says Jones. "Producers can try to preserve some of these profits by locking in a portion of their feed costs or they can roll the dice and hope that feed prices do not rise to even higher levels."

To better understand the impact of rising feed prices, Jones compared prices from March 2006 to March 2008. During that period, corn jumped $2.70/bu, from $2.10 to $4.80. Soybean meal was up $7.85/cwt, climbing from $8.75/cwt to $16.60/cwt. And dairy hay was up $45/ton, from $100 to $145.

Jones then assumed a fairly high-producing herd, pumping out 80 lb./cow/day. The resulting impact on COP adds up like this:

  • A $2.70/bu jump in corn prices results in $1.35 higher COP.
  • The $7.85/cwt ($157/ton) jump in soybean prices results in 71¢ higher COP.
  • And the $45/ton increase in hay prices tacks on another $1.01 in higher COP.

"All total, the cost of producing 100 lb. of milk rose $3.07 due to the increases corn, soybean meal and hay prices from March 2006 to March 2008," says Jones.

Dairy producers who raise their feed may think these price jumps don't affect them, adds Jones. But the rising cost of fuel, fertilizer and seed could easily push the cost of growing corn up $1/bu. "Raising hay could rise as much as $20/ton due to higher costs of inputs and cash rents for cropland," he says.

"These higher costs for raised feed are going to erode dairy producers' profit margins the same way that increases in the prices of purchased feeds cut into producers' net returns," Jones says.

Bonus content:

  • Click here to see chart showing increasting cost of production.

  • Click here to view the chart showing changes in the per hundredweight costs of producing milk related to variations in the prices of corn silage and hay for rations formulated with differing mixes of corn silage and hay.