Profit in the Details Memories or Nightmares?

January 14, 2009 06:00 PM
Dan Little
As I write this column, Class III milk price has plummeted from a high of $20.63/cwt. in June to $12.20/cwt. in December 2008.

Corn prices have also changed dramatically. Since the gross margin of milk sold minus feed cost (income over feed cost, or IOFC) represents about 80% of the change in dairy farm profitability, what effect have market prices had on your profitability?

Calculating your Milk Profit Index (MPI) may be the quickest way to get a handle on the feed and production changes that are influencing a majority of profit changers. MPI combines changes in milk production, milk components, feed intake, feed cost and feed efficiency into one number to help you determine the net effect of these variables on profitability.

You can find your MPI by using the MPI calculator at my Web site or you can use the following steps to calculate the index by hand:

Feed cost/lb. of dry matter (DM). Determine the total cost of a ration

and divide that amount by the pounds of DM in the ration. If the total ration cost is $5/cow/day based on a 50-lb. DM ration, the feed cost/lb. of DM would be 10¢.

Feed cost. Multiply feed cost/lb. of DM by the total pounds of DM fed.

Value of milk sold. Multiply the pounds of milk sold by the value per cwt. of the milk. Therefore, 70 lb. of milk times $15/cwt. would equal $10.50/cow/day.

Income over feed cost. In this example, IOFC is $10.50 (value of milk sold) minus $5 (feed cost), or $5.50/cow/day.

Milk Profit Index. MPI is calculated on a per-cow basis by dividing your IOFC by an index of $7 and multiplying the result by 100. In the example above, the MPI would be $5.50 times 100 /$7, or 78.6.

Why calculate MPI when you could simply compare the IOFC of two herds, or the same herd on two occasions? Once calculated, MPI makes it easy to calculate the change in IOFC/cow/year between any two situations, since 1 MPI point equates to a change of $25.50/cow/year in IOFC. Therefore, if your MPI was 100 in June and 80 today, your IOFC has dropped by approximately 20 times $25.50, or $510/cow/year.

The table below illustrates the impact that feed cost, feed efficiency and milk price can have on MPI as an indicator of changes in profitability. Herd 1 may be an example of your herd this past June.

In response to lower milk prices, many producers overreact by attempting to slash feed costs. Note that Herd 2's MPI is less than Herd 3's even though Herd 3 is paying more for feed. Herd 3 does better because of higher herd feed efficiency. Herd 3 has a greater IOFC and MPI, resulting in more than $100/cow/year in higher IOFC.

The combination of good ration formulation and decreased feed costs results in Herd 4 maintaining a competitive advantage over both Herds 2 and 3 in the face of lower milk prices.

Please scroll down to view "Change in Profitability" chart. 

Bonus content:

Click here for a dairy profit analyzer.

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