The Basics of Dairy Economics

 From the
CONCEPTIONS  Dairy route newsletter                                  Sept Oct 2024

Mark Curry    (989) 984- 7027     Route services and sales

Sue Palen       (989) 277- 0480     Office manager and Product specialist

Greg Palen     (989) 277- 6031     “aAa” Breeding Guide/ Certified Seed Specialist

Mich Livestock Service, Inc    “For the Best in Bulls”   and    “High Energy Forages”
110 N Main St  (PO Box 661)   Ovid,  MI  48866    office ph (989) 834-2661   fax (989) 834- 2914 

 

You have heard the old joke:  “Question:  what do you call a church basement full of farmers?” Answer:  a WHINE cellar!”      We whine about things we cannot control --  such as the weather, the prices we pay for inputs we use, the prices we get for what we produce.    We look at every new idea and new technology, hoping to find the magic bullet for profitability.    Meanwhile, the reality of successful farming is  doing the basic things well… every day.    You cannot spend your way to prosperity  (in spite of what all the politicians claim every election cycle!!)

First:  THE  PRICE  OF  MILK
Milk is a “commodity”, made that way by government pricing policy and cooperative pooling.   The many ways you can differentiate milk at the farm are negated by FMMO class definitions and the dilution of putting it all on the same truck route, making it a “generic” raw product.   Economists tell us that raw materials of any kind fall into this category.    Producers have lost control over its pricing, as its “wholesale” price is determined after initial processing allows processors to establish its “value” based on which markets they choose to serve.

Profits for any “commodity” raw material are NOT earned by increasing volume of production (even though your producer cash flow increases) but by controlling COST of production.   Only those who produce below average costs earn profits, as the raw commodity markets rarely pay more than average cost of production.     Produce one pound (one gallon) (one bushel) more of any farm commodity than the wholesale processors require, and the price of ALL we produce will fall to absorb that surplus increment of industry yield.    This is economic truth.

Second:   THE  COST  OF  PRODUCTION
You can divide the dairy industry into two groups:  dairy “farmers”  (those producing the feed their cows will eat)  and milk “factories”  (those who buy all their feed from neighboring crop farmers and commodity brokers).  

Theoretically, the dairy “farmer” should have cost advantages over the milk “factory”, as those crop farmers on whom factory farms depend hope to have a profit margin in the feed they sell to them.    But this logic breaks down once we realize that feed crops also have a “commodity” character.     Milk “factories” avoid the heavy iron capitalization that modern crop farming has.

Third:  CATEGORIES  OF  COSTS
Many years ago the Minnesota FHA district hired a major CPA firm to study their dairy farms, which had the highest levels of defaulting and “troubled” loans of all FHA districts nationally.   The CPAs broke dairy farm costs into four operating units:  (1) producing milk, (2) raising herd replacements, (3) growing forages, (4) growing grains.    The results were:
Producing milk.    High Minnesota production levels generated a 25% profit margin
Raising replacements:    While showing an average 5% profit margin, only half of all the dairies actually raised heifers profitably.     In those dairies cows left faster than heifers could grow up.   (Note this time period was prior to the commercial availability of gender-selected semen.)
Growing forages:   The average farm had a 20% loss, ie, cost more to grow and harvest than their commodity market value.     The CPAs said these farmers had too much machinery cost per acre, compared to the industry average for crop farming.
Growing grains (primarily, corn and soybeans):   The average farm had a 10% loss.    However, the CPAs noted that the loss would have been more like 30% if not for federal crop subsidies.

To summarize, the typical FHA financed dairy farmer made milk OK, but lost more than milk checks generated on his breeding and farming practices.    Household income came mostly from sale of deacon bull calves and culled cows.    (Is that any different than today’s economics?)

Cost control solutions:   GENETIC  SELECTION  for both CROPS and ANIMALS

“Peer pressure” in the dairy industry is that you select from the HIGHEST YIELDING corn, soy, alfalfa and annual forage varieties… just like crop farmers do.    In this, the peer pressure says you FERTILIZE at high levels, to insure the highest yield per acre.    Then we pile all this volume of feed in front of our cows, expecting them to eat more in order to produce more.    Without realizing it, we are buying into the “more yield makes a profit possible”, a direct contradiction of “lower your costs” commodity economics.     
Within plant genetics there is a wide variation in the nutrient density and fiber digestibility of any crop you choose to grow.    The high yielding varieties may require your cow to eat a pound of dry matter for every pound of milk she gives you.    But if you choose more nutrient dense, higher fiber digestibility varieties, you could get 50% more milk per pound of dry matter!!    In fact, you are less likely to run out of feed by spring if you grow the varieties with the highest concentration of available nutrients, rather than chasing after higher tonnages.

                      This is ultimately why we prefer to sell Byron Seeds forages and corn.
After feed, your next major cost is providing replacements.    In traditional dairy designs we had one heifer on hand per cow of milking age.    Heifers today consume 25% of the average gross milk value each cow produces (and in that Minnesota study, 25% was an average profit margin).    This is financially unsustainable, even with current deacon calf and cull cow salvage prices at all time highs.     Cows need to live longer productively than they do today to generate profitability at any level of attained herd average.    

Another way to look at that is, if it costs $ 1642.50 to raise a heifer calf to production (estimate $2.25 per day over 730 days of heifer raising) then it takes $ 6570.00 of milk sales for each one you raise (32,850 pounds of milk at a net $20/cwt you receive from milk checks) when you only get the average 25% profit over production costs.     Note this:  using premium priced gender-sorted semen has NO impact on lowering the cost of replacements.    If anything today getting a salable deacon bull calf generates a lot more income than an extra heifer calf.        

Comparative culling rates:
At 2.5 lactations per cow, you will cull 40% of the milking herd annually.     At this level you will get fewer heifer calves per cow lifetime than is required to maintain herd size.    This is still the national average for dairy farms, explaining why there is a market for gender-selected semen.

At 3.0 lactations per cow, you will cull 33% of the milking herd annually.    At this level, and with good calf management, you may have just enough heifers to maintain herd size.
At 4.0 lactations per cow, you will only cull 25% of the milking herd annually.    At this level you not only have enough heifers, you will produce more milk oer cow from the higher percentage of matured cows producing at matured levels of milk.   Zoetis’ “wellness trait” research says the cows who are still productive at maturity produce 30% more milk  than heifers typically do.

The Genetics Industry has had an obsession over selection for faster maturity of production, and the theories they use to promote Genomic selection have accelerated this.    The CDCI recently declared that they are eliminating “Mature Equivalent” (ME) factoring of lactation records for sire evaluations, basically because the majority of cows today only complete two lactations. The peak lactation yield is their second lactation.    After this, cows of modern genetics are just aging rapidly and production declines.     This kind of genetic selection basically has raised the cost of replacements higher than ever before.     Chad Kreeger, the largest online source for cows in the upper Midwest, says there is a replacement cow shortage, and prices have moved above the $3000 average mark for the first time in his career.

                      This is why we believe in sire selection based on cow family maturity.
                      This is also why we believe in the “aAa” breeding guide.

If you wish to lower your cost of replacements, you have to change your breeding programs so that matings are focused on producing “balanced physiques”  adaptable to ever-changing cow environments; and sire selection is based on “longevity of productivity” so that higher mature levels of lactation production can be realized.     Under this approach, you will again have more replacements than you need (Grandpa’s typical experience) and you can sell the extras at what is now a profitable price over the costs of raising them.    

Cows from these kinds of longevity cow line genetics break the cycle of inbreeding depression that Genomic lines express in their short, higher-cost herdlives.    Your cost of production will go down right alongside costs of reproduction and rearing replacements.    You will become that “least cost” producer whose dairy generates a dependable profit not matter the price of milk.