Business as usual no longer sustainable in dairy industry's new normal
The dairy industry is in crisis and there is no simple fix to the problem. The new reality is consecutive years of mediocre margins and over the long-term, possible erosion of farm equity. Is it realistic to assume that consecutive years like 2014 are possible? If that is not the case, then there are some tough questions that probably need to be answered.
Table 1 lists the average income over feed cost for the past five years. If the dairy industry was able to repeat 2014’s number for consecutive years that would help many farms improve their financial health. However, it is highly unlikely that scenario will occur. The 3-year average breakeven income over feed cost per cow has been around $9.00 (Penn State’s Dairy Outlook, November 2018).
The only year since 2014 that comes close to showing a surplus is 2017. The extremely high number in 2014 was after six years of mediocre margins. This is not a sustainable cycle in today’s economy, even for operations that have consistently maintained competitive costs of production.
On most farms feed costs represent the largest or second largest expense. Over the past five years feed costs have remained relatively high. There has been a slight downward trend; however, feed costs are still highly significant to the operation’s cash flow.
The culprit is not necessarily the purchased feed cost. Due to unusual weather patterns, producers have struggled with extreme drought or excessive moisture at the wrong times. Yields have a direct influence on profit; the cost to produce forage is the same whether yield ends up high or low. When forage and feed quantity suffer, the home-raised cost for forage can be as high as the market price and more purchased feed will be needed to offset the shortfall.
The other scenario is the effect weather has on quality. Both outcomes can have a negative impact on animal performance, which then effects milk income and ultimately has a negative impact on the operation’s breakeven cost of production.
The first step to overcoming this impasse is to “Know Your Numbers”. This is more than just calculating an operation’s breakeven margin or cost of production. It is knowing where cash is going out and if enough cash is coming in.
Based on work with hundreds of dairy producers of all sizes, the Penn State Extension Business Management Team has summarized data to help illustrate what is normal or excessive.
There are many facets to the cow, a biological unit, and milk income is impacted by deficiencies in nutrition, reproduction, and health to name a few. If any of these are ignored, a short-term problem can easily turn into a long-term one. Monitoring the herd’s financial and performance metrics, even on a quarterly basis, can help keep the operation on target. Considering the new normal for the dairy industry, business as usual is no longer sustainable.
Action plan for monitoring a dairy’s financial and production health.
Goal – Determine the business’s breakeven margin and monitor the appropriate production metrics on a quarterly basis.
Step 1: Utilize Penn State Extension’s Excel Cash Flow Spreadsheet to determine the farm’s breakeven cost of production.
Step 2: Evaluate expenses and income to check they are in line. For any outliers in direct, overhead, or family living expenses, examine opportunities for making reductions. If income in inadequate, examine production related bottlenecks.
Step 3: Set goals and timeline for making any adjustments. Measure and monitor the appropriate metrics.
Step 4: Work with an advisory team and discuss strategies for improving the financial health and/or production related limitations.
Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows income over feed costs is a good way to check that feed costs are in line for the level of milk production.
Starting with July 2014’s milk price, income over feed costs was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen® and a mineral vitamin mix. All market prices were used.
Also included are the feed costs for dry cows, springing heifers, pregnant heifers and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.
Income over feed cost using standardized rations and production data from the Penn State dairy herd.
Ishler is a dairy specialist with the Penn State Extension. This article appears in her Dairy Sense series.