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Dairy Sense: The margin still rules

Virginia A. Ishler
Penn State Extension
Margin, either on a per hundred weight basis or per cow basis is the gold standard for measuring an operation’s financial status and milk price alone is a minor character in the narrative.

There is a sense of optimism as 2019 ends and 2020 begins with milk prices trending in excess of $20/cwt. Unfortunately, milk price is only one chapter of the story and when combined with the rest of the book, the ending may not be too promising. Milk income and feed costs are major players in the story line and can drastically impact the finale. Margin, either on a per hundred weight basis or per cow basis is the gold standard for measuring an operation’s financial status and milk price alone is a minor character in the narrative.

Production perspective

The Dairy Cents mobile app that reports the monthly margin and income over feed cost (IOFC) uses USDA data from nineteen states that report both milk price per cwt and hay price per ton. Compared to these states, Pennsylvania typically is $0.50 to $0.60 higher in the All Milk Price reported.

Pennsylvania also has one of the highest hay prices compared to the other states. In 2018 Pennsylvania’s alfalfa hay averaged $13/ton higher compared to the other states and in 2019 it was $36/ton higher. This same trend holds for corn and soybean meal.

Using feed costs for an average milk production of 85 pounds, the margin and IOFC are always lower for Pennsylvania compared to the other states. In 2018 there was a $0.10 difference in margin/cwt between Pennsylvania and the other states ($10.67/cwt versus $10.77/cwt). The difference was greater in 2019 mainly because of the larger difference in hay price. Pennsylvania’s margin was $11.94/cwt compared to the average of the other states at $12.62/cwt

From the outside looking in, Pennsylvania appears to have an advantage when discussing milk price. The reality though is far different. The gross milk price producers receive can be divergent from what is reported by USDA. Components and quality premiums can dramatically lower the milk price.

However, it is the milk income that is the key metric. Over the past decade working with producers the same story surfaces. The farms generating the positive cash flows are not the ones receiving the highest milk price/cwt; they are the ones generating the highest milk income per cow. In today’s economy, cows should be averaging at a minimum of 75 pounds of milk on twice a day milking and greater than 85 pounds on three times a day milking. Pounds of components at a minimum should exceed 5.5 pounds. These are the metrics that will have a greater impact on the margin versus milk price per se.

The Northeast tends to have higher market feed costs when compared to other parts of the country. Therefore, keeping costs in line for home raised feeds has a significant influence on the margin. The operations with competitive costs of production raise their feeds well below the market price and they produce enough inventory to minimize purchased forages. They also minimize their reliance on purchased feeds by raising corn grain and sometimes soybeans to offset that expense.

The goal moving into 2020 should be to optimize milk income while keeping feed costs in line. If animal performance is not close to the benchmarks for 2x or 3x milking, then prioritize that bottleneck. Work with the appropriate consultant to determine how the cropping enterprise is performing and how that is affecting feed costs. Ultimately determining the operation’s breakeven margin and monitoring the margin or IOFC monthly will help make sure everyone is reading from the same book and coming to the same conclusion.

Action plan for determining the herd’s margin/cwt or income over feed cost/cow.

Goal – Complete a cash flow plan including the whole farm, dairy and cropping enterprises.

Step 1: Using Penn State Extension’s Excel spreadsheet, complete a year-end analysis for 2019 on both a cash and accrual basis.

Step 2: Record the amounts fed of all home-raised and purchased feeds for all animal groups.

Step 3: Develop the cropping enterprise including all home-raised feeds, yields, direct expenses, and overheads.

Step 4: Determine the breakeven margin and IOFC for the whole farm and dairy enterprise.

Step 5: Work with the appropriate consultants to discuss bottlenecks to improve the herd’s margin.

Economic perspective

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows, income over feed cost 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 cost 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 an Extension Dairy Specialist with Penn State Extension