2015 came to a close pretty much the same way it started: disappointing milk prices and negative margins.
December Class III prices came out at $14.44/cwt, which translates to an average mailbox price in the low $16/cwt. This figure is $2 to $2.50 under the cost of production on an average dairy farm.
A mailbox price of $16/cwt covers cash costs and variable costs on an average, but losing $2.00+ per cwt quickly takes the fun out of milking cows. But there is more to this story.
Bring on the butter!
Butter prices have been very strong lately: they averaged $2.57/lb in December. The price that you are getting paid for butterfat is entirely driven (calculated) by butter’s wholesale price.
Hence, and you got paid $2.97 for each pound of butterfat that your cows produced in December. Compared that to a two year average of $2.03/lb and you quickly should realize that you were paid quite well for the fat produced by your cows last month.
Pizza time!
Cheese price averaged $1.57/lb in December. Using the wholesale prices of cheese, butter, and dry whey, the Federal Order calculates (using a somewhat complicated set of equations) a milk protein price: this came out at $1.36/lb in December.
If I tell you that milk protein price has averaged $3.10/lb over the last two years, you do understand that $1.36/lb is historically quite low.
No whey!
Dry whey was priced at an average of $0.23/lb in December. From wholesale whey price, the Federal Order calculates the price of other milk solids (primarily lactose and minerals) in milk. You were paid four cents per pound of other solids in December, compared to a two year average of $0.37/lb.
Ouch! What about January? The nice thing with Federal Order pricing is that if we know the prices of butter, cheese, dry whey and nonfat dry milk, we can pretty much calculate what milk will be priced at and, more importantly, how milk components will be priced.
So if I use the current cash prices on the Chicago Mercantile Exchange (butter: $2.13/lb; block cheese: $1.48/lb; barrel cheese: $1.50/lb; dry whey: $0.23/lb; nonfat dry milk: $0.75/lb),
January milk components
I can calculate how much you will approximately be paid for milk components in January.
They should come out at about $2.35/lb for butterfat, $1.70/lb for protein, and $0.05/cwt for other solids.
So, what can you do with these numbers? First, we have to figure out how much money you would net over the cost of feeds if you were to produce one additional pound of components.
Butterfat first
Let’s start with butterfat. An additional pound would gross you $2.35, but you would have to put a bit more feeds in your cows to produce this pound of fat (there is no free lunch).
I won’t explain in this column how I get this number – just trust me, it would cost you about 45 cents in additional feeds, netting you an additional $1.90.
Not bad! Now the protein. An additional pound of protein would gross you $1.70, but you would have to put 90 cents in additional feeds, netting you an additional 80 cents. Not as good as butterfat, and not as good as when protein was priced at $3/lb, but you are still making more money if your cows produce more proteins. . . . and the other solids.
An additional pound of other solids would gross you an additional five cents- nothing to get excited about, but it gets worse. You would have to feed an additional 20 cents worth of feeds to produce this extra pound of other solids, netting you. . . negative (minus. . . red numbers. . .) minus 15 cents. Clearly, you don’t want to produce more other solids!
Solids
Where are these other solids from? Other solids are made up of lactose and minerals. And here is the catch: it is very difficult to change the percentage of lactose and minerals in milk. That’s why the other solids in milk are always close to 5.7%.
Put differently, water comes with the other solids in milk: if you increase milk yield, then you are automatically increasing the yield of other solids. So although it might be fun to brag that your cows are producing 80 (or 90, or 100) lbs/day, the last thing that you want right now is 15 more pounds of milk without more fat and protein!
Managing for fat and protein
The interesting thing is that there is nothing new to this story. For the last 15 years, you have generally been paid pretty well for producing butterfat and protein, but not so for producing other solids and water.
Milk components are quite heritable. Over the span of a few years, you can substantially affect fat and protein yields in your herd through genetic selection.
It’s in the genes
The next time that you are looking at a bull catalog, don’t even look at the proofs (or genomic tests) for milk yield; concentrate on fat and protein yield. Of course, it takes years for genetic selection to have an effect, but you are not left completely hopeless in the mean time.
Nutrition and management can have a significant effect on both butterfat and protein yield. First, compare your herd to the breed average for fat and protein components. If they are less than the breed average, it is likely that fine-tuning your nutrition program and tightening your management could have a significant effect.
If your herd is more than 10 percent above the breed average, say like 4.1 percent fat and 3.3 percent protein for Holstein, then you, your employees and your nutritionist are doing quite a few things right.
The bottom line
Look at other ways to improve your bottom line. If your herd is above the breed average, but not by 10 percent, there might still be some tweaking that would improve milk components, but don’t expect miracles. Meanwhile, keep your cows in good condition.
These low milk prices will break some time: I don’t know when, but as surely as death and taxes, milk prices will eventually go up.
You better be ready then!
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