Milk prices are still phenomenal and feed prices are far below what you were paying last year. So what am I fretting about?
The party soon will be over.
Down the road
As of this writing, October component prices and class prices have not been announced yet. Class III should be in the $22-$23/hundredweight (cwt.) range, resulting in very nice mailbox prices to dairy producers.
But these historically abnormal prices should end soon. Within the next two to three months, Class III should settle in the $17-$18/cwt. range. Meanwhile corn and soybean prices appear to have already hit bottom and are bouncing back.
The next 12 months look OK from a dairy margin standpoint — OK, but not great. All we need is a couple unpredicted market hiccups and things could go south rather quickly.
So it is time to sharpen your pencil and look closely at the largest expense on most dairy farms: feed costs.
What feed costs?
One would think that it should be easy to calculate feed costs, but it isn’t for four reasons:
1) what costs should be used for homegrown feeds,
2) what animals should be included,
3) who pays for the left-over, and
4) costs per unit of what?
Homegrown isn’t free
I remember visiting a farm in northeastern Ohio just a few years ago. When asked about his feed costs, the dairy producer answered with a number that was less than half of what I had just calculated for a typical Ohio farm.
Being challenged, he showed me the feed cost analysis that his nutritionist had prepared. Sure enough, the nutritionist had used a price of zero on all homegrown feeds: haylage, corn silage, hay, and high moisture corn were all “free.” He reasoned that the costs to raise these crops really occurred the prior year and shouldn’t count in the current year.
I don’t think that I have to explain the fallacy of this reasoning. But pricing homegrown feeds is not so easy.
Arguably, one should use market prices. There are fuzzy markets for hay from which one can extract reasonable prices for homegrown hay and haylage.
Corn silage markets, however, are nearly non-existent. As a good approximation, we suggest that you take the December futures for corn the day that you are chopping, multiply this price by 7.5 and then add 15.
For example, say that the December futures were trading at $3.50/bu. the third week of September when you were chopping the crop. Your corn silage when delivered to your mixer wagon would bear a cost of (3.50 x 7.5) + 15 = $41.25/ton. More about these calculations in a future column.
For what animals
When calculating feed costs, some people include only the lactating cows, others include lactating and dry cows, and still others include lactating cows, dry cows, and replacement heifers. Good thing that the cost of feeding one’s family is never included…
What animals are accounted for while calculating feed costs makes a lot of difference.
Let us look at a simple example. Our virtual herd milks 85 lactating cows producing an average of 70 lbs/day and eating 50.5 lbs of dry matter (DM) priced at an average of $0.115/lb. The herd feeds 15 dry cows eating an average of 25 lbs of DM/d, priced at $0.10/lb. The herd raises 50 young heifers (< 12 months) that eat an average of 14 lbs of DM/d, priced at $0.09/lb, and 50 yearlings eating an average of 25 lbs of DM/day, priced at $0.08/lb.
The cost of feeding the 85 lactating cows is calculated as: 85 x 50.5 x $0.115 = $493.64/day, for an average of $5.81/lactating cow per day. The cost of feeding the 15 dry cows is: 15 x 25 x $0.10 = $37.50/day, or $2.50/dry cow per day. For the young heifers, the daily feed costs are: 50 x 14 x $0.09 = $63/day, or $1.26/young heifer per day.
Lastly, the daily cost to feed the older heifers is: 50 x 22 x $0.08 = $88/day, or $1.76/yearling per day. The herd produces 85 x 70 = 5,950 lbs of milk per day (or 59.5 cwt./day).
If one accounts only for the lactating cows, feed costs are equal to $493.64 ÷ 59.5 = $8.30/cwt.
If one also accounts for the dry cows, feed costs are now ($493.64 + $37.50) ÷ 59.5 = $8.93/cwt.
Lastly, if one also accounts for the replacement herd, then feed costs become ($493.64 + $37.50 + $63 + $88) ÷ 59.5 = $11.46/cwt.
So, which animals you are counting make a lot of difference.
Who pays for the leftovers?
It would be nice if cows were like starving teenagers and would clean up their feed bunk. Well, we could force them to, but it is generally not a good idea (milk production drops).
In general, a bare minimum of 3% of the feeds purchased and fed to animals on a dairy farm are never eaten due to shrinkage and feed refusals. So the $11.46/cwt. figure that we calculated in the previous paragraph should be conservatively majored by 3%; so the actual total feed costs become $11.46 x 1.03 = $11.80/cwt.
Amazing! We started with a figure of $8.30/cwt. and we now have $11.80/cwt., a difference of $3.50/cwt. Same cows, same heifers, same feeds, same unit costs.
Per unit of what? In my example, I told you the cows were milking 70 lbs/day, but I never told you what the milk looked like.
By “look”, I mean what were its components?
Producers shipping milk in Federal Order 33 are in a milk components market. If you look at component prices over the last five years, you come to realize that over 90 percent of the average producer’s milk check is determined by the pounds of fat and protein that he/she is shipping.
On a net basis, there is nearly nothing remaining for the other 93+ pounds of water and other solids.
So, if the feed costs in my example were for a herd of Jerseys averaging 5.0% fat and 3.6% protein, the calculated feed costs would be excellent, whereas if they were for Holstein cows going through an episode of milkfat depression and, hence, shipping milk at 2.9% fat and 3.0% protein, then the same feed costs would in fact be deplorable.
Where to start? To manage your feed costs, you first need to measure what is purchased, what is fed, and what is eaten. We will cover this in more details in a future column.
Good records are important, and measurements have to be made over a period of time long enough that the measurement errors made become insignificant. For most farms, this would be at least one week of data, and up to a month on smaller farms.
Something to think about on a belly full of turkey on Thanksgiving day…
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