Has the formula for dairy farm profit changed?

Jim Salfer, University of Minnesota Extension

We are in for a bumpy ride in milk prices for the remainder of 2018 This will be the fourth year in a row that milk prices have not allowed most farms to make enough money to reinvest and provide for a reasonable return. It has been especially challenging since the middle of 2017.

Figure 1. Milk sold from 2001 to 2005 and from 2015 to 2017 by profit

Looking at farm financial records over the past 25 years, the most recent three years show a slightly different pattern for milk production by profit cohort than previous years (Figure 1). From 2001 to 2005, cows in the highest profit cohort produced over 1900 pounds of milk more than the 20-40 percent profit cohort. The difference from 2015 to 2017 was only about 450 pounds. I compared milk production of several other 5 year periods going back to 1993 and the difference between the highest profit and the 20 to 40 percent cohort groups was between 1600 and 2000 pounds per cow. Historically, for every higher profit cohort, there was a linear increase in milk sold per cow. Does this mean that milk production per cow has become a less important to profitability? Will this trend continue?

The lowest profit cohort produced considerably less milk in both sets of years. This is consistent across all years going back to 1993.

It will be interesting to see if this trend continues in the future. I believe the message is not that high production is not important (we can debate what that means), but rather that high production may be becoming the ante to play the game. On the other hand, maybe during periods of lower profitability, focusing on cost control is more important than focusing all your efforts on achieving the highest production. If you look closer at the records (not shown), some interesting trends emerge. These include:

  • In every year, higher profit cohorts have a lower cost of production per hundredweight and often per cow.
  • There is no clear herd size advantage or disadvantage across the top four profit cohorts.
  • Each higher profit cohort produces higher value milk. This could be because of higher components, lower somatic cell count or other reasons such a lower hauling.

Each higher profit cohort has higher gross margin per cow. This is mostly driven by higher milk income per cow ($4186 for the 20-40%, rising to $4450 for the high profit group) and $174 per cow lower net replacement cost (cull cow value – cost to bring in replacements) from the 20-40% vs. the high profit group.

  • Each higher profit cohort has lower direct costs. Direct costs are $480 lower for the high profit cohort compared to the 20-40% cohort group. About half ($245) of this is because of lower feed cost per cow. A couple of reasons may be less feed shrink and better forage quality.
  • Overhead costs by cohort are more random and does not follow a linear trend.

Why might the rules have changed? Farmers have been rapid to adapt technologies that increase productivity per cow. Here are some practices that have been adopted to improve productivity and profitability over the decades.

  • 1960’s and 70’s – Hard work, silo unloaders, gutter cleaners and confinement housing
  • 1980’s – Forage quality
  • 1990’s – Milk quality
  • 2000’s – Comfortable stalls and heat abatement
  • 2010’s – Reproductive technologies

What will be the focus of profitable farms in the future? I believe farms that excel at labor efficiency and business acumen are likely to be the high profit farms of the future. Family cost of living and hired labor costs are rising rapidly and there is no reason to believe this will change in the near future.

This can be accomplished by:

  • Focusing on capital investments that improve cow productivity and labor efficiency. Use partial budgets and cash flows for these new investments.
  • Developing a well-trained, engaged and organized work force with written protocols (family or hired)
  • Designing facilities that facilitate easy cow handling with minimal labor.
  • Designing feed centers that facilitate labor efficient mixing and delivery of feed
  • Partnering or share equipment to spread the cost over more acres and cows
  • Focusing on production systems that promote labor efficiency and take advantage of the farms natural resource base and the manager’s skills. These might include sensors, robots, or grazing. Many of these choices require balancing a larger capital investment with improved labor efficiency.

This information shows that milk production may not be as important as in the past for profitability. However, every farmer needs to develop a strategy for his or her farm to improve profitability.

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