Cost Control in an Era of Low Milk Prices and High Feed Prices

Farm Business Management Update, April - May2007

By Peter Callan (peter.callan@vt.edu), Extension Agent, Farm Business Management, Northern District

Dairyman are faced with the prospect of cutting costs with corn grain prices near 10-year highs and milk prices at 25-year lows to generate positive cash flows. To reduce costs; dairymen need production and financial information which shows a structured analysis of the cost of inputs and returns for inputs. Dairymen need to know the net return to milk production for each additional pound of grain added to the ration. Most dairymen lack production and economic data to measure the cost effectiveness of adding additional inputs of grain to increase milk production. Before trimming costs, dairyman must determine the limiting factors that are holding back milk production and crop yields on their farms. The limiting factors for each farm are different.

A variety of factors limit milk production on a dairy farm. A dry cow ration that is not balanced will result in higher levels of ketosis, milk fever, and retained placentas. Metabolic problems cause the fresh cow to have lower peaks in milk production and a reduction in total production for the lactation. Poor ventilation and lack of cow comfort decreases the herd’s milk production. Many dairies have installed mattresses, sand bedding, and fans to improve cow comfort which has increased milk production. Mastitis levels rise due to malfunctioning milking equipment. High NDF levels in haylage decrease dry matter intake which results in lower milk production. The incidence of Johannes can seriously reduce milk production. One or more of previously mentioned limiting factors in a dairy herd may prevent a herd from milking to its genetic potential. Generally, energy is not the limiting factor which prevents a herd from producing to its genetic potential.

Soil type is the greatest limiting factor to maximizing crop yields. Deep, well drained soils that have the capacity for water retention during the summer months have higher production capabilities than heavy clay soils. Soil pH maybe second the greatest limiting factor in crop production; therefore, regardless of whether nitrogen, phosphorous and potash are applied to the soil soils with pH levels below optimal levels the result is unprofitable yields. Liming to achieve optimal soils pH levels will lead to profitable use of the existing levels and applied nutrients.

Dairymen need to take into account several considerations when reducing costs. First, they need to determine the limiting factors for each enterprise. Second, can the manager measure the decline in revenues when an input is reduced? If feed costs are reduced: what is the decline in milk production? Due to the variability of rainfall from one growing season to the next and within a growing season; it is harder to measure the cost effectiveness of reducing inputs in crop production. When reducing costs, producers need to generate sufficient returns to cover fixed costs, e.g. insurance, taxes, and debt service.
Dairymen need to look at the big picture as they cut costs. They need to ask themselves the following questions:

• What percentage of total expenses is this expense?
• How does this expense impact profitability?
• If an expense is reduced; what return is given up?
• What are the largest expenses on the farm, e.g. feed, labor?

Dairymen’s largest cost, feed makes up approximately 60% of total cash costs of producing a hundred weight (cwt) of milk. Therefore, if total cash expenses are $12 per cwt, feed costs are $7.20 per cwt. A 10% reduction in feed cost will lead to a $0.72 reduction in cash costs. Conversely, stopping a practice that makes up less than 2% of total cash costs could lead to a reduction in milk output greater than the reduction in costs. Examples of these minor costs are DHIA, reducing herd health visits, reducing or eliminating herd vaccination programs, foot baths, hoof trimming, silage inoculants, forage testing, time to check forage dry matter, soil testing, reductions in bedding in freestalls, calving pen and hutches, and genetics. Postponing and increasing intervals for scheduled maintenance can reduce the productive life of farm equipment. Dairymen need to evaluate reductions in minor costs that can significantly impact the bottom line of their businesses.

Cost reduction is a difficult task for dairymen because every farm is different. Dairymen need to determine the limiting factors for production on their farms. Can they measure the decline in revenues when an input is reduced? Dairymen need to remember Ben Franklin’s adage “Do not be penny wise and pound foolish” when evaluating decisions that impact the profitability of their businesses. Best wishes for a safe and profitable 2007!

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