PROFIT MAKING

Simply stated, dairy producers make money in one of two ways—increasing income or lowering cost (or both). While we have become very focused on the cost side of the equation—especially with feed prices climbing to all-time highs—the ultimate goal for any dairy operation should be to generate more profits. One way to maximize profitability on-farm is to utilize marginal thinking.

Calculating Marginal Milk Cost

Marginal thinking simply asks, “How much more would it cost to increase milk production?” To calculate the answer and make decisions based on the marginal cost, you must calculate two different numbers:

1.     Average maintenance cost per cow per day. This is best measured using the dry cow ration, as they are using feed for daily maintenance needs only.

2.     Additional feed cost per hundredweight of marginal milk. This number accounts for the additional investment needed to generate more milk.

To better explain this calculation, let’s assume the cost of feeding a cow producing 88 lbs. of milk is $6.46 and the cost of feeding a dry cow is $2.50. That means the feed cost to support the 88 lbs. of production is $3.96 ($6.46 - $2.50 = $3.96). If it costs $3.96 to support 88 lbs. of production, the marginal cost is $.045 per pound of milk ($3.96/88 lbs.).

Marginal Thinking in Action

Table 1 below compares feed costs and revenue generated with different milk production levels. Regardless of production levels, the maintenance feed costs are the same across all groups, so our focus is on the feed cost for marginal milk—the additional cost needed to support additional production.  

The cow producing 70 lbs. of milk costs the dairy producer $5.65 in feed costs per day, while the cow making 90 lbs. of milk costs the producer $6.55, a mere $0.90 increase. The 90-lb. cow produces 20 more lbs. of milk compared to the 70-lb. cow, resulting in an additional $2.30 of income over feed cost (IOFC) when compared. This far exceeds the $0.90 investment in feed cost.

Feeding Cows with a Marginal Mindset

Marginal thinking may mean incurring additional costs upfront, knowing this investment can result in greater production and profit potential. To generate the greatest revenue through marginal thinking:

- Invest in the ration. The ration delivered to the feedbunk must allow cows to maximize production, remain healthy and become bred in a timely manner. Taking shortcuts can jeopardize the ability for the herd to continually meet your goals, ultimately decreasing profitability.

- Utilize high-quality, proven ingredients. Research-proven feed ingredients play a pivotal role in marginal thinking, ensuring that the added investment in the ration will translate to greater profit potential for your operation.

- Make a change.  Continually evolving the diet ensures that cows are performing optimally, and the ration needed for success is provided. Evaluate each change independently to understand the marginal cost of the change and the long-term benefits for the herd.

- Work with your nutritionist to properly balance the ration. Your nutritionist can provide sound insight into how to properly balance the diet to maximize production and IOFC. Work with your nutritionist to outline the estimated maintenance feed costs and the costs that result in even greater milk production profit for your operation.

Click here for more information on implementing marginal thinking into your decision-making (will link to full article on PeakReportOnline.com).

Source: Dr. Elliot Block, Senior Manager, Technology, Arm & Hammer Animal Nutrition

1 Eicker S, Fetrow J, Stewart S. Marginal Thinking: Making Money on a Dairy Farm, in Proceedings. Western Canadian Dairy Seminar Advances in Dairy Technology 2006;137-155.