Feed Price Impacts on Dairy Profitability and Economics: Part II

As producers look at options for their dairy rations in light of increased feed costs, it's important to consider the relationship between changes in milk price and feed costs on dairy profitability and cash flow. To make these comparisons, actual 2006 data from a 200-cow dairy was used to study scenarios that include changes in corn grain price at three different milk price levels.

As shown in Table 1, during 2006 the farm had an average feed cost of $4.13 per cow per day for the milking ration. Gross milk price was $13.90 per cwt. and annual milk production was 77.6 lbs per cow. This generated an average income over feed costs (IOFC) of $6.68 per day. In a 200-cow dairy this would provide annual IOFC of $486,936.

To look at the impact of feed price increases on 2007 dairy profitability and cash flow, two scenarios were considered at three different milk price levels. A high haylage diet was compared to a high corn silage diet. Diets were balanced for starch, sugar and soluble fiber and cost comparisons were made at 58 pounds of dry matter intake to support 85 pounds of milk. Both the high haylage and high corn silage diets included less than 11 pounds of ground dry shelled corn as-fed and included other commodity ingredients to provide the energy balance needed in the rations.

For this comparison, corn silage was priced at $36 per ton and mixed mostly legume haylage was priced at $65 per ton. Table 1 shows the change in IOFC for corn at $4 or $5 per bushel. Actual herd performance for 2007 matches the 85 pounds per day used in the scenarios. Both the haylage and corn silage-based diets have been fed with these performance results.

The most obvious impact of the corn and forage price increases is shown in the feed cost/cow/day. On the high haylage diet with $4 corn, cost per day increased $1.12 per cow. On the high corn silage diet, cost per cow went up .73 cents per cow. However, as we consider feed costs it's important to relate them to milk production and milk price. Feed cost per CWT provides a measure that can be compared across farms, but this measure alone doesn't show the cash flow impact to the farm operation because differences in milk price are not considered. Income over feed costs relates feed cost, milk production and milk price impacts in one measure. This gives the producer a clearer picture of the cash flow impact of feed and milk price changes on the dairy operation.

During most of 2006, feed cost per CWT of milk ranged from $5-$5.25 per CWT of milk on the 200 cow dairy. The projected 2007 diets all exceed the range of $5-$5.25 feed cost per CWT of milk. We need to look at IOFC to see the full impact of feed price increases on dairy cash flow.

If we examine the $13.90 milk price scenario for 2007, we see that IOFC is reduced $.11 per day at $4 corn and $.31 per day at $5 corn on the haylage diet compared to 2006. Without any increase in milk price during 2007, this would result in a loss of $7,326 of cash flow for a 200-cow dairy with corn at $4/bushel. This revenue loss increases to $21,926 if corn price increases to $5 per bushel without a milk price increase. Further investigation shows projected annual IOFC becomes positive compared to 2006 when milk price increases $1 per CWT. to $14.90/CWT if the herd maintains the 85 pounds of milk production.

Across all milk prices the scenarios suggest an economic advantage in favor of the high corn silage diets on income over feed costs. At any milk price with $4 corn, the corn silage diets could generate an additional .39 cents per day IOFC assuming milk yield and components were the same on each diet. The haylage diets require a higher corn feeding rate than the corn silage diets to meet energy needs. This is reflected in the feed cost per day and it translates into higher potential income over feed costs for the operation where higher corn silage rates are fed.

As producers consider spring cropping plans, they may wish to consider diverting more crop acres to corn silage and grain production. While this looks favorable from an economic standpoint, carefully evaluate this decision with a whole farm budgeting approach that combines all the anticipated outcomes this decision would create. These impacts go well beyond purely economic concerns and include conservation plans that require hay crop forages in the rotation, hay establishment costs not fully recovered from early conversion of alfalfa stands, increased fertilizer and chemical costs in the current environment that increase the cost of growing corn, and weather-related risks from planting one crop with a narrow harvest window compared to hay crop forages that are harvested throughout an entire growing season. A hidden benefit of a higher corn silage program might include more consistency in the dairy ration if a producer historically struggles to produce high quality hay crop forages.

Current conditions suggest the dairy producer who can grow a high percentage of their own grains and forages appears to have a competitive cash flow advantage over producers who purchase most or all of their grains and forages. However, it's important to remember producers growing their own grains and forages are giving up the opportunity to sell these crops at higher prices instead of feeding them to cows, so the feed price increase reduces their dairy profitability as well when full economic costs are assigned to raising forages.

Producers should carefully calculate income over feed costs each month as milk production, milk price and feed costs change. Benchmarking this measure against past performance and future goals will help the producer make favorable, economically beneficial decisions for the dairy.

Tim Beck, Dairy Extension Educator, Lancaster County and Virginia Ishler, Penn State Dairy Alliance Extension Associate*
*Penn State Dairy Alliance is a Penn State Cooperative Extension Initative