Using Income Over Feed Costs to Monitor Cash Flow

Income Over Feed Costs (IOFC) provides a useful measure to assess how well the feeding program is working on a dairy operation. Because it establishes the relationship between milk output for the dollars required to produce the product, it can be readily compared across operations to evaluate efficiency and profitability.

IOFC is calculated by taking the Daily Bulk Tank Average times the Milk Price per Lb. minus the Feed Cost per Cow per Day. It’s important to remember this measure includes only feed costs for milking cows. The feed cost per day needs to include the cost of purchased feeds and the value of home raised grains and forages. To establish a reasonable market value for forages and grains, it’s often useful to consult a source like the Dairy Feed Price List available on the Penn State Dairy and Animal Science web site. Virginia Ishler updates this price list monthly and makes it available on the web. http://www.das.psu.edu/pdf/feedprices.pdf. Another valuable use of this measure can be to evaluate and test the feasibility of cash flow plans. Ken Bailey and Virginia Ishler researched the use of Income Over Feed Costs as a predictor of dairy profitability and compared it to USDA’s milk/feed ratio. Their study of historical feed and milk prices showed that IOFC is a more reliable indicator of profitability than the USDA’s previous measure. http://pubs.cas.psu.edu/Publications.asp (“Tracking Milk Prices and Feed Costs”).

The goal of this research was to identify a measure that could be related to the farm’s cash flow and be used to predict future profitability based on both milk and grain futures prices. Dr. Bailey calculates the IOFC ratio and provides this information in his monthly dairy outlook newsletter. http://dairyoutlook.aers.psu.edu/

Based on the table at the end of the January 2008 Dairy Outlook newsletter, current futures prices are suggesting an average IOFC for 2008 of $6.55. This is based on a projected average all-milk price of $16.70 for the coming year. Given these two pieces of information, how does a producer plan their cash flow and manage their operation to achieve realistic income and expense targets?

After completing a cash flow projection for the farm operation that is based on historical costs and returns for the farm, the next step is to “translate” this information into a breakeven Income Over Feed Cost Goal and determine the Maximum Daily Feed Cost per Cow that would allow the producer to make the cash flow work. A worksheet accompanying this article may be useful to make these calculations. Ten items of data are needed to complete the calculation. For the example farm shown, the IOFC breakeven per day is calculated at $6.31 per day. If milk averages $16 mailbox and the herd is producing 70 lbs of milk this sets the maximum feed cost per cow per day at $4.89 per day. The $4.89 must pay all purchased feed costs for cows and the crop production costs needed to produce raised grains and forages. Comparing that figure to the $6.55 predicted IOFC suggests this farm has a reasonable expectation of achieving this breakeven target if cow feed costs can be maintained below the $4.89 per cow per day level.

Certainly a producer strives to do more than breakeven, so further cost reduction without loss of milk income or increased milk production without added costs would provide cash surplus to the operation. After calculating both these numbers it’s very easy for a producer to quickly assess if the IOFC margin is working as planned or if adjustments will be needed.

The second chart accompanying the article provides goal ranges to strive toward at various milk prices. In a herd producing 75 lbs of milk, if the producer is spending $4.80 per cow per day on feed, the IOFC goal ranges can be achieved at a price of $16 or higher. Only the producer can say if the IOFC goal range provides adequate cash flow to the operation as this figure is different for every farm. Use the previous worksheet to establish your breakeven targets and work to improve them.

When using IOFC, it’s important to calculate the cost per cow per day based on the amount of dry matter the cows are actually consuming. If this is above or below the formulated level, the cost calculation on the ration sheet may be very different from the actual cost. This requires the producer to have a good handle on dry matter intake for the milking cows.

Income Over Feed Costs is a useful measure to establish the input-output relationship on the dairy farm. When monitored over time it can provide very beneficial information to assess profit potential and monitor and predict cash flow.

---Tim Beck, Agricultural Business Management Educator, Cumberland County