Taking on low milk prices

Posted on August 1, 2016 in Dairy Performance
By Rod Wautlet
The Class III futures are looking better than they were, but they still aren’t great.  As of July 25, the market showed:

  • 2016 first half average (actual):  $13.48
  • 2016 second half average:  $16.47
  • 2017 first half average:  $16.23

So what’s your game plan for taking on these challenging markets?

Rule number one:  Know your cost of production!
How much does it cost you to produce a hundredweight (cwt) of milk?  Take the time to get an accurate number.  We generally see a range in cost of production from $14.50 to $18.50 per cwt.  The top third of producers seem to average below $16 per cwt; the middle third achieves $16 to $17; and the bottom third goes above $17.

Consider what you can do to lower your cost of production while still providing optimal care for your animals and resources.  Involve outside advisors and team members to get creative in lowering your costs.

What’s at stake?
Equity drives your business success and determines your staying power in this ever-changing marketplace.  Know your equity position so you have a good feel for how much money your bank may be willing to lend.  Regardless of your equity position, keep you lines of communication open with your bankers, partners and vendors.  Nobody likes surprises, so keeping everyone in the loop is vital.  Also evaluate marketing opportunities available for both inputs and outputs and use those to your advantage.

On the revenue side
Maximize your milk basis.  Fat prices remain strong relative to protein prices ($2.24 versus $1.85 in April), so maximizing total output of fat pounds can, in turn, maximize revenue.  A good goal for gross basis is $2 per cwt with $1.50 per cwt for your mailbox (net) basis.

In addition, consider the milk quality premiums available to you.  Analyze somatic cell count (SCC) premiums and cow contributions to the bulk tank.  Can you cull high-SCC cows, chronically sick cows or low producers?  Create an index to help you make these decisions.  Set the economic parameters for SCC, reproductive status and production and design your culling strategy accordingly.

Maximize your combined fat and protein (CFP).  Here are some potential goals:

  • 3x milking with bST:  6.50 lb
  • 3x milking without bST:  6.0 lb
  • 2x milking with bST:  5.75 lb
  • 2x milking without bST:  5.5 lb

When evaluating your herd’s reproductive status, consider production, days in milk, total lactations and genetics.  You may further evaluate your cows’ genetics/pedigree, conformation/quality, history and milk quality when making culling decisions.

Next, look at your replacement heifers.  What’s your inventory?  What are your replacement needs?  What’s your future strategy and how is that affected by your inventory?  For example, if you plan to expand in the next couple years, are you keeping enough replacements now?

Once you know your replacement needs, index your youngstock and act accordingly.  Sell your low-ranking excess youngstock based on marketability, genetics and economics.  If you don’t want to sell them, can you use these animals to generate revenue in other ways, such as breeding them to beef or using them as embryo transfer recipients?

Finally, let’s look at your biggest three expenses, which account for more than 45 percent of your total costs.

  • Labor:  Keep your employees engaged in the business and motivated to work hard.  Providing incentives to key employees may build leaders for the rest of your team.
  • Feed:  Focus on quality forages and storage.  Make the most of your on-farm feeds.
  • Payments and interest:  If you must, make interest-only payments in the short-term.For a longer-term strategy, restructure your debt to slow down your payments.

Our kneejerk reaction in tough markets is to cut all costs.  However, beware of short-term cuts that will impact future margins long-term success.  Make thoughtful decisions for feed quality, genetics and cow comfort.

About the author:  Rod Wautlet provides financial and business consulting services with Agri-Business Consultants LLC, a Vita Plus-related company.  He was born and raised on a dairy farm and is a lifetime FFA Alumni member.  He earned his bachelor’s degree in agricultural education from the University of Wisconsin-River Falls and a master’s degree in animal science from the University of Minnesota.  Wautlet has more than 20 years of consulting experience with dairy producers on financial, business, marketing, milk quality, genetics, expansion, personnel, nutrition and other facets of the dairy industry.

Category: Business and economics
Dairy Performance