Editor's note: This article ran in the April 2011 edition of Dairy Herd Management.

In early 2011, Sean Jones of Massey, Md., was looking to save money on his feed cost. Jones had the opportunity to purchase some wet brewers grain. Based on an evaluation he did with his nutritionist using CPM-Dairy, it appeared that they would lose a half a pound of milk per cow per day by feeding the wet brewers grain. Jones decided to go ahead with the ration change anyway due to the savings in the ration of 15 cents per cow per day.

What actually happened when Jones fed the wet brewers grain was a different story. Initially, dry matter intake and production went up; however, dry matter efficiency went down.

Because Jones evaluates his herd’s income over feed cost (IOFC) on a weekly basis, he could evaluate the true economics of what was happening and it showed him the wet brewers grain was a good decision. “Without collecting all of the data and running income over feed cost, it would have been difficult to evaluate the economics of this change,” says Jones.

The end result was a higher income over feed cost, and the herd has continued to consume wet brewers grain. This is just one of the reasons why Jones has calculated his IOFC for more than three years.

This ration change could quite easily have been a bad one had milk production gone down more than Jones had anticipated. Virginia Ishler, manager of the Penn State Dairy Research Complex, points out that any change that jeopardizes milk production will have more of an impact on income than a change in feed cost per cow ever could. IOFC is a tool that lets you be smart about making feed changes.

That said, “There are still too many producers who don’t know what their IOFC is and far fewer who know their cost of production,” says Gary Sipiorski, dairy development director for the Vita Plus Corporation. In today’s economy, everyone should be calculating IOFC.

The good part is IOFC sounds more intimidating than it actually is. “It’s a fairly simple calculation,” says Jones. Here’s what you need to know before you start.

Know the formula

First, know what the formula is to calculate IOFC.

    IOFC ($/cow/day) = Pmilk x (DAMP/100) – DFC

You take your gross milk price (Pmilk) and multiply it by the daily average milk production (DAMP) divided by 100. Next, subtract the daily feed cost (DFC) to arrive at your income over feed cost per cow per day.

Daily feed cost is the daily cost of feedstuffs required to produce the amount of milk reflected in the daily average milk production or DAMP.

The gross milk price (Pmilk) can be taken from your monthly milk check. To figure the daily average milk production, take the total pounds of milk shipped (from your milk check) and divide it by the number of days in the month, then divide by the number of lactating cows.

Essentially, the gross milk price is being converted from dollars per cwt to dollars per pound of milk produced and then the cost of producing that milk is subtracted.

For example, if your gross milk price is $18.50, your daily average milk production is 70 pounds and your daily feed cost is $5.15, the formula would look like this: $18.50 x 70/100 - $5.15 = $7.80/cow/day IOFC. In this example, if your IOFC breakeven is $9, this means you will probably have trouble paying bills and won’t be able to save cash.

Dry cow vs. lactating cow

Only include lactating cows in your calculation. Dry cows and heifers should be excluded from all calculations because it’s only the lactating cows that provide the income.

Account for homegrown forages

Your ration likely consists of both homegrown and purchased feeds. Therefore, it’s important to calculate the real cost of home-grown forages.

The cost of home-grown forages should include the cost of the seed, fertilizer, crop chemicals, and custom harvesting. The value of home-grown forages is most important when you are planning a cash flow and wish to determine your breakeven IOFC. While this is not the full cost of producing the grain or forage, the overhead cost must be covered by the IOFC you receive on the farm. When you want to benchmark your herd with other dairy farms, use the market price for that forage

Whether you choose to use your own cost calculation for homegrown forages or the market price, it is important the method used be consistent each month.

Pounds fed

Actual pounds fed to the lactating herd are needed. Do not exclude feed refusals. There is a cost to feed the cow whether she consumes the feed or not, notes Ishler.

Feed prices for all ingredients are also needed. This includes forages, grain mixes and commodities. If you forward-contract, use the contracted price instead of the actual market price.

When gathering figures to calculate, accuracy is important. “If you make too many assumptions, it is harder to rely on IOFC as a decision-making tool,” notes Jones.

Calculate and recalculate

Calculating IOFC one time is not meaningful, says Ishler. Ideally IOFC should be calculated every month if not more frequently.

And, it’s something that shouldn’t be a chore to update — 10 to 15 minutes once you have the Excel file set up, says Tim Beck, Penn State extension educator in dairy business management. (See Library corner to find where you download an Excel spreadsheet to calculate IOFC.)  The best time to calculate IOFC is right after the monthly milk check is received.

Jones says he finds it advantageous to calculate IOFC on a weekly basis. “A weekly IOFC calculation allows me to make better decisions and be able to evaluate changes faster.”

The bottom-line is herds that do a good job monitoring their IOFC have a higher likelihood of sticking around longer.

Cheap can be expensive

As we move through these volatile times, feed prices are changing rapidly. But, Virginia Ishler, manager of Penn State Dairy Research Complex, cautions against making decisions based on single ingredient prices alone.

Often, a knee-jerk reaction when a commodity gets expensive is to automatically remove it from the ration, notes Ishler. Next, you start bringing in all sorts of ingredients because they are cheap. But, Ishler says, cheap can get expensive really fast.

“Maybe an ingredient is more expensive, but if you don’t lose milk production, and your income over feed cost is within the benchmarks you set, then you are still OK,” she says. “I’ve seen more disasters from this cheap-feed strategy than success.”The Next step

Once you have calculated your income over feed cost (IOFC), it’s time to put it to use. Knowing your IOFC enables you to:

•     Make informed decisions about feed purchases.

•     Know when to lock in milk price.

•     Know when to adjust your ration to accommodate price volatility.

Library corner

Penn State University offers several resources on calculating income over feed cost. Here is a list of available resources.

•     Managing income over feed cost

•     How to use the Penn State income over feed cost tool

•     Penn State income over feed cost tool