Use income over feed cost

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Some people say that when your feed cost is a little higher than the average, or you milk 3X, or use BST, that you’re just buying that extra milk production. However, when you look at the profitability of each individual decision (as opposed to simply looking at the cost of implementation), you can see the true value of each,” says North Rupert, Idaho, dairy producer Brad Fife. “For me, the question always is, will a change pay for itself and generate a return?”

“That’s why I use income over feed cost to judge all suggested feed changes,” stresses Fife, who milks 625 cows.

Income over feed cost is an efficiency measure that allows you to gauge the return from a change in your feeding program. It’s the only measure that ties nutrition to herd profitability. And, it can keep you from making a change that may appear to cut feed cost, but actually results in a milk loss that’s greater than the savings.

Measures of efficiency
Income over feed cost, feed cost per day, and feed cost per hundredweight are all measures of efficiency that producers can and should use, says Dan Kluth, dairy nutritionist with Standard Nutrition in Jerome, Idaho. However, each looks at feed cost a little differently.

For example, daily feed cost provides a good way to judge how well you did buying feed supplies. And, feed cost per hundredweight allows you to look at the production response, but not the profitability of that production response. That’s where income over feed cost comes into play.

Income over feed cost (IOFC) allows you to see how much income you put at risk by making a feeding change. Or, how much income you stand to gain from making a feeding change. And that, in turn, allows you to make better business decisions.

Although IOFC should not replace the other measures you already use, it should be a number that every producer calculates, says Debbie Wilks, dairy marketing manager for Moormans, Inc. By including the milk production response and the current milk price in the calculation, IOFC tells you the return on investment for a feeding change.
As with all measures of efficiency, IOFC has its weaknesses, too. For example, it doesn’t take into account the health and reproductive benefits of certain feeds. You still have to use your management records for health and reproductive performance to judge the overall results of a feeding change. Remember, short-term gains from reduced feed cost can quickly be wiped out by long-term negative effects.

Focus on return
“I’ve never seen a least-cost ration generate the best profit for a dairy,” says Brian Perkins, a New York-based technical services specialist for Monsanto Dairy Business. If you save a little money on feed cost, but produce less milk because of it, you are not ahead in terms of profitability. You have to look at the marginality of the decision — that is, the impact of the feeding change on profitability.

With the current low milk prices, the inclination to cut feed cost — the largest on-farm expense — can become quite strong. However, in order to make the best decision for your dairy, you have to look beyond the expense side. Otherwise, you’ll end up making the same mistake that a lot of producers did in 1996 when the cost of grains was high, says Phil Anderson, an independant nutrition consultant in Emlenton, Pa.

During the summer of 1996, a lot of producers replaced some of the corn in the diet with wheat midds, for example, to cut daily ration cost. The savings were substantial — 15 to 20 cents per cow per day. However, when corn prices declined and corn was returned to the ration at the previous rate, producers saw a 4- to 5-pound milk response. Hindsight showed they were losing about 50 cents worth of milk per cow per day by substituting the wheat midds. If they had used IOFC to judge the decision, as opposed to simply focusing on getting feed cost down, they would have seen that the savings were not worth the loss in milk production.

“Even in that extreme grain-price environment, the producers would have been money ahead if they had just kept feeding the corn,” says Anderson.

Flash forward to today’s low milk prices, with reasonable feed prices, and producers are once again looking for ways to cut feed cost. For example, one of Kluth’s clients wanted to substitute a byproduct for some corn in the diet. Estimated daily cost savings was 3 cents per cow. However, by using IOFC to analyze the feed change, Kluth was able to show the producer that if he lost just one pound of milk from the change, he would have a net loss of 6 cents per cow per day.

When margins get squeezed, producers often believe that least-cost rations (rations designed to minimize cost instead of maximize production) carry some short-term economic benefits. However, it’s during these tight times that you must focus on profitability, or minimizing losses, instead of cutting cost.

Oftentimes, when an IOFC analysis is run, the producer is surprised to discover that making a small change to improve a ration results in a production response which more than covers the extra cost of the ingredient, says Wilks. It all comes down to how much bang do you want from your feed buck.

The big picture
Reagon Hatch and his partner try to run a lean, efficient operation at the 1,500-cow Kowz R Us Dairy in Castleford, Idaho. However, when Hatch’s veterinarian first showed him a comparison between his farm and the other herds he works with — in terms of milk production and income over feed cost — Hatch was surprised. “We didn’t have near the production or income over feed cost to compete with our vet’s top herds,” says Hatch. “We knew that we wanted to be in the top 20 percent to compete for the long-term, and that prompted us to make some changes.”

During the past two years, Hatch has learned the value of using IOFC to judge feeding changes. Today, with a 23,500-pound herd average and with a $10.63 milk price, his cows still generate an income over feed cost per cow per day of $4.90. Those numbers put him firmly in the top 20 percent of his veterinarian’s clients.

“Feed cost per cow and feed cost per hundredweight weren’t telling me the whole story,” says Hatch. “I need to know both, but when judging the value of making a feeding change, I’ve learned that I also need to look at income over feed cost.”

Anytime you’re looking at making cuts anywhere on the dairy, you have to look at what all of the changes will affect, stresses Hatch. Will it have a negative impact on milk production? Will it impact employees? Will it affect cow health? How will it affect the bottom line?

For Hatch, IOFC ties his nutrition decisions to profitability. And, that’s something he needs to do to make good business decisions and remain competitive.


Keep good records

No matter what tool you currently use to judge feeding decisions, if you have good records, you can calculate any of the efficiency measures — feed cost per day, feed cost per hundredweight or income over feed cost.

Good records, explains Phil Anderson, an independent nutrition consultant in Emlenton, Pa., must include: milk price, milk production per cow and exact feed cost. With accurate records, dairy producers can look back to discover what caused the change in income over feed cost at any point in time.


How to determine your income over feed cost

Use the following steps to figure income over feed cost for your dairy:

1. Determine your milk income for the month.

2. Determine your feed cost for the month. (Feed cost can be done for all animals or just the lactating herd. Whichever you choose, always do it the same way each time.)

3. Subtract feed cost from the milk income = total income over feed cost

4. Divide total income over feed cost by the number of cows milking that month.

5. Divide the answer in step 4 by the days of the month to get IOFC per cow per day.



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