Don’t blindly cut back on feed cost

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With the price of corn, soybeans, hay and other feeds at or near-record levels, your feed cost is painfully high. No doubt you are tempted to cut back on feed purchases to reduce cash outflows. But before you do this, think about other cash-flow changes that could occur due to this decision.

Milk production is almost certain to fall if you cut back on feed. This production reduction translates into lower cash flows. Therefore, reducing feed expenditures to reduce cash outflow results in less cash inflow.

Whether it makes economic sense to cut back on feed depends on the relationship between the value of feed savings and the value of milk lost from feeding cutbacks.

If the value of feed savings exceeds the value of lost milk, you’ll see a net economic gain from dialing back feed.  

Alternatively, an economic loss results if the savings from cutting feed are less than the value of the milk that is lost. This is what would likely happen now if you were to cut back on feed to dairy cows.

Run the numbers

The chart (at upper right) contains feed-cost estimates using a modified version of the PRICER.XLS spreadsheet. These cost data — featuring $6 per bushel corn, $350 per ton soybean meal and $185 per ton hay — show how feed cost can vary based on milk production. More importantly, they show changes in daily feed cost that occur for every 10-pound decrease in daily milk production.

This cost, which economists refer to as marginal cost, is the savings from cutting back on feed.

According to chart cost estimates, you will save about 50 to 55 cents per day for each 10 pounds of milk production that you are willing to forego to save on feed. With milk prices at $18 per hundredweight, you lose about $1.80 in milk sales by cutting milk production by 10 pounds to save on feed cost.

Giving up $1.80 of daily milk sales per cow to save 50 to 55 cents per day on feed costs is not profitable. Neither is giving up $1.20 of daily milk sales when milk is $12 per hundredweight. Even with relatively low milk prices, cutting feed to reduce cost does not appear to be profitable.

Don’t focus solely on cost

The high prices of corn, soybean meal, hay and other feeds have made you more cost-conscious. But avoid knee-jerk responses to higher feed prices and the temptation to blindly cut back on feed to control cost. 

Focusing only on cost is a mistake. Cost control does not in itself determine profits. The other profit-determinant is the value of the output that is produced with inputs. You need to consider both the money spent on feed and the value of the milk produced from feeding feed to dairy cows. 

Thanks to strong milk prices, the value of milk has generally kept pace with the cost of feed. As such, net returns over feed cost have mostly remained steady, even though feed prices have risen. Because your net returns over feed costs have not declined, you have not had any incentives to cut back on production.

You must remember that your objective is not to minimize cost, but to maximize net returns or profits. So even though feed is relatively expensive, it may be appropriate for you to feed for high levels of production when, as is now the case, milk is quite valuable.

Bruce Jones is a professor of farm management at the University of Wisconsin-Madison.

Changes in daily feed cost at
various levels of milk production

Milk per day (pounds)

 

Feed cost
per day
($)

 

Change in feed cost per day
with 10-pound decline in daily
milk production ($)

 

110

 

7.11

 

 

100

 

6.55

 

-0.56

 

90

 

6.02

 

-0.53

 

80

 

5.50

 

-0.52

 

70

 

4.98

 

-0.52

 

60

 

4.46

 

-0.52

 

The above cost figures were computed using a modified version of the PRICER.XLS spreadsheet, developed at the University of Wisconsin by W.T. Howard and R.D. Shaver, which computes the corn, soybean meal, and hay cost in a ration fed to dairy cows.

 



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