milk-to-feed ratio = all-milk price / price of 100 pounds of 16 percent protein-mixed dairy feed
milk-to-feed ratio = $19.10 / $13.07
milk-to-feed ratio = 1.46
The milk-to-feed ratio represents how many pounds of the 16 percent protein-mixed dairy feed could be purchased with the gross revenue from one pound of milk at the stated all-milk price. So in our example a milk-to-feed ratio of 1.46 means the hypothetical dairy producer could purchase 1.46 pounds of feed when the USDA all-milk price was $19.10/cwt and the USDA 16 percent protein-mixed dairy feed was valued at $13.07/cwt of feed.
The logic behind the milk-to-feed ratio is that as the ratio goes higher the hypothetical dairy producer would be able to purchase more feed. Since feed typically accounts for 50-60 percent of the cost of producing milk a higher milk-to-feed ratio also suggests higher profits for dairy producers. Conventional wisdom says when the milk-to-feed ratio is greater than 3.0, milk production is more profitable and dairy producers, as an industry, will tend to expand production by adding more cows, decreased culling and increased milk per cow by feeding more concentrates. When the milk-to-feed ratio drops below 2.0 conventional wisdom says milk production is less profitable and dairy producers, as an industry, will contract by some producers going out of business, increased culling and/or decreased milk per cow by feeding less concentrates.
However, one must be very careful in interpreting the milk-to-feed ratio, because, as stated in this article’s title, not all milk-to-feed ratios are created equal. For example, let’s look at two very similar milk-to-feed ratios. In May of 2009 the milk-to-feed ratio was 1.49, while in March 2012 the milk-to-feed ratio was nearly identical at 1.48. By simply comparing the two ratios many would conclude the potential profitability for dairy producers in those two months were almost identical. Furthermore, based on conventional wisdom, most would conclude the dairy industry in general was likely to be in a contraction phase in both periods with perhaps some producers liquidating herds, others increasing culling, feeding less concentrates, etc.
However, a more careful analysis of those two months would reveal an entirely different situation. A major drawback of the milk-to-feed ratio is in the fact that it is a ratio. A ratio does not take into account the size of the pie. For example, which would you rather have, a 20 percent slice of an eight inch apple pie or a 20 percent slice of a 16 inch apple pie? In both cases you receive the same ratio of the pie (i.e., 20 perecnt), but in the latter case you will receive a much larger slice in an absolute sense. The same is true when it comes to the milk-to-feed ratio.