Dairy Sense: Formula to Profitability is MBA

The frequency of feed delivery influences a dairy cow’s eating behavior.

Successful farms implement good management practices, find balance in their various enterprises, and invest in appropriate assets.

Production perspective:

Over the years it seems the focus of research has been to find that ever-elusive formula for achieving high milk production or positive cash flows. Some examples include the addition of feed additives, various ration strategies like high starch or low starch diets, the incorporation of brown mid-rib corn silage, low lignin alfalfa, and the list could go on and on. The Dairy Business Management Team at Penn State has been conducting on-farm projects for almost ten years searching for that silver bullet to distinguish between high animal performance herds versus low and operations maintaining positive cash flows consistently compared to those showing a deficit. The formula that keeps coming up time and time again is having an MBA.

The answer is not having a Masters of Business Administration degree, but attention to Management, Balance, and Assets. Regardless of the operations participating in our projects, the successful farms have captured the essence of an MBA. There is no one strategy that will guarantee success in animal performance or profitability. Every farm is unique with respect to their cropping program, cow management practices, people working on the farm, and financial situation. The successful farms implement good management practices throughout all areas of the operation, they have found the correct balance of their various enterprises, and their assets are appropriate with what they want to accomplish.

Management is key when assessing crops, cows, people, and cash. Everything is intertwined and mismanagement in one area can have a long lasting ripple effect in others. Cropping programs start with the seed, acreage planted, harvested, stored, and fed out. Any misstep during one or more of these areas can create problems for the cows and the finances. For the cow part of the equation, feeding management trumps the nutrition side most every time. There is only so much nutrition can do to compensate for poor quality forage or limited amounts. This can have implications for animal growth, reproduction, health, and lactating cow performance. The end result can have significant ramifications on the financials. The human resource component probably revolves around time and money. If employees are not happy, then that will translate into less than stellar performance in many of the management categories.

Balance. The one glaring result from our projects is that the most profitable or highest producing herds do not have the best quality forage, or real fancy rations, or the best or newest of equipment or facilities. They have learned how to keep things balanced for their herd. Some examples are maintaining average forage quality and quantity that works for the cows. Implementing good feeding management practices where the formulated diet matches the actual ration, having feed available to the cows over a 24-hour period, and other common sense approaches to make sure cows are set up to succeed. Balance is also important for income and expenses. There are many examples where the cows are doing their part at producing high volumes of milk, but the operation is over spending funds.

Assets such as land, buildings, and equipment affect the farm’s success. Land and equipment can factor very heavily in the timeliness of getting forages harvested, which can relate to both quality and quantity. Facilities can influence cow comfort and acceptable stocking densities. If equipment is not well taken care of and repair expenses are very high, that can be a detriment to the cash flow.

The good news is that no one approach is needed for a dairy operation to maintain a positive cash flow or high levels of milk production. The farms participating in our projects all know their breakeven cost of production, and the feedback has been how valuable this number is to making decisions. If you are not measuring it then how can you monitor it? With a fourth year of milk prices that do not come close to what many need to breakeven, it is even more critical to know your numbers and how decisions will impact the cash flow.

Action plan for improving profitability

Goal – Develop an income statement and a balance sheet for 2017 and project a cash flow plan for 2018

  • Step 1: Working with a financial advisor or consultant, fill in the necessary information for the income statement and balance sheet.
  • Step 2: Working with an Extension specialist or consultant, develop a cash flow plan for 2018.
  • Step 3: Monitor IOFC monthly and compare to the farm’s breakeven number.

Economic perspective:

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows income over feed costs is a good way to check that feed costs are in line with the level of milk production. Starting with July 2014’s milk price, income over feed costs was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage, and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen, and a mineral vitamin mix. All market prices were used. Also included are the feed costs for dry cows, springing heifers, pregnant heifers, and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.

Income over feed cost using standardized rations and production data from the Penn State dairy herd.

Note: Penn State's January milk price: $17.54/cwt; feed cost/cow: $5.48; average milk production: 85.0 lbs.

Feed cost/non-lactating animal/day.