What do you tell producers when milk prices stink?

Over the past 10 years, we have become accustomed to some roller coaster milk prices. They actually have been rather favorable for producers for much of that period. At present time, however, they are very low, and it looks as if they will remain low for some time.

Milk prices at this level make it very difficult for even the best managers to remain profitable. As such, a kind of "waiting" game develops, with many of our clients simply trying to "hang on" until prices improve. Those with low debt, or those who operate very efficiently, have a distinct advantage.

Many dairy veterinarians play an active role on the management team of their dairy clients. They have an opportunity to influence the decisions the producer makes as he or she tries to stay afloat. I think there are some important insights that we can offer that are helpful. Some of them seem rather obvious, but the dairyman caught up in the pressure and emotions of the day may not always see them.

Maximum profit, not minimum costs

"Duh! No kidding," is a normal reaction if you tell a client that his goal should be to maximize his profit. Yet, producers sometimes get hung up on cutting costs, and lose site of the end goal. Some believe that with milk prices this low, it makes sense to produce less if costs can be cut. In reality, this is almost never true.

One pitfall to avoid is putting too much emphasis on "costs per hundredweight (cwt) of milk produced". It is very possible to make changes that will decrease costs per cwt, but also reduce profit. Consider the following example, where a producer simply reduces the grain and increases forage in his TMR, in an effort to cut feed costs. All figures are per cow per day.

If the producer is only looking at feed cost per cwt, he will conclude that he is better off with the reduced grain ration.

The logic here is that since he cannot change his income per cwt, he has to get his cost per cwt as low as possible. However, he also must consider the number of cwts. He is far better off to sell more cwts at a lower margin, than less at a larger margin.

In general, if it makes sense to do something when milk prices are high, it still makes sense to do it when milk prices are low.

It is relatively rare that some practice has such a clearly defined payback, and generates such a narrow margin that it pays when prices are $16 per cwt, but not when they are $12.

Some producers quit using BST (bovine somatotropin) in times of low milk prices, but they are usually wrong to do so (Table 1).

There are some practices, that while are profitable in the long run, still consume valuable cash in the short run. An example might be feeding a product to improve conception rates. This takes cash right now, but the payback will not come for another year, after the fresh cows become pregnant and deliver their next calf. Therefore, if a farm strapped for cash simply must cut some costs, eliminating this type of product would make sense, if current milk production does not drop.

Consider three elements

When considering where to cut cash, there are three elements to consider. An assumption is that products or protocols that do not generate a positive return have already been eliminated. To state that same concept a little differently, we assume that any current expense is generating a positive return. If this is true, and if a positive cash flow exists, then no changes are justified.

However, many dairy farms are not seeing positive cash flow now, and, therefore, must look for ways to cut current expenses even more. If this is true, they need to ask three questions for every item of current expense.

• How large of a return does this item generate?

• How soon does the return occur?

• How certain is the return?

Returning to the ration example above, the extra grain in the current ration added $.85 per cow per day to expenses, but generated $1.20 worth of milk. The timing of the return is about 24 hours, and the certainty is quite high.

If we look at our own role on the farm, how do reproductive exams fit into this scenario? Doing pregnancy exams identifies the open cow, allowing the producer to focus on getting her into estrus and rebred. The return on this expense does not occur for at least nine months, but the expense is very low, and the certainty of the return, on a herd basis, is very high. By contrast, palpating open cows does little to improve pregnancy rates over simply putting all eligible animals on a timed breeding protocol.

Managing a dairy farm in these times of extremely low milk prices is a difficult task. Trying to allocate a finite, and insufficient, amount of cash is challenging, and the survival of the business may be at stake. As expenses are cut, the extent and the timing of the impact must be understood. The dairy practitioner who understands the concepts involved can be a key ally to his or her clients.