Dairy business consultant examines operating margins

REEDSVILLE – It's a myth that “things have to get better” in the dairy market, dairy business consultant Matt Lange of Compeer Financial at Baldwin told attendees at the Manitowoc County Forage Council's annual dairy cattle feeding and management day.

Lange works with 100 to 120 clients per year throughout much of the United States. Those dairy operations have from 100 to 13,000 dairy cows. “Margins is my theme for today,” he stated.

On average in Compeer's records, the variable and fixed costs of production exceeded the income for every year from 2015 through 2018, Lange observed. “The prosperity from the record high milk prices in 2014 carried over for 18 months.”

For 2019, he reported that a top performing client with 2,400 cows expected a net return of about $2.5 million compared to $800,000 in 2018.

Listing of “what matters”

Speaking at a time when raw milk prices had reached their highest level in five years, Lange said that “what matters” is “not milk price” but rather “its cost of production,” not feed cost but rather the income over feed cost, not a milking herd's cull rate or heifer numbers but rather the net herd replacement cost, and not milk production but the energy corrected milk production equivalent.

Among many numbers and “margin management measures” that could be analyzed in dairy production, Lange said that what matters most is the average longevity of dairy cows. He noted that the average on-farm lifetime span for Holstein cows today is six months less than it was 40 years ago.

Timetable for profits

With that being the case, “stop talking genetics” and give more attention to keeping dairy cows healthy and productive for longer periods, Lange advised. “A dairy cow is not profitable until midway to late in her third lactation, when she has produced 73,000 to 80,000 pounds of milk.”

“You are lenders until then,” Lange emphasized. “If a cow is gone before then, you have defaulted on a loan. The age at death is crucial.” He noted that deaths also forfeit the income from cull sales.

Lange used $1,700 as the average cost for raising a heifer until she enters the milking herd. “Each heifer is an expensive employee.” It's possible to buy springing heifers for less than $1,700, he observed.

To a question about having heifers contract raised outside of the state, Lange has “a mixed opinion.” He cited the risk of tuberculosis infections when animals from many sources are mingled along with some pinkeye outbreaks and a shortage of bedding during transportation.

Many operators are very happy with the results of contract raising of their heifers, Lange acknowledged. “The management varies. There's lots of heifer movement today. It's a shifting pattern.”

Heifer replacement numbers

Losing heifers before they have repaid what it cost to raise them increases the net herd replacement cost, Lange pointed out. He suggests acceptable limits of a 3% death or cull loss for heifers in the first 60 days of a lactation and of 5% for older cows.

Lange finds that too many heifers are being raised in many cases – often at 90% of the number of cows in the milking herd. Instead, he calculates the need for 788 heifers as an adequate replacement number for a herd of 1,000 cows with a 35% annual death and cull rate. His top client raises 68 heifers for every 100 milking cows, Lange reported. He also cited a client in Ohio who built a housing facility for his three plus lactation cows. “What a concept,” he remarked.

Strongest correction factors

Among some 60 correlations between net dairy farm income and management practice variables, Lange finds that the 21-day pregnancy rate rises to the top of the list. He said the ideal period between a calving and a new pregnancy is 100 to 110 days.

To achieve that would require less than 2.3 artificial insemination services on average, Lange stated. His top client has a breeding program which achieves pregnancy goals with an average of 1.7 services.

Energy-corrected milk

Lange has a target of a minimum of 6 pounds of combined butterfat and protein per cow per day. That could be achieved at 85 pounds of milk at 3.9% butterfat and 3.2% protein or with 91 pounds of milk at 3.6% butterfat and 3% protein.

Energy-corrected milk is also a key variable, Lange continued. It is a formula which compares the market value of milk based on 3.5% butterfat and 3.2% protein. Higher percentages of those components mean that a lower volume of milk could provide more income and net margin than a higher volume.

Based on what the federal milk market order or individual processor prices for protein are, some dairy farmers could afford to boost the protein in the ration, Lange indicated. In that case, it would be worth it to spend an extra 19 cents per cow per day to increase the protein by .1%, he said.

Role of nutrition

Striving for a better energy-corrected milk rating is often a function of nutrition, Lange indicated. He mentioned a herd of 5,000 cows which jumped from 5.85 to 6.45 pounds of combined butterfat and protein daily per cow on average within one month after a nutrition change and an operator in Michigan who switched from Holstein to Jersey cows for that reason.

The most profitable herds also ship milk with a somatic cell count (SCC) of under 200,000 per milliliter, Lange pointed out. For both components, such as the spread between butterfat and protein, and SCC, match the management with what the milk buyer/processor wants, he advised.

“What matters is what you get for what you pay for. It's not what the milk price is or the feed cost is,” Lange repeated. “Share your milk check value with your nutritionist.”

Four top performing herds in Wisconsin, Michigan, and Minnesota that Lange tracked in 2018 all posted income over feed costs (IOFC) returns of $8.67 to $9.01 per hundred of energy-corrected milk. He said they were all over $10 for their IOFC in 2019. All have a total daily per cow average of more than 6 pounds of combined butterfat and protein.

Immediate challenges

Addressing milk income over feed cost could prove to be “a doozy” in the coming months, Lange admitted. Based on feed quality in many cases and quantity in others, he estimated a chance of daily decreases in milk per cow of as much as 3 pounds well into 2020. If necessary, buy corn silage, haylage, and other feeds before prices rise, he advised.

On a related point, Lange called attention to the loss of forages in storage and handling, often referred to as “shrink.” He cited averages of 10% but noted the range between farms runs from 3 to 21%.

In a mostly post-BST (bovine somatotropin) era, cows will also be eating more, making the pushing up of feed in free-stall alleys more important than ever – best done with automatic units, Lange stressed. He also mentioned limited access to water and inadequate ventilation in facilities as hindrances to milk production.

Cash flow dispersal

At times of improved cash flow, pay outstanding bills first, check for an updated operating line of credit, make pre-payments to take advantage of early purchase offers, and tend to deferred maintenance, Lange advised. He noted that some dairy farmers have contracted for corn gluten, cottonseed, soybean meal, and other commodities as far ahead as the third quarter of 2020.

“Costs are not costs. Costs are investments,” Lange concluded. “It's not about doing everything right. It's about doing simple things consistently well.”

Quoting Dave Whitlock, the Southeast regional manager for Select Sires, Lange says “the difference between an average farm and a good farm and the difference between a good farm and a great farm is execution of the plan. Execute every day.”

Lange can be reached by phone at 715-977-2669 or by e-mail to Matt.Lange@Compeer.com.