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Managing Income Over Feed Costs


The milk cow feed costs have typically represented a large percentage of the total cost of producing milk and can range between 30 to 70 percent of the milk income. The revenue left over after accounting for the lactating cow feed costs is what pays the other expenses. The same market unpredictability affecting milk and feed prices can also affect fertilizer, seed, and fuel costs. To remain profitable, producers can monitor and make decisions based on their herd’s “income over feed costs” (IOFC). This enables producers to make more informed decisions about feed purchases, when to lock in milk or feed prices, or adjust the ration program to accommodate market uncertainty.

Income over feed costs is a gross margin concept. It takes the lactating cow, values her daily output (milk), and then subtracts off the highest variable cost, which is her feed. What remains is gross income, which can be used to pay for dry cow and heifer feed, dairy directs, overheads, owner withdrawals and loan payments.

Income over feed costs is measured in dollars per lactating cow per day. The following equation can be used:

IOFC ($/cow/day) = Pmilk x (DAMP/100) – DFC

Pmilk is the gross milk price ($/cwt), DAMP is “daily average milk production” (lbs./cow/day), and DFC is “daily feed costs” ($/cow/day). DFC is the daily cost of feedstuffs required to produce the amount of milk reflected in DAMP. Essentially, the gross milk price is being converted from dollars per cwt to dollars per pound of milk produced, and then the cost of producing that milk is subtracted. For example:

$19.59/cwt (Pmilk) x 80 lbs./cow/day (DAMP)/100 – $5.90 feed cost/cow/ day (DFC) = $9.77 IOFC/cow/day

There are two approaches to monitoring IOFC. The first approach is to compare a herd’s IOFC to a benchmark based on the value of milk output (milk production and price). This approach uses market prices for feed. The second approach is to calculate the herd’s cash flow to determine the breakeven IOFC value, which uses the farm’s actual costs to produce home-raised feeds. This has more meaning as it reflects what the dairy operation needs to make in IOFC to pay bills and remain profitable.

Calculating Feed Cost per Lactating Cow per Day

Dairy rations consist of two basic components: home-raised and purchased feeds. These can be further divided into forages (hay, corn silage, and hay-crop forage), concentrates (cereal grains, protein sources, minerals, and vitamins), and by-products (distiller’s grains, soy hulls, and whole cottonseed). Many combinations of feedstuffs can be used to develop balanced rations. The ideal approach to calculate daily feed costs per lactating cow is using the batch feed weights, the number of cows fed, and their respective prices. Feed refusals are not excluded from the calculation because it costs money to feed the lactating cow regardless of the feed consumed.

The lactating cow ration summary illustrates how both market value for home-raised forages and grains and the cost value are used (Figure 1a). Both pieces of information are valuable and provide important management information to the dairy producer. IOFC can be determined using market and cost-based feed cost per cow per day. Figure 1b shows the amounts of total forages and grains fed to the lactating cows per day along with their total costs. This is useful information to not only monitor costs but feed inventory.

Information needed is as follows:

  • Batch weight of ingredients fed to the lactating herd or the various milking cow groups if the herd is fed a total mixed ration (TMR)
  • Individual ingredient amounts per cow per day for component-fed herds; break the herd into number of cows representing average milk production and number of cows representing peak milk production (more than 20 pounds over average milk production)
  • Feed prices for all ingredients (forages, grain mixes, and commodities) fed to lactating cows.

Figure 1a. Feed prices for ALL ingredients (forages, grain mixes, and commodities) fed to lactating cows.

Figure 1b. Feed cost per cow per day based on market prices and the farm’s cost value.

Forages

Most producers raise their own forages. There are times when shortages occur and purchased forage is needed to balance the ration. The most difficult part regarding forages is determining an accurate price. There are two methods to assign a price to home-raised forages. A price is assigned to the home-raised forage that includes seed, fertilizer, chemicals, custom hire, rent and overheads or the market price of the forage if it were sold today. The Department of Animal Science at Penn State maintains a monthly feed price list on all ingredients, including forages. If the producer already has an accurate price for their home-raised forages, that price can be used in addition to the market price. Table 1 lists prices for home-raised feeds based on a profitability ranking (FINPACK®). Price per ton is heavily influenced by the amount harvested.

Table 1. Forage crop enterprise analysis combined for years 2016 and 2017 and sorted by return over labor and management.1

  Low profit Medium profit High profit
Corn silage      
Number of farms 16 17 17
Acres, average 212 306 152
Yield per acre (as-fed tons) 15.25 19.83 21.6
Cost per ton, $ 40.51 31.43 22.58
Cost per acre, $ 617.78 623.31 487.65
Alfalfa haylage      
Number of farms 8 9 9
Acres, average 112 74 91
Yield per acre (as-fed tons) 6.89 11.9 14.38
Cost per ton, $ 78.81 51.35 35.5
Cost per acre, $ 542.64 611.52 510.4
Small grain silage      
Number of farms 13 13 14
Acres, average 176 184 270
Yield per acre (as-fed tons) 5.52 5.67 8.2
Cost per ton, $ 61.6 40.12 33.85
Cost per acre, $ 340.3 227.45 277.56
Grass hay      
Number of farms 11 12 12
Acres, average 32 106 47
Yield per acre (as-fed tons) 2.1 2.84 3.92
Cost per ton, $ 231.95 111.87 64.45
Cost per acre, $ 487.53 317.39 252.33
Corn grain      
Number of farms 11 12 13
Acres, average 76 240 126
Yield per acre (as-fed bushels) 104.65 200.06 192.33
Cost per bushel, $ 4.62 3.18 2.37
Cost per acre, $ 483.93 635.42 456.38
Soybeans      
Number of farms 10 10 11
Acres, average 89 152 99
Yield per acre (as-fed bushels) 42.37 56.93 57.93
Cost per bushel, $ 9.25 7.46 4.48
Cost per acre, $ 391.88 424.99 259.76

1Based on 25 PA farms participating in two-year (2016-2017) Crops to Cow project (Ishler, Goodling, & Beck, 2018), and analyzed with RankEm software (Minnesota, 2018b).

Concentrates and By-Product Feeds

Much variation exists on farms between home-raised and purchased feeds. The only price the producer uses is the actual purchase price for any grain, by-product, grain mix, and/or mineral vitamin mix. In the event producers forward contract on a feedstuff, they should use the contracted price.

Creating a Benchmark for Success

One approach for using IOFC is to compare against a benchmark. A high IOFC benchmark means that given the herd’s daily average milk production, the feed cost per cow is relatively low and gross earnings are relatively high. An example would be feed costs accounting for 40 percent or less of the milk income. A low IOFC benchmark means the feed cost per cow is too high and gross earnings are relatively low, which would be feed costs accounting for 60 percent or greater of the milk income. Milk price will vary from month to month and from farm to farm due to the prevalence of component pricing and milk quality premiums in each region. This will affect the level of IOFC.

The following formulas are used to define the low and high IOFC benchmark:

Low IOFC Benchmark = Pmilk x (DAMP/100) – 0.60 * DAMP * Pmilk/100

High IOFC Benchmark = Pmilk x (DAMP/100) – 0.40 * DAMP * Pmilk/100

These benchmarks use the farm’s actual daily average milk production calculated from the bulk tank. In addition, feed costs are measured as a percent of daily average milk production. In Figures 2a and 2b, the example herd is examined based on the market price of feeds and their on-farm costs. On a market basis the dairy’s IOFC falls between the high and low range, which is typical of many farms (Figure 2a). Using the dairy’s actual costs (Figure 2b) the farm is doing a very good job with IOFC based on current milk production and feed costs. The IOFC exceeds the high range of the benchmark, which is good. If a farm trends continuously toward the low end that may represent some opportunities for cost control. However, the key number missing from this benchmark is the breakeven IOFC for the dairy.

Figure 2a. Example calculation of IOFC using market feed costs and production.

Figure 2b. Example calculation of IOFC using actual farm costs and production.

Interpreting Results

It is recommended to track IOFC over time and to compare the farm’s performance to a benchmark. This information can be used to evaluate the farm’s historical performance and for developing goals. This information provides a guide of how efficiently the feeding program is working for the milk being produced. Producers can use this information to evaluate seasonality and develop quarterly and/or monthly budgets.

There will be times when the milk price is extremely low and regardless of how well cows are performing and how reasonable the feed prices, IOFC will fall at or below the low range. An example year was 2009 when milk prices averaged between $13 to $14/cwt. It was difficult to maintain a competitive IOFC. However, in more typical years when milk price is reasonable, producers should examine the nutrition and feeding management of the dairy operation when IOFC is out of line or below the breakeven IOFC. Some areas to investigate are dry matter intake efficiency, level of concentrate feeding, and the cropping enterprise. If home-raised feeds are not competitive, either because of quality or quantity, then whole farm profitability may be compromised. Conversely, if IOFC is consistently at or above the high range, the operation is doing a good job of converting feed to milk.

Figure 3 illustrates graphically how the example farm has been performing in 2018 and 2019. The dairy’s IOFC both on a market and cost basis are compared to the breakeven IOFC for both years. There are months when the IOFC exceeds the breakeven and other months when there is a deficit. This observation is common when accounting for monthly variation for milk price, milk production and feed cost. Monitoring IOFC monthly against the breakeven IOFC is an opportunity to implement possible changes to correct a problem versus overlooking it for months with continued financial loss. Milk income and feed costs are two areas that can be controlled by the producer.

Figure 3. Income over feed costs compared to benchmarks and to the farm’s breakeven.

Market Value

The market value of forages is derived from the monthly Penn State Feed Price List and reflects a compilation of current market prices around Pennsylvania. Table 2 lists the market prices for some select forages and grains from 2015 through 2020. This price includes the transportation charges associated with the sale of forages and grains and includes the opportunity cost that producers could capture through the sale of these feeds instead of marketing milk. This value is useful for comparing the farm to benchmarks and determining if feed costs appear high or low relative to other dairy operations. Standardizing the value of home-raised feeds means benchmarks will be more consistent across dairy operations.

Table 2. Market prices for select forages and grains from 2015 through 2020.

Ingredient 2015 average market prices ($/ton) 2016 average market prices ($/ton) 2017 average market prices ($/ton) 2018 average market prices ($/ton) 2019 average market prices ($/ton) 2020 average market prices ($/ton)
Corn silage 57.89 48.22 40.54 39.07 51.98 59.95
Grass hay 210.50 175.33 147.42 142.08 189.00 218.00
Grass silage 91.22 75.98 63.88 61.57 81.90 94.47
Legume hay 226.83 172.58 162.50 188.33 272.50 277.71
Legume silage 133.42 86.29 81.25 94.17 136.25 138.85
Mixed, mainly grass hay 210.50 175.33 147.42 142.08 189.00 218.00
Mixed, mainly grass silage 93.56 77.93 65.52 63.15 84.00 96.89
Mixed, mainly legume hay 214.25 179.04 164.13 164.92 204.33 241.75
Mixed, mainly legume silage 102.36 85.54 78.42 78.79 97.63 115.50
Corn, ear, high moisture 91.11 92.26 97.28 93.58 104.13 101.48
Corn, ear, dry 114.88 113.83 122.94 117.97 131.32 127.95
Corn, shelled 146.27 147.97 154.73 148.63 165.47 161.18
Corn, shelled, high moisture 123.67 125.10 130.81 125.66 139.90 136.27
Soybeans, roasted 386.83 390.42 387.18 373.33 349.85 373.53
Soybeans, raw 313.31 316.81 313.58 299.75 276.25 299.92

Cash Flow

IOFC can be used to assess the viability of future cash flow plans during an upcoming month or year. This metric allows the producer to make management adjustments when expected cash flow looks tight and provides information to evaluate forward-pricing opportunities to determine when pricing milk and feed would be beneficial to the farm’s cash flow.

Figures 4a and 4b show the difference in IOFC breakeven between the dairy enterprise and the whole farm. Obtaining these numbers involves more details to collect data to separate the dairy enterprise from the whole farm. If a farm has a substantial amount of other income, such as crop sales, then there can be a big difference between the breakeven IOFC for the dairy and whole farm.

Using the case farm, the dairy enterprise shows a positive cash flow of $1.95 per cow per day or $2.61 per hundredweight per day using the farm’s actual costs. The breakeven IOFC is $7.41 per cow for the dairy enterprise.

Figure 4a. Comparison of on-farm breakeven income over feed costs (IOFC) compared to current market and cash flow IOFC – Dairy Enterprise.

Figure 4b. Comparison of on-farm breakeven income over feed costs (IOFC) compared to current market and cash flow IOFC – Whole Farm

Examining the whole farm, the breakeven IOFC is $7.07 per cow and is showing a substantial gain per cow and per hundredweight compared to the dairy enterprise. If other income and expenses are reasonable, it is not unusual for the whole farm to be substantially more profitable than the dairy enterprise. Sometimes the dairy can show a loss while the whole farm remains positive. In the case farm, the producer is maintaining a positive cash flow for the dairy and whole farm, which is very good. Evaluating IOFC for both helps to identify the bottlenecks to a positive cash flow. If the dairy must consistently rely on other income to show a positive cash flow, then the sustainability of the dairy enterprise may be at risk.

For feed costs, the cost value is more appropriate than the market value because it reflects the accrual-based expenditures incurred to produce a forage or grain crop. The cost value should reflect the amount producers spend to produce the crop on the farm. It should be lower than the market value of the forage or grain since transportation costs are not included. If the cost value exceeds the market value of forages or grains, then crop production is inefficient with either low yields or high crop production costs. When crops can be produced well below the market price producers can operate a highly profitable dairy.

Establishing a cost value requires producers to conduct enterprise budgeting. This can be challenging when allocating expenses between the crop and dairy enterprises. Accounting systems typically do not make this easy. Expenses that should be separated between the dairy and crop enterprise include repairs, labor, and fuel. Figure 5a illustrates a simplistic approach for calculating the breakeven for the dairy enterprise. To determine the cost of production for the cropping enterprise will involve a more detailed approach using tools available from Penn State Extension or using FINPACK®.

Figure 5a. Comparing breakeven cash flow, IOFC goal and maximum daily feed cost per cow using standard factors versus actual farm data.

Determining Breakeven Cash Flow

The simple first step is to calculate the breakeven IOFC on an annual basis at the start of the year to establish the big-picture overview. This would be for the whole farm. Monitor IOFC monthly, using information from the milk checks and compare it to the cash flow required during the upcoming month. Frequent review of IOFC will alert managers to the need for adjustments as market conditions change throughout the year. When summarized on an annual basis, the IOFC calculation provides a measure of the feasibility of the whole farm cash flow for the coming year and assesses the amount of risk associated with the projected plan.

To calculate the breakeven IOFC based on cash flow, producers need to calculate their cashflow requirement for a future time. Figure 5a shows the manual calculations for a whole-farm cash flow projected on an annual basis for 2020. It uses actual farm data as well as standard factors for the user who has not completed the more extensive approach. Figure 5a shows the comparison between using assumptions versus having the actual numbers. Figure 5b illustrates the process for determining some of the key factors for completing the breakeven IOFC.


Figure 5b. Projected annual cash flow plan for 2020

The process begins with cash inflow. Sources other than milk are included since cash-flow needs must be met with either milk income or income from crop or livestock sales. Inflow from sources other than milk is calculated and entered. The total amount of outflow planned for all direct and overhead costs is calculated. The total outflow includes owner withdrawals (family living) and a minimum ending balance. These must be deducted from the total. The total amount of all loan payments is entered to finish the calculation of the total outflow required for the farm.

IOFC includes only the cost of feed used for milking cows, since they are the animals generating income. The user needs to compute the dollars required for purchased cow feed and enter the cash crop expenses for seed, fertilizer, chemicals, crop custom hire and land rent. A percentage of the overheads used for crops should also be added to the direct crop expenses to compute this total cost.

Producers are not going to know these factors unless they complete the detailed projected annual cash flow. In Figure 5a, the factors assumed for manual calculations are the percent of total purchased feed going to the milk cows (85 percent); the percent overheads going to crop production (15 percent); and the percent of home-raised feeds going to the lactating cows (85 percent). These standard percentages are based on multiple years of cash flow plans on hundreds of dairy operations. However, as illustrated in Figure 5a, they can be significantly different than the actual farm numbers. If the farm is doing custom heifer raising or has substantial acreage beyond what is needed for the dairy herd (major crop sales), this can dramatically alter these standard percentages.

The projection shows the cash inflow that must be earned to cover all costs other than milk cow feed. The IOFC required can be translated into a monitoring tool for the farm cash flow. After entering the number of cows to be milking, the expected milk price, milk production, and the days in the calculation (month or year), the IOFC breakeven per day can be calculated. Subtracting the daily milk income from the income over feed cost breakeven identifies the maximum amount available to spend on feed cost per milk cow per day. The feed cost per cow per day maximum can be compared to the current feed cost to determine if the ration and milk production are providing sufficient income to cover the needs of the whole-farm cash flow. While it is not always possible to readily change feed costs or milk production, producers can identify when management interventions are needed using this approach. The information can be used to proactively look at forward-pricing opportunities based on the IOFC concept.

Using the case farm’s actual numbers (Figure 5b), Figures 6 and 7 provide some helpful information for future discussions or troubleshooting. Figure 6 shows the maximum feed price that can be supported to maintain a breakeven cash flow when milk production and milk price change. Markets are constantly in flux and production is rarely constant monthly. Heat stress, days in milk, reproductive performance, forage quality changes are a few production related areas that can affect milk production. This coupled with fluctuating milk prices can substantially alter the maximum feed price throughout the year. Figure 6 is a useful resource when communicating with the nutritionist or during profit team meetings.

Figure 6. Maximum feed cost per lactating cow per day with changes in milk price and production (Actual Costs from Figure 5b)

Figure 7 graphically identifies how the IOFC breakeven moves with milk production and milk price changes impacting cash flow and whether it is staying positive or moving in a negative direction. It is important to detect when cash flow is deficient so adjustments can be made quickly before losses accumulate. This data is also very useful for discussions with farm advisors.

Figure 7. Cash surplus or deficit per lactating cow per day with changes in milk price and production (Actual Costs from Figure 5b)

In summary, IOFC can be a valuable planning tool that can be used to establish benchmarks for profitability of the dairy operation. After planning a cash flow for the year, a producer can determine the breakeven IOFC needed to keep the operation viable. This measure can provide a means to benchmark the operation against other dairy farms and monitor the farm’s financial progress against the projected cashflow plan. IOFC can then be computed monthly and compared to this benchmark level. The milk check and actual monthly feed expenditures can be used to monitor IOFC. Corrective action can be taken if IOFC suddenly declines. In addition, the monthly calculations can be used in a hedging or forward contracting program to lock in an acceptable IOFC level. In this way a producer can protect a profit margin.

Source: Penn State Extension


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