Monitor feed margin to lift profit

Dairy farmers can monitor feed margin to keep their farm business on track to profitability


Business Management
TRACKING COSTS: The feed margin is calculated by taking the costs of feed to produce milk (grown feed and purchased feed) from the income received for the milk.

TRACKING COSTS: The feed margin is calculated by taking the costs of feed to produce milk (grown feed and purchased feed) from the income received for the milk.

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Dairy farmers can use a simple report to monitor their feed margin twice a month to ensure their business is on track to generate a profit at the end of the season.

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There is a constant, and important, debate in dairy farming around the "feed margin". I have just watched an argument on Twitter a Friesian guy boasting that his cows were producing 2.5 kilograms of milk solids per cow per day, and another guy saying "big deal, Friesians need twice the food of a Jersey". In recent publications, a farmer milking once-per-day is 'doing well', while cows up north are producing 780kg MS per cow per year.

There are many statements made about milk, grain, and grass, in this magazine, at discussion groups, at focus farms, in local stores. These discussions often claim successful performance but without a robust analysis we can't really know who is making money.

High production, measured by MS/cow or MS/ha, does not necessarily make more money. It may be costing too much for the extra milk.

Likewise, reducing cost does not necessarily make more money. Cutting the feed costs may lose too much milk.

At its simplest level, farm performance is the amount of money left over, measured simply as "$ profit per farm". The farm must make a profit, or create a margin. And, of course, that profit must be sustainable, meaning, in the chase for money, the environment, the people, and the cows, are not negatively affected.

But how do farmers know if they are really making money, and more to the point, how do they know what to change to make more? The Profit and Loss statement in a tax return is not a great tool because it is designed to manage tax, and it comes way too late, just once per year. Data captured to do the GST arrives more often, but is often of limited value.

Having a pile of cash in the bank on any day is not necessarily a good assessment of money making, because the farm may have just sold a heap of choppers, and still have plenty of bills to pay. "End-of-year" analysis is far too late to fix things to ensure money is being made throughout the year.

To achieve profit, a lot of costs need to be kept under control: e.g. overheads (rates, repairs and maintenance, accountant, admin, etc), herd costs (health, breeding, mating), milking costs, rearing replacements, labour and debt.

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But it is the "feed margin" that makes the fundamental contribution to farm profit. The feed margin is calculated by taking the costs of feed to produce milk (grown feed and purchased feed), from the income received for the milk.

The feed margin must be positive and large to have any hope of paying all the other costs. To know if the business is performing well, farmers need to be aware of their feed margin right now. The feed margin involves huge money and needs managing all the time in constantly changing circumstances, if the farmer is to maintain strong performance throughout the season.

True, it is a partial analysis of whole farm performance, and therefore not perfect, but no analysis is perfect. An assessment of the current feed margin, including the indicators that drive that feed margin, can pinpoint issues a farmer might be able to tweak to improve farm performance.

The Macalister Demonstration Farm is always looking for ways to report on the performance of the farm in such a way that others can get better value from the information published.

"Feeding your herd is such an important driver to making money that we are focusing on reporting on the feeding performance through the feed margin that's the link between feeding costs and milk income," MDF chairman Neil Baker said.

"We acknowledge that it doesn't tell the full story of farm performance that comes with the profit and loss statement at the end of the year.

"But what we are looking for is a set of performance indicators that can be delivered every fortnight that help us analyse our feeding decisions and show us the impact they have on feeding profitability. That way we can respond to changes in feed margin and make necessary tweaks in an informed way. Of course, this relies on good quality data, collected regularly, so we can compare month to month and year to year."

The fortnightly MDF Feed Margin report (shown in the gallery above) is an example of a report that uses meaningful indicators to tell the MDF managers how they are going and lets them investigate how they might do better. It tells them:

How they are performing now, compared to last fortnight, compared to last month, compared to this time last year, and how it is performing compared to another MID farm. (Look at the columns in the report.)

What the main drivers, or inputs, that affect that feed margin performance are. (Look at the rows in the report.)

Let's break down the table shown in parts in the gallery above that appeared in the MDF report, on AusdairyL, just before Christmas 2018.

It looks like a lot of numbers but it's pretty simple it is worked through. Most farmer will have, or will be able to get, most of this information for their farm already.

Stocking rate

The stocking rate (line 5) is an important setting. Ideally it should be set with the aim of achieving a certain amount of grass per cow, but other non-feed issues (e.g. how many cows is the farmer prepared to milk and, in the longer term, are they growing cow numbers), make it difficult to exactly follow the grass per cow guideline to determine stocking rate.

Stocking rate is simply the number of cows in the herd in any reporting period, over the number of hectares of grazing area. The MDF stocking rate is reasonably steady, making it easy for comparisons of farm performance through the year, and with previous years.

Grass

The block from row 6 to 17 tells the farmer about the grass: the grass-growing input quantities, the grass consumption per hectare, and an estimation of grass price, based on the cash cost of all the inputs (fertiliser, water, topping and renovation) to grow it.

The cost of irrigation water is made up of the cost of water used, and the water overhead costs, spread over the irrigation season.

Fertiliser costs are simply calculated as the number of kilograms spread at the cost per kilogram. Pasture renovation costs for the farm give a cost per hectare. Topping is an estimate, based on using a contractor.

Estimated grass consumption per hectare, probably the most important driver of margin, comes from the industry standard back-calculation.

All of this generates a price for the pasture consumed. Grass price is usually quite low, making it easy to get a margin from it. But, sometimes, when grass growing inputs quantities are high, and/or expensive, and not much grass is consumed, the grass price gets quite high. Grass price is rarely higher than concentrate price, but it does need watching.

Grass consumed per cow is a useful indicator. If grass per cow is high, a high margin is almost certain, and vice versa.

The report shows that the MDF's grass-growing input levels and costs are pretty stable. The report reveals the impact of topping on the cost of grass, an increase of more than $20/tonne DM. However, the expectation is that, in the next couple of rotations, higher quality and higher utilisation of grass will still generate a higher margin.

Supplements

The next seven lines (18-24) in the table look at the supplements being fed: the quantity, the price, and an estimate of supplement wastage. All feeds are wasted to some extent, which needs to be allowed for, and that waste reduces feed margin.

Supplement prices have an important impact on the feed margin. But this doesn't necessarily mean that feeding a supplement, at a higher price, or feeding more of it, does not get more margin.

It is difficult to know the marginal milk response from an extra kilogram of supplement, but by monitoring feed margin over time, a farmer at least knows the average response being achieved.

Feed intake and efficiency

Line 26 shows total feed intake per cow. Intake level is a major driver of feed efficiency or how well the feed is used. This is because higher intake leaves more for milk production, after the first 5-6kg of food is used for the cow's maintenance requirement.

Feed efficiency is shown in line 25. If the cow does not get much milk from feed, because of the proportion lost to maintenance, the feed margin is reduced.

Lines 27 to 29 show the energy, protein and fibre levels in the whole diet. Feed efficiency will be lower, and margin lower, if these are not in balance.

Production

The next block, from lines 30 to 36, shows the detail of what the cow is producing (litres, and fat and protein composition), and any change in body condition. These are important to know because they give some idea what the cow is doing, i.e. is the cow using body fat for milk, or vice versa, is some food being used to build body fat?

The fat test gives some idea of ration balance.

Income and costs

The milk income is broken into the money that the protein kg, and the fat kg, are actually returning, (considering that protein is paid double fat), and shows the amount of money each cow has deducted because of the litres it produces Lines 37-41. It always surprises me that each cow is charged about 60 cents per day for milk volume produced.

Line 42 shows the milk income per cow (which is milk price, times the quantity of milk being produced), and Line 43 shows the total of the feed costs.

Lines 44 and 45 show the Margin Over All Feed, including grass, and not just supplements. Including the cost of grass in the calculation of feed costs, and therefore in the feed margin, gives a real value to that grass, focuses on the feed input that generates the best margin.

Farmers need pay whatever is asked for supplements, but it is within their control to manipulate the quantity of grass they produce, and the cost of producing it. Finally, to Line 46: this is how much money the farm is making after all feed costs (all grass growing, and all purchased feed costs) are subtracted from the milk income. This is the whole farm feed margin, $1644 per day.

The feed margin pays all the non-feed costs for the farm labour, repairs, rates, insurances, debt and so on, hopefully leaving some for profit. Is it enough? The farmer will have to look to their whole farm budget to work that out.

Comparison

The MDF feed margin table includes indicators to enable comparison with the performance of other farms: Margin per Cow (farm margin over the numbers of cows) and Margin per Hectare (farm margin over the number of hectares).

Both are important and meaningful indicators, because both the herd of cows and the land are the two major investments and the on-going non-feed costs needed to get the feed margin.

Look at what the MDF report tells about two different farms. The column on the far right is for another farm in the district it has been chosen because it is distinctly different in feeding performance to the MDF.

It's Farm Margin Over All Feed (MOAF)/day in Line 46 ($1023) is lower than the MDF's ($1644), partly because it is milking fewer cows.

By comparing the Margin per Hectare (Line 45) and Margin per Cow (Line 44), the feeding performance of one farm against the other can be compared.

In this case, the MDF is doing better per hectare ($22.84 compared to $15.04/ha/day) and per cow ($5.14 compared to $3.41/cow/day).

What drives the difference performance between these two farms?

Firstly, the cost of feed per cow (grown grass and supplements) on the other farm is much less than the MDF. If performance was compared on this measure, the other farm would win hands down.

But clearly lower costs in this case are not for the better. The MDF has a higher grass consumption/ha (50kg DM/ha/day compared with 40kg DM/ha/day). Stocking rates are the same, so MDF has a higher grass intake per cow (11.2 to 9.1 kg DM/cow/day).

So, is there an opportunity for the other farm to spend more on water and nitrogen and increase grass intake? Maybe more careful irrigation, less waterlogging, more topping, would get more grass consumed. Maybe increasing grass consumption/ha needs a higher stocking rate, but that would probably reduce grass per cow.

The fibre level of the whole diet on both farms are similar, but the MDF cow intake is much higher (16.9 compared to 13.4kg). So, the other farm has a strong opportunity to get cow intake up, get feed efficiency up, to get a higher margin. This could be achieved by growing more grass and/or feeding more grain.

Hopefully, the cows on the other farm could actually eat the extra feed at this point in their lactation.

This is a snapshot of a 10-day period in December and this margin will move up and down as things change.

Some might look at the different margin between the two farms, and say, "does it matter much?". A difference of $7.80/ha (if it could be maintained) on a 68ha milking area, over a 300-day lactation, is worth $159,000 for the year a significant amount.

The other farmer can use the information in this report to work their way backwards through the figures to see where the differences are, and look for clues to lift their own farm's performance.

Of course, the MDF can do the same to interrogate the data of a higher performing farm, and use this to set some "stretch targets" to lift performance even further.

The figures in the MDF report are real and provide a good basis to think through the farm's feed margin performance. The figures do not prove that the MDF input settings are optimum, not by a long shot.

But they are saying: "This is the margin we are getting in today's circumstances, and this is how we are getting that margin".

Farmers can ask themselves: What margin are you getting today, and what is the level of your inputs? We would all learn from you, if we compared in the same way with these indicators?

The three indicators highlighted bright yellow in the table the actual farm margin in dollars, the grass consumption per hectare, and the milk per cow are the big indicators. The latter two are the essential efficiencies.

Watch feed margin all the time. Getting good weekly feed margins means the yearly profit has more chance of being achieved.

Meaningful indicators tell a meaningful story. Good decisions come with good data.

The industry needs a standard and agreed "method" to sensibly assess, not argue about, the feed margin.

It would guide extension to help us get to the bottom of all the talking about farm feeding performance, and, best of all, help us all make a dollar. D

*Frank Tyndall has dairy farmed, worked in dairy extension, and as a farm consultant. He been analysing farm and feeding performance for 35 years. He has developed the Farm Tracker to help him see what grass growing, feeding, and milk production performance is actually happening on farms, every week. Contact him on mobile 0409 940 782 or email ftyndall@ozemail.com.au.

This story first appeared on Australian Dairyfarmer

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