Feed and Nutrient Costs in Dairy Production: Where are we now?

Dr. Normand St-Pierre, Dairy Extension Specialist, The Ohio State University

Rain, rain, rain…  When is it ‘gonna’ stop?  As I write this column, Ohio is still getting more than its share of rain.  The Southwest is under drought, while the Eastern Cornbelt is flooding.  On an average, we are OK…  Considering that the corn carry-over is already projected to be very low at the end of this marketing year (i.e., in September), we should expect additional gyrations in the feed markets.  Although we might not like to hear this, we must remember that it is the fluctuation in market prices that create buying opportunities.  Let’s look at what these are right now in the middle of April.

Feed Ingredients

As usual in this column, we used the Sesame program to compare the different commodities available in Ohio based on the value of their nutrients.  The nutrients that we used were: net energy for lactation (NEL), metabolizable protein (MP), effective neutral detergent fiber (eNDF), and non-effective NDF (neNDF).  Over the years, we have found that these 4 nutrients alone explain over 98% of the difference in prices across commodities.  The prices used were for Central Ohio on a farm delivered TTL (tractor-trailer-load) basis.  Your own local prices might be different but probably not by very much.  The results obtained for all feeds in our analysis are reported in Table 1. This table summarizes the information in regards to the prices used for the analysis (i.e., the market prices), the differences between market prices and the calculated values (what we call ‘Deviation’), and a categorization of feed ingredients into 3 categories: bargains, at break-even, or over-priced.

How can you make use of this information?  First, you should verify that the majority of the feeds that you use are either underpriced (o symbol in the class column in Table 1), or close to their break-even prices.  Your nutritionist might have to use a few over-priced feeds to balance the rations in your herd, but these should be few and they should have a nutritional justification.

Some readers have asked me where I get my corn silage prices, or more specifically, why doesn’t the price of corn silage change from month to month.  The corn silage price that I use is calculated from the prevailing cash corn price at the time of silage harvesting.  This is when the decision is really made whether to let the corn fully mature to grain or to harvest the crop as silage.  Once the cropped is chopped and ensiled, it is be pretty hard to reverse one’s decision and get the corn kernels out of the silage to market the crop as corn grain.  Very little corn silage is traded in Ohio, so we can’t rely on good market information to price the silage.  It is important to note that all feeds are priced ‘at the mixer wagon’.  So for corn silage, the cost is not just the value of the corn standing in the field but also consists of the harvesting and storage costs, including the inevitable dry matter losses during storage.

Table 1.  Market prices, deviations from break-even values, and categorization of feed ingredients used in dairy, central Ohio market, week of April 11, 2011.1
Table 1

1Deviation represents the difference between the market price and the calculated value of a feedstuff.  For example, a deviation of $28/ton for citrus pulp means that the market price is $28/ton above the value of the nutrients in citrus pulp.  The Class column categorizes ingredients as follow:  x = ingredient is significantly over-priced, o = ingredient is significantly under-priced (i.e., a bargain), and a blank entry in the Class column means that the ingredient is priced about for what it is worth.

Price of Nutrients

As explained numerous times before, a nice byproduct of this analysis is that the implicit prices of the economically important nutrients are estimated.  Results for the middle of April are shown in Table 2.  The cost of dietary energy, which is expressed as net energy for lactation, is currently very high, approaching a 175% increase over the six-year rolling average for this nutrient.  Making good use of the energy contained in feeds is economically very important.  Avoid things that can negatively impact feed digestibility, such as acidosis, corn grain that is too coarsely ground, or forage mean particle size too small due to long mixing time, etc.  The current cost per unit of usable protein, the metabolizable protein, and that of the two fiber components are close to their historical ranges.  So, it is the high cost of dietary energy that makes current feed costs so high.

Table 2.  Estimated cost per unit of nutrients, central Ohio, week of April 11, 2011.
Table 2

Returns to Dairy Producers: the Cow-Jones Index

Using a ‘standard’ cow producing milk at a level that approximates the national average, it is easy to calculate the cost of feeding this cow given the nutrient costs on a given month.  This ‘standard’ cow is a 1,500 lb cow producing 65 lb of milk per day at 3.6% fat and 3.0% protein.  This cow requires 31.3 Mcal/day of net energy, 4.64 lb/day of metabolizable protein, 10.2 lbs/day of effective NDF, and 3.4 lb/day of non-effective NDF.  The total daily cost to supply these nutrients during the month of March was $5.86/cow/day, or $9.02/cwt of milk.  Consequently, the average cost of the ration dry matter is estimated at 12.1 ¢/lb.  Using Federal Order component prices for March, this cow generates $12.77/day of gross milk revenues, which equates to $19.66/cwt.  The difference between the gross revenues per cwt and nutrient costs per cwt constitutes an index of milk revenues minus feeding costs.  We have named this index the Cow-Jones Index as it mimics the information of the Dow-Jones Index for the U.S. stock market.  In March, the Cow-Jones Index for Ohio stood at $10.64/cwt.  A Cow-Jones of ~ $8/cwt indicates that milk is produced at break-even, whereas a Cow-Jones exceeding $9/cwt is indicative of profitability in the dairy sector.  We have monitored this index since 1998.  Results since January 2005 are shown in Figure 1.  Although the index was much better in 2010 than in 2009, it still was not a profitable year.  The substantial increases that we have seen in milk prices since January resulted in a break-even month in February and a profitable month in March.  The cash market for cheese has dropped in the last few weeks and most dairy economists expect a softening of the Class III milk in April.  One should note that March 2011 feeding costs ($9.02/cwt of milk for the lactating cows) in addition to the other costs of production ($8.00/cwt) result in a break-even milk price of about $17.00/cwt.  It was not that long ago, in 2006 to be precise, that the break-even price was calculated at $12.76/cwt.  In those days, a $15/cwt milk price was generating net returns that averaged about $2.25/cwt.  Nowadays, the average dairy producer would be loosing about $2.00/cwt if milk prices were to drop to $15/cwt.  What a difference can less than 5 years make!

Figure 1

Figure 1. The Cow-Jones Index from January 2005 through March 2011.  A Cow-Jones under $8/cwt (the red zone) indicates that milk is produced at less than average break-even costs of production.  A Cow-Jones exceeding $9/cwt (the green zone) indicates that the average production is occurring under profitable conditions.  The yellow zone is one of transition.