Costs of Nutrients, Comparison of Feedstuff Prices, and the Current Dairy Situation

Dr. Normand St-Pierre, Dairy Extension Specialist, The Ohio State University (top of page) pdf file

The milk and feed markets have clearly gone up over the last few months – nobody has missed this.  With all these changes, however, it is too easy to loose track of what should be the overall feed strategy and where the average dairy producer stands in term of profitability.  First, let’s examine the feed markets in July and how feed prices translated into nutrient prices.

Nutrient Prices

As usual in this column, I used the software SESAME™ that we developed at Ohio State to price the important nutrients in dairy rations to estimate break-even prices of all major commodities traded in Ohio and to identify feedstuffs that currently are significantly underpriced.  Price estimates of net energy lactation (NE_L, $/Mcal), metabolizable protein (MP, $/lb – MP is the sum of the digestible microbial protein and digestible rumen-undegradable protein of a feed), non-effective NDF (ne-NDF, $/lb), and effective NDF (e-NDF, $/lb) are reported in Table 1. Compared to its historical average of about 10¢/Mcal, NE_L is now severely overpriced at 15.7¢/Mcal, although this figure is down from its peak of 17.4¢/Mcal in June.  For MP, its current price (27.6¢/lb) is just about at its 6-year average (28¢/lb).  Thus, we are currently in a period of very high dietary energy prices.  This is even more evident when one is reminded that less than 10 years ago, dietary energy (NE_L) was priced at about 5¢/Mcal.  Thus, the current dietary energy cost is substantially above its long-run average.  The cost of ne-NDF is currently discounted by the markets (i.e., feeds with a significant content of non effective NDF are price discounted), but the discount is at about its 6-year average.  Meanwhile, unit costs of e-NDF are historically high, being priced at about 3¢/lb over the 6-year average.  Homegrown forages can be inexpensive sources of this important nutrient.

Table 1.  Prices of dairy nutrients for Ohio dairy farms, mid-July 2011.

Forage Prices

I have received quite a few emails over the last few months inquiring about the method that we use to price forages in our Sesame analyses.  Alfalfa hay is priced using an average of alfalfa hay prices at the Farmerstown, Kidron, and Mount Hope auctions.  The price of corn silage is updated only once per year using the December futures as of the end of August.  The reason for a single annual update is simple.  For most of Ohio, the decision to harvest corn for silage or for grain is taken at the end of August.  Once the corn is chopped into silage, it is very difficult to convert it back to shelled corn…  The decision is thus made in mid to late August based on the farm forage requirements for the next 12 months but also based on the information on corn price available then – essentially the December corn futures.  Whatever happens to the corn grain markets afterward is irrelevant to the corn silage price.  In essence, the cows have bought the corn for silage in August; this crop no longer belongs to “the farm”.  Approximately 50% of the dry matter content of corn silage comes from the grain.  Using a little bit of algebra and assuming that the silage dry matter is 35%, then the value of the whole plant standing in the field can be calculated by simply multiplying the price of corn per bushel by 7.  To convert the value of the whole corn plant standing in the field into a price for the corn silage coming out of storage, one has to add harvesting costs ($5/ton), transportation ($3/ton), packing costs ($2/ton), inoculation and cover ($2/ton), and fermentation losses (a minimum of 10% of the value of the material put in a silo).  An example is probably helpful here.  Let’s say that the December corn futures is $6/bu as of the end of August.  Then the price of the corn silage at 35% DM during the next 12 months is:

            Corn price ($/bu) x 7               $6 x 7                        $42
            Harvesting costs ($/ton)                                             $4
            Transportation ($/ton)                                                $3
            Packing costs ($/ton)                                                 $2
            Inoculant & cover ($/ton)                                           $2
           
            Subtotal                                                                   $53

            Losses from ensiling:              10% of $53                $5.30

            TOTAL ($/ton)                                                      $58.30

Economic Value of Feeds

Results of the Sesame analysis for central Ohio in mid July are presented in Table 2. Detailed results for all 27 feed commodities are reported.  The lower and upper limits mark the 75% confidence range for the predicted (break-even) prices.  Feeds in the “Appraisal Set” were either deemed outliers (completely out of price), or had an unknown price (e.g., alfalfa hay of different qualities).  One must remember that Sesame compares all commodities at one point in time, mid July in our case.  Thus, the results do not imply that the bargain feeds are cheap on a historical basis.

Table 2.  Actual, breakeven (predicted) and 75% confidence limits of 27 feed commodities used on Ohio
dairy farms, mid-July 2011.

For convenience, Table 3 summarizes the economic classification of feeds according to their outcome in the Sesame analysis.

Table 3. Partitioning of feedstuffs, Ohio, mid-July 2011.

As usual, I must remind the readers that these results do not mean that you can formulate a balanced diet using only feeds in the “bargains” column.  Feeds in the “bargains” column offer savings opportunity and their usage should be maximized within the limits of a properly balanced diet.  In addition, prices within a commodity type can vary considerably because of quality differences as well as non-nutritional value added by some suppliers in the form of nutritional services, blending, terms of credit, etc.  In addition, there are reasons that a feed might be a very good fit in your feeding program while not appearing in the “bargains” column.  For example, molasses is often used to reduce ingredient separation in a TMR.  Molasses is also an excellent source of sugars.  Some nutritionists balance rations for sugars.  In those situations, molasses might in fact be a bargain.

Current Dairy Situation

We use the estimates of the nutrient costs to calculate the Cow-Jones Index (CJI), an index constructed here at Ohio State to measure the difference between milk revenues and the costs of providing the required nutrients at a production level of 65 lb/cow/day.  The Cow-Jones is conceptually very similar to income-over-feed costs, but it is calculated without making reference to any specific diet.  The reference cow used to calculate the Cow-Jones weighs 1500 lb and produces 65 lb of milk at 3.6% fat and 3.0% protein.  This cow has daily requirements of 31.3 Mcal of NE_L, 4.64 lb of MP, 10.15 lb of e-NDF, and 3.38 lb of ne-NDF.  The cost of supplying these nutritional requirements has fluctuated in the last 6 years.  Dietary energy is currently quite expensive, and it currently costs nearly $5.00/day to provide the NE_L required for the production of 65 lbs/day (Figure 1).  This means that, on an average, one has to pay $7.56 just to supply the NE_L required to produce a hundredweight of milk.

Figure 1.  Costs associated with the supply of 31.3 Mcal of NE_L and 4.64 lb of MP per day from January 2005 through July 2011.

The change in the Cow-Jones Index over time is shown in Figure 2.  We cannot calculate the CJI for July yet because the component prices will not be announced until August 5 by the Order administrator.  As of June 2011, the cost for supplying all the nutrients amounted to $10.63/cwt.  The milk income was $19.38/cwt.  The difference is the Cow-Jones Index and was equal to $8.74/cwt. The break-even level for the Cow-Jones Index is approximately $8.00/cwt.  A Cow-Jones in excess of $9.00/cwt is indicative of good profitability in the dairy industry.  Thus in the month of June, Ohio dairy producers were operating slightly above break-even levels.  Of course, some people did lock in favorable feed prices last fall, making their current margins better than what the CJI would indicate.  Still, the fact that the nutrient costs in June amounted to nearly 55% of the milk revenues is very troublesome and foreshadows a very difficult financial environment if either the current feed prices are maintained throughout the fall cropping season or if milk prices were to fall from their current near record levels.

Figure 2.  Cow-Jones Index from January 2005 through June 2011.  Although milk prices have been substantially above their 6-year average so far in 2011, the large increases in feed prices have resulted in very modest profit margins so far this year.