The Costs of Nutrients, Comparison of Feedstuffs Prices and the Current Dairy Situation

Dr. Normand St-Pierre, Extension Dairy Management Specialist, Department of Animal Sciences, The Ohio State University

Feed and dairy markets are quite uncertain as of mid-March.  On the dairy side, milk appears to be plentiful in most regions of the country.  As of the end of February, it was estimated that the cumulative national milk production was running close to 4% above last year (this is after accounting for the extra day in February).  The number of cows (9.25 million) is up slightly from last year (about 1%), which indicates that the extra production is primarily due to additional productivity per animal (60 lb/day compared to 58 lb/day at this time last year).  Exports have remained strong.  Exports are in essence supporting U.S. domestic prices, but there is a real danger that our domestic prices might collapse later this spring.  As I write these lines (March 21, 2012), the Class III futures for the next 10 months are trading between $15.55 and $16.83/cwt.  These prices would equate to a blend price in Ohio between $16.35 and $17.63/cwt.  At best, these are at break-even prices when one considers current cash feed prices.  The latest reports from USDA and other private organizations indicate that U.S. farmers are planning to plant 94 to 95 million acres in corn this year.  But a great many things can happen between now and harvest.  And the high oil prices are creating additional demand for ethanol, hence pressuring the corn markets upward.  I see little chance for a significant downturn in feed prices.  The rest of the year should not be as bad as 2009, but dairy producers will have to be very vigilant.  This includes the proper selection of feed ingredients to make up the dairy rations.

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 (NEL, $/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, NEL is now severely overpriced at 19.4¢/Mcal – which is near record prices.  For MP, its current price (13.5¢/lb) is considerably less than its 6-year average (28¢/lb).  Thus, we are currently in a period of very high dietary energy prices but low protein prices.  This is even more evident when one is reminded that less than 10 years ago dietary energy (NEL) was priced at about 5¢/Mcal.  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), and the discount of 11¢/lb is above its 6-year average (-9¢/lb).  Meanwhile, unit costs of e-NDF are historically low, being priced at about -1.1¢/lb compared to the 6-year average (3.3¢/lb).  Homegrown forages are generally the best sources of this important nutrient.

Table 1. Prices of dairy nutrients for Ohio dairy farms, mid-March 2012.

Economic Value of Feeds

Results of the Sesame analysis for central Ohio in mid March 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 deemed outliers (completely out of price).  One must remember that Sesame compares all commodities at one point in time, mid March in this 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-March 2012.

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-March 2012.

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. 

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 – which is about the average cow productivity in Ohio.  This cow has daily requirements of 31.3 Mcal of NEL, 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 very expensive as it currently costs $6.09/day to provide the NEL required for the production of 65 lb/day (Figure 1).  This means that on an average one has to pay $9.37 just to supply the NEL required to produce a cwt of milk.

Figure 1.  Costs associated with the supply of 31.3 Mcal of NEL and 4.64 lb/day of MP from January 2005 through March 2012.

The change in the Cow-Jones index over time is shown in Figure 2.  We cannot calculate the CJI for March yet because milk component prices will not be announced until April 6 by the Order administrator.  As of February 2012, the cost of supplying all the nutrients amounted to $9.55/cwt, down from a peak of $11.40/cwt. last August.  The milk gross income was $16.24/cwt.  The difference is the Cow-Jones Index and was equal to $7.22/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 February, Ohio dairy producers were operating below break-even levels using cash prices for feeds.  Of course, some people are more efficient in feeding their cows; others achieve greater production levels than the State average of 65 lb/day; some have purchased their feeds timely.  For these producers, their income over feed costs would be better than the Cow-Jones.  The index, however, is a very good barometer for the average producer.  The fact that the nutrient costs in February amounted to over 55% of the milk revenues is very troublesome and foreshadows a very difficult financial environment if either the current feed prices were to increase throughout the year or if milk prices were to fall even further from their current levels.

Figure 2.  Cow-Jones Index from January 2005 through February 2012. 
Although milk prices have been substantially above their 6-year average so far in 2012, the high feed prices have resulted in modest profit margins so far this year.