Buckeye Dairy News: Volume 6 Issue 3

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

I recall just a few months ago when the soybean meal market jumped above $250/ton. I received numerous phone calls and emails requesting help on how to deal "with these obscene soybean prices". I imagine that most dairy producers wouldn't mind still paying $250/ton for soybean meal. But the rapid changes in soybean and corn prices have opened many opportunities for judicious ingredient substitutions in dairy diets. There are bargains out there!

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 for net energy lactation (NE_L, $/Mcal), rumen degradable protein (RDP, $/lb), digestible rumen undegradable protein (D-RUP, $/lb), non-effective NDF (ne-NDF, $/lb), and effective NDF (e-NDF, $/lb) are reported in Table 1. Compared to January 2004, the cost per unit of net energy is up by 44%, RDP is up by 29%, D-RUP is up by 27%, ne-NDF is down by 6.5¢/lb, and e-NDF is also down by more than 4.0¢/lb. Thus, although the sticker shock associated with soybean meal has focused our attention on the protein prices, it is the energy that has seen the most dramatic increase. In fact, we have tracked down the NEL cost in the Midwest market all the way back to 1981, and we have never seen a cost exceeding $0.09/Mcal before. We shall expand more on this later.

Based on early May wholesale prices, central Ohio commodities can be partitioned into the three following groups:

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.

One must remember that SESAME compares all commodities at one point in time, early May in our case. Thus, the results do not imply that the bargain feeds are cheap on a historical basis. As a matter of fact, all commodities would be considered expensive on a historical basis. There are some feeds that are relatively more expensive than others.

In Tables 2 and 3, we report the results for all 26 feed commodities. The lower and upper limits mark the 75% confidence range for the predicted (break-even) prices.

We can use estimated nutrient costs to benchmark feeding costs. Refer to the article "Using Nutrient Cost to Benchmark Your Nutrition Costs" in the January 2004 issue of Buckeye Dairy News. Table 4 reports the nutrient costs for a 1500 lb cow producing 77 lb of milk at 3.5% fat and 3.0% protein for September 2003, January 2004, and May 2004.

From this table, one can see that the costs of nutrients have gone up by approximately $0.53/cow/day since January (or equivalently of $0.69/cwt of milk). The $0.53 increase is the result of $1.00/day increase in NE_L, $0.10/day in RDP, and $0.16/day in D-RUP, but a drop of $0.46/day in the cost of e-NDF and a drop of $0.26/day in ne-NDF. Thus, the proper usage of energy sources combined with a wise selection of byproduct feeds can result in substantial savings in feed costs. Savvy buyers will keep a close watch to the commodity market during the summer month as we can expect rapid changes in prices due to seasonal changes in supply and demand of some commodities (e.g., wheat midds and wet brewers grains).

Table 1. Estimates of nutrient unit costs - OH, May 2004.

- A blank means that the nutrient unit cost is likely equal to zero.
- ~ means that the nutrient cost may be close to zero.
- * means that the nutrient cost is unlikely to be equal to zero.
- **means that the nutrient cost is most likely not equal to zero.

Table 2. Estimated break-even prices of commodities - OH, May 2004.

Table 3. Estimated break-even prices of outliers - OH, May 2004.

Table 4. Benchmarks of nutrient costs - Ohio.¹

¹Costs are for a 1500 cow producing 77 lb of milk at 3.5% fat and 3.0% true protein.

"The highs will be higher and shorter (in duration); the lows will be lower and last longer than the highs." A major cause is consolidation coming at us hard and fast, driven primarily by food companies. This prediction of what dairy farmers can expect in the future was made by David Kohl, Professor Emeritus, Virginia Polytechnic Institute at the recent NE Ohio Dairy Management Conference. Any dairy person familiar with the numbers on their farm should not find this hard to believe. Kohl also made another important observation: "...when prices are high, prepare for the lows...don't do anything stupid."

"Be Clean on Credit"

Absolutely, the first priority with improved income is to make sure all accounts are current. Interest charges on open accounts at 1.8 to 2% per month may sound minor but are equivalent to annual rates of 20 to 24%. For example, if a farm owed $10,000 to a feed mill, did not make any payments and simply accumulated 2% per month interest charges (not a situation the feed mill would support), in 12 months, the amount owed would be the original $10,000 plus $2,795 in interest. None of which is deductible on Schedule F until it is actually paid.

Equally important is to pay off outstanding credit card balances. Credit card use is growing in the agricultural sector. Nationally, Kohl stated that more than 70% of people regularly carry an unpaid balance on credit cards. With increased use come horror stories of credit card misuse and abuse. Besides the amazing story of an older farmer running up credit card debts of $80,000 twice in three years (gambling, a trophy wife, and obviously a slow learner), Kohl particularly got the attention of younger members of the audience with examples such as the following:

If a credit card holder has a $2000 balance on a credit card with an 18% interest rate and only makes minimum payments, it will take 16 years to pay off the balance (without making additional charges!). Conversely, if that same minimum monthly payment was invested in a mutual fund generating an 8% return for the same 16 years, the investor would save and earn more than $12,000.

Make a habit of checking your credit rating regularly. Items can mistakenly land on your credit report, which if left uncorrected, can damage your credit rating and ability to get loans approved.

Make budgeting and strategic planning part of how you do business. Most important, let information and facts, not emotion, guide these activities. It is particularly important to be careful of investing in land. Remember that cash flow and earnings pay the bills and pay back debt, not necessarily ownership of land.

This is a particularly challenging issue where land values are rapidly increasing out of agricultural use value because of its' desirability as a location to build the "Ken and Barbie" houses (those huge fancy multi-zillion dollar houses) that are crowding out agriculture on the fringes of urban and suburban development. Kohl did note that eventually the homeowners will discover that these huge houses on multiple acres "own" them with their demanding and costly upkeep�but not soon enough to keep new construction from gobbling up farm ground and driving up land prices.

Budget additional expenses and income for the year. Currently, high feed prices will pick off some of the additional income on many farms. High fuel prices will also take their toll as we enter spring planting and forage harvest.

Pay down lines of credit. Not only will you save interest on the balance, but you are rebuilding credit reserves to help you through the next downturn.

Put some money back - checking accounts that pay interest, certificates of deposit, or whatever investment vehicle pushes your buttons. It needs to be safe, should generate some return, and be readily available for your use during the next down cycle.

"Don't do something stupid"

One of the biggest challenges during market peaks is to not do something stupid with the money. New paint disease is particularly contagious when milk prices are high. I guarantee that someone in your community will start buying stuff. Who cares? Their decisions (which may or may not be good) should not guide yours. Ask several questions before purchasing:

1) Is this a purchase that we were planning before milk prices increased?
2) How will this ________ machine, tractor, cow, building, or 4-wheel-drive king-cab super truck (fill in the blank) increase my farm's profitability?
3) How will we pay for this when milk prices are back to average or below average?
4) Will this purchase compromise our cash reserves?

If this purchase was not in the long term plans and won't increase the farm's bottom line, reconsider. If how the purchase will be paid for in less than optimal milk price times is unclear, just don't do it.

Be aware of what is happening in your industry. Start to think in terms of higher and shorter highs, lower and longer lows. Integrate information-based short term and strategic planning into your business priorities. Carefully monitor cash flow and credit. Fill in any chinks in the mortar of your dairy business's foundation. With careful planning and restraint, the current milk prices give us a chance to do just that.