April 10, 2009

Experts help dairies milk what they've got with cost-cutting tips

The Class III milk price - an estimate of the price of milk used for cheese production and the foundation for other milk prices - dropped to $9.31 per hundredweight in February. In 2007 the price was more than $20, and it's estimated to be in the $10 to $11 range for the next month or two. By year's end, the price is expected to recover to more than $15. In Indiana the mailbox price is typically $2 higher because prices are adjusted upward to reflect the greater value of milk sold as fluid, said Mike Schutz, Purdue Extension dairy management specialist.

Fortunately, dairy producers are getting some money back from the Milk Income Loss Contract (MILC) program, he said. The MILC program is a government payment, much like a crop subsidy program.

In addition, the dairy industry developed the Cooperatives Working Together (CWT) program to help producers. The industry-funded program takes bids to buy cows and bred heifers to help reduce the U.S. milk supply. More information about the CWT program is available by calling 888-463-6298 or visiting https://www.cwt.coop/.

"Estimates are that the CWT program returns 81 cents for every 10-cent contribution," Schutz said. "For every hundred pounds of milk produced, dairy producers participating in the program contribute 10 cents.

"While milk prices are the lowest they've been in four years, they are about the same as in 2001 and 2003. The difference is that feed costs for producers have doubled. Not only have feed prices doubled, but the price drop was very abrupt - milk is about half of what it was a year ago."

Schutz and Tamilee Nennich, Purdue dairy nutrition and nutrient management specialist, explained some of the factors that have played a critical role in the price drop and provided six tips for dairy producers.

"This has really been the perfect storm," Schutz said. "The poor economy for trade partners and the strengthening U.S. dollar, coupled with New Zealand and Australia moving more product into the world supply chain after two years of drought, has just eroded global demand."

High milk prices in 2008 influenced many producers to expand their dairy herds, which caused an increase in supply, Schutz said. In addition to the supply increase, many retailers and wholesalers have not been able to increase inventories, which usually happens when prices are low because of the lack of access to capital.

Fortunately, this downturn came after a period of relatively high prices, so many producers had the opportunity to pay down debt and now have access to operating capital, Schutz said. But those farmers who are heavily leveraged may have considerable difficulty making loan payments.

Even though times are tough, there are some things producers can do to help their situation. Nennich has six recommendations to help dairy producers cut costs.

Feed rations are typically designed with cushion. This means that dairy producers are actually feeding more than what's needed, Nennich said. Because of high feed costs, one of the first things a producer needs to do is evaluate and fine tune their feed rations. Specifically look at protein because it's expensive, she said.

She also advises producers to compare milk production to their milk check and make use of any bonuses received for optimal somatic cell count, milk fat and milk protein. This can be done by adjusting feed rations and making management changes on the farm, Nennich said.

"As we look at the feed rations, there are numerous ingredients that we include," she said.

Nennich warned that sometimes there are great deals out there, but producers need to make sure they are getting the true value of the feed ingredient they are paying for. Just because it's a deal doesn't mean it's worth it, she said.

Before long, producers will be harvesting forages, and it's important that forages are harvested at the right time to get the highest quality forage possible with the appropriate moisture content. Not only is harvest timing important, but so is forage storage. When storing silages, make sure it's packed correctly and covered to help prevent loss, Nennich said.

Another important thing when looking at a cow herd is to think about income over feed costs, she said.

"As milk prices drop, we have to make sure the cows are paying for themselves and that they are at a minimum covering their feed costs," Nennich said. "Cows that were profitable at higher milk prices are not necessarily profitable at lower milk prices."

Schutz added that at lower milk prices, a dairy producer might be better off milking fewer more productive cows than many cows that aren't necessarily as productive.

"If cows are not covering their feed costs, producers need to consider culling them from the herd," Nennich said. "We need to make sure they are covering their variable costs in order to stay in the herd."

Lastly, Nennich said that dairy producers should continue to work closely with their banker to help them understand what their dairy operations are doing to improve productivity and maintain access to whatever capital is available.

For questions or more information, contact Schutz at 765-494-9478, mschutz@purdue.edu, or Nennich at 765-494-4823, tnennich@purdue.edu.

Writer: Julie Douglas, 765-496-1050, douglajk@purdue.edu

Sources:   Tamilee Nennich, 765-494-4823, tnennich@purdue.edu

Mike Schutz, 765-494-9478, mschutz@purdue.edu

Ag Communications: (765) 494-8415;
Steve Leer, sleer@purdue.edu
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