Discipline: economics; Keywords: milk yield, lifetime production, age at first calving, lifetime profit margin, modelling.
Dairy farming generally has small profit margins. A large capital outlay is required at start-up while daily operations also require a high, mostly feed, cost input. A number of factors affect the economic success of dairy farming. The average milk yield of cows is often regarded as the most important factor affecting profit margins. Although, generally, higher producing dairy herds have higher profits, a high average milk yield does not always guarantee high profits, because production systems differ, for example TMR and pasture-based systems. Milk yield of cows increases after the first lactation reaching peak yields at about the 5th to 6th lactation. After this, milk production per lactation decreases again. This suggests that the lifetime production of cows increases the longer they stay in the herd resulting in an increase in production efficiency, especially if the rearing cost of the cow as a heifer is also included. The rearing cost can only be recovered in two ways, i.e. selling the heifer as a breeding animal or during the milk production stage of a cow’s lifetime. Although an advanced age at first calving (AFC) may increase the first lactation milk yield of cows, it also increases the rearing cost to first calving and therefore may reduce the lifetime profit margin of the cow.
The lifetime profit margin of cows is not a commonly discussed concept in the South African dairy industry. Most dairy farmers do not have such a figure for their production system. At most the difference between the daily production cost and milk income per litre of milk is used as an indication of profit. However, a simple model can be used to estimate lifetime profit margins. This was the objective of the study referenced below.
The lifetime profit of a dairy cow can be estimated by the following simplified equation:
Profit = (output x price) – (input x price) – fixed costs
The output for a cow refers to all the milk produced during her lifetime plus the value (at birth) of bull or heifer calves at each calving event and the cow’s own salvage value at culling. The input refers to all the costs required to rear heifers to first calving plus all the feeding and other production costs during the subsequent lactation and dry periods. The fixed costs include all the infrastructure, interest, etc. required to operate a dairy farm. These, obviously, will differ between farms and therefore the exercise must be done per farm. As the input of a cow’s lifetime production starts as a heifer, it naturally follows that the rearing cost of heifers to first calving, age at first calving, the number of heifers surviving to first calving, culling age of heifers, the mortality cost of heifers not reaching first calving, would affect lifetime profit. Therefore, a cow’s output starts from a negative basis because of her rearing cost while during first lactation, milk income has to pay for her own daily milk production cost while “paying back” her rearing cost.
In this model, an example of a Jersey cow which produced on average 6000 kg of milk over the first four lactation periods in a pasture-based system was used. She was supplemented 7 kg of concentrates per day and delivered two heifer and two bull calves. The rearing cost of the cow as a heifer was R9000 to 24 months of age and the survival rate of the heifers to first calving was 75%. Other factors and prices that were used included a milk price of R4.85 per litre, feed cost at 70% of all production costs, concentrate cost at R4.85 per kg, pasture cost at R1.50 per kg, age at first calving 24 months, and a 75% heifer survival to first calving.
The results of the model showed that if the rearing cost of the heifers is subtracted from the profit per lactation a negative profit margin (R per ℓ) results at the end of the first lactation while it shows only a small profit at the end of second lactation. By increasing AFC from 24 to 30 months reduces the profit margin per litre of milk by 13%. While the profit margin is positive at the end of the second lactation period at AFC of 24 months, it is still negative when AFC is 30 months of age, i.e. R0.21 vs. -R0.08 per litre of milk.
A sensitivity analysis was also conducted to determine the effect of each factor on the lifetime profit margin of cows. The value for different factors was increased or decreased by 5% and the lifetime profit margin per litre of milk estimated. Each of these results was subtracted from the lifetime profit margin of the standard (or example) cow. By increasing the average production to 6300 kg resulted in a R0.20 per kg higher lifetime profit margin while reducing the average milk yield by 5% resulted in a R0.39 per kg lower lifetime profit margin. As expected, milk yield per lactation, feed cost as a percentage of all costs and concentrate cost (R per kg) had the largest effect on the lifetime profit margins of cows. When feed cost constitutes a large proportion of the total production cost, other costs actually decrease resulting in a better margin over feed cost. An increase in concentrate cost has a larger effect on profit margins than a similar increase in forage cost, i.e. reducing profit margins by –R0.13 and –R0.06 per kg of milk, respectively. Increasing the average lactation number of cows in the herd and decreasing age at first calving resulted in an improved profit margin of R0.06 and R0.03 per kg of milk. Increasing the proportion of heifers surviving to first calving from 70% to 80%, also increases the lifetime profit margin at the end of third lactation by 5%. These traits are strongly affected by management and could be used as management indicators.
This example clearly shows the importance of a longer productive life (PL) and an early age at first calving. The average lactation number of cows gives an indication of the age of cows in a dairy herd. In many herds this figure is less than three, meaning that only a small proportion of cows manage to survive to an advanced age. Many cows are lost from the herd because of involuntary (preventable) culling reasons. Recent research by the ARC showed a positive relationship between an early AFC and higher milk yields in first lactation on the PL and lifetime of cows as well as the efficiency of production. Overseas studies have shown that daughters from higher genetic merit sires have longer PLs than daughters from lower genetic merit sires, i.e. 40% vs. 27% of daughters of high and low genetic merit sires respectively reach the 6th lactation. While it is difficult to improve PL genetically, because the heritability estimate is less than 10%, the range among sires for the PL of their daughters available for insemination, varies from -1.4 to 8.1 months. This means that over time it would be possible to improve PL by using bulls with higher than average breeding values for PL. Nevertheless, PL is affected mainly by environmental factors. This includes all factors affecting the production of cows such as feeding level, reproduction management, mastitis and housing conditions. Farmers should keep their cull list up to date, i.e. a list of all animals leaving the herd. Over time, this will give an indication of cull reasons. Management should then be aimed at improving these problems.
C.J.M. Muller, 2017. Key drivers towards economic success. Agrikultuur, November 2017.