The importance of milk yield and price in the overall profitability of a dairy farm.

The question may be raised, how important is milk yield and price in the overall profitability of a dairy farm? Both impact on output – what about input costs as a main determinant? DairyCo in the UK investigates these issues regularly for their members, the most recent being 2011/2012, which can be obtained from www.dairyco.org.uk under Dairyco Milkbench + Report 2013.

The investigators took a representative number of farmers from pasture systems, mixed and total mixed ration systems. Then they compared the top 25% of dairy farms within a system with the bottom 25%, and determined the reasons for the differences in profitability. What is scary in this analysis is the vast difference between top and bottom which for some parameters considered were as high as 50%! One can imagine that South African dairy farms will show similar variation if this analysis is to be done here, thereby illustrating how much scope we have to increase farm profitability and probably also competitiveness of the industry.

In the analysis the investigators analysed economic figures down to net margin, taking into consideration revenue from value of milk, calves at 20 days, other dairy income minus herd replacement costs, dairy variable and fixed costs, as well as a range of physical performance indicators. The most important outcomes of this and previous investigations are:

The key determinant of profit is total cost of production
Although important, average yield per cow is not the main driver of profit
Milk price per se is not an important reason for the difference between the top and bottom 25% (this may differ in South Africa as the payment system is different from the UK)
The right balance between input use and milk output (herd size and average yield) is essential for high net margin
Milk can be produced efficiently from any of the systems identified and at almost any scale of production

Four specific cost areas explain a minimum of 60% of the difference in net margin between the top and bottom 25% farms. These are:

Feed and forage (roughage) variable cost (the best performers in each production system fed less feed per litre and made better use of forage, resulting in a higher proportion of milk from forage and lower feed costs)
Herd replacement cost (the top 25% of farms in each production system had lower replacement rates as a result of lower mortality and culling rates)
Labour costs
Power and machinery costs

What are the implications for us? I have been concerned for a number of years that in many cases we concentrate on milk yield alone without giving adequate attention to what does it cost us to produce higher yields and how does it affect the health and well-being of our cows; the latter being a prime reason for high replacement costs and poor longevity. The study of DairyCo unequivocally showed that input costs, with feed costs the primary variable, are crucial. Feed and some variable costs are increasing at a faster rate than the revenue from milk. Selection for milk yield has increased the size of our cows to create feed intake capacity but the ratio input-output is narrowing, which implies that this selection approach is not sustainable. We need to select for increased efficiency, but not only biological, other inputs in the equation as well, and in addition, improved health and longevity of our herds. You may argue that it is done already – yes, but not in the vast majority of cases.

Another variable that is related to the above discussion is cow size. Cow size relates to maintenance requirements and adaptability to the feed and physical environment, which is highly relevant in pasture-based systems. With lower feed input, optimum cow size will decline which usually is also an advantage to adaptation to warmer environments. We can fast-track it by crossbreeding, but we have not sufficient information to decide on optimum cow size for different production systems or physical environments. We need data for analysis and this is where farmers with accurate and long records can assist. If they can make their data available for analysis, it would help us to reach the goal much quicker.