Living On the Margin

Someone once said, “Within the margin is where your opportunity lies.” Those of us in dairy know this all too well.  Dairy farm families must balance their income carefully against their expenses, and any slight change on either side of the equation can drastically impact their margin. The current year in which we are living is a good example of how important the margin is.

USDA recently announced the Class III and Class IV prices for June 2021. So far this year, Class III prices have averaged $16.96 per hundredweight, while Class IV prices have averaged $14.84 per cwt. Those prices are about $1 higher than where they were in 2020. However, the margins announced through the USDA’s Dairy Margin Coverage Program paint a different story.

USDA just announced the May margin under the DMC Program. The All-Milk price reported for May was $19.20 per cwt., the highest since November 2020. Yet, most dairy farmers would probably agree that margins are not any better right now on the dairy farm than they were a year ago. In fact, in many cases, they may be worse.

That is because higher milk prices are not equaling higher profit margins on the farm right now. Despite a $19.20 All-Milk Price, the May margin was announced at only $6.89 per cwt., down nearly $4 from the last time when the All-Milk price was announced in the $19 range. The difference is due to increasing feed costs on most farms right now. The USDA Ag Prices report showed an average price per corn in May of $5.91 per bushel and an average blended alfalfa price of $210 per ton, which were both the highest prices listed since this round of the DMC Program began in 2019.  Soybean prices were reported at $421 per ton in May, which was the highest price reported since the program began.

These record prices are driving up feed costs on the farm significantly, with the USDA reporting that final feed costs for May were at $12.31 per hundredweight, up nearly $4 from a year ago and the highest listed since this round of the DMC Program began. That means that the milk prices a farmer receives would have to be $4 higher than it was a year ago for dairy farmers to receive the same margins they did last year if all other inputs were the same.

We all know, though, that other input costs are not the same as they were a year ago. In addition to feed costs, the costs for fuel and fertilizer have risen significantly. Land rent values and custom farming costs have increased as well, with higher fuel costs and more demand for land driving up those prices. So, what does this mean for the average dairy farmer in Pennsylvania? Paying close attention to where your margin is and how you can maximize that margin will make all the difference this year.

This spring, the Center offered a Dairy Excellence Grant to help dairy farm families improve their efficiency and performance on their dairy farms. We had 193 farms apply for that grant, and we asked each of them to share their cost of production with us on the application. Among those 193 dairy farms, there was more than a $15 difference between the farm with the highest cost of production and the farm with the lowest cost of production.

So, what does the farm with the lower cost of production do differently than the farm with the higher cost of production? It’s not all about economies of scale because we also asked herd sizes, and more cows did not necessarily correlate with a lower cost of production. It’s about controlling the controllables. Here are a few strategies that some farms have found beneficial in managing their margin.

  • Pay attention to the details. For example, making sure there are plenty of fans and that they are all in good working order is critical to maximizing milk production in the hotter months of the year. Clean out the waterers regularly, feed during cooler parts of the day, and keep feed pushed up. Do not cut back on bedding or on regular herd health measures like footbaths, hoof trimmings and vaccination protocols.
  • Develop and follow standard operating procedures. Maximizing quality premiums and component levels can boost your milk check by more than $1 per hundredweight. It is easy to drift away from standard procedures when they’re not written down, so write them out and post them in the barn or on the feed wagon for everyone to see and use.
  • Manage your forage quality and nutritional strategies. Whether it is haylage, small grain or corn silage, harvesting high-quality feeds is a matter of timing and attention to detail. Also, watch the additives in your ration. Make sure your additives reflect your milk production and component goals based on current market conditions. Challenge your nutritionist to keep feed costs low while maximizing herd health and performance.
  • Form partnerships or share resources with neighboring farms. Hiring custom operators for planting and harvesting can cut your equipment costs and enhance your ability to plant and harvest crops in a timely and efficient manner. Some farms are sharing cropping equipment and technology like heat detection software. In some cases, they are even sharing specialized employees, like herd managers. If you do share employees, though, it is important to have biosecurity measures in place to protect against any cross-contamination between herds.
  • Manage your reproduction cost closely. Keeping calving intervals and the age to first calving within industry-recommended thresholds is critical to maintaining maximum milk production and performance within the herd. Keeping cows in the herd when they are far-out in lactation can be a profit drainer and can lead to health issues once they finally do freshen in. Cull cow prices are up right now, and it may be an opportunity to weed out poor performers.

There is no doubt that higher feed costs will challenge dairy farm profitability margins in 2021. Managing during periods of low margins can be tremendously challenging. But good dairy managers have learned that tough times do not last. Hopefully, you’ll find these strategies and others helpful in improving your efficiency and better positioning your business for when stronger margins return.

Editor’s Note: This column is written by Jayne Sebright, executive director for the Center for Dairy Excellence, and published monthly in the Lancaster Farming Dairy Reporter.