Decreasing cost of production one way to improve milk checks

BLOOMINGTON, Ill. — Illinois dairymen experienced significant milk price volatility during 2020.

“U.S. Department of Agriculture data shows we saw the lowest milk price in the last five years in May and our highest milk price in the last five years in July of last year,” said Derek Nolan, University of Illinois Extension dairy specialist and assistant professor in the U of I Animal Sciences Department.

“Dairy producers don’t control milk prices, but they can impact the total amount they are paid through the components, total product and milk quality,” said Nolan at a presentation during the 2021 Illinois Dairy Summit organized by the Illinois Milk Producers Association and U of I Extension.

In Illinois, most milk is shipped into a federal marketing order where milk is valued using the multiple component pricing scheme.

“However, some milk is shipped into federal marketing orders where it is priced using the skim butterfat value,” Nolan said.

One of the differences between the two pricing schemes is the amount of protein in the milk.

“Once the protein percent increases above 3% the milk value is always higher with a multiple component pricing value,” Nolan said.

“The other major difference between multiple component and skim butterfat pricing schemes is the producer price differential,” he said. “Once the producer price differential decreases to $1.50 per hundredweight, the milk tends to be valued higher when using the skim butterfat pricing schemes.”

Dairymen don’t have much control over how their milk is valued. However, they can increase the value of their milk check by decreasing their cost of production.

“If we have a value for our cost of production, we can benchmark and compare our cost of production to other producers,” Nolan said.

“That also allows us to forecast as prices become volatile,” he said. “Then you can get more out of your milk check by making management changes to lower your total production cost.”

Based on U.S. Department of Agriculture data, Nolan said, the total cost of production on dairy farms was from $35 to $40 per hundredweight on the high end and around $25 per hundredweight on the low end.

For U.S. numbers compared to Illinois dairymen, the biggest difference is for the opportunity cost of unpaid labor.

“The opportunity cost for unpaid labor has a strong correlation with herd size as it tends to increase as the herd size decreases,” Nolan said. “Those with a larger herd size may benefit from being able to delegate farm activities and when it comes to the smaller herd size the owner has to stretch himself across each part of managing that dairy farm.”

Nolan encourages dairymen to calculate a cost-benefit analysis to determine if management practices are feasible to increase milk production or to promote cow or calf health by decreasing disease incidence.

For example, the cost of a disease includes any losses or benefits taken away such as lost milk production or losses in somatic cell count premiums plus the expenses to manage the disease which may be new management practices and the labor associated with adding that management practice.

“If we do nothing to manage the disease we’re going to experience maximum loss,” Nolan said. “As we add management practices we can get to the point where we’ve decreased the incidence of disease as far as we can go.”

However, Nolan said, a dairyman may have spent too much money on prevention expenses.

“There’s a point we reach economic optimum which is the point where any dollar we spend on management practices will return $1 back,” he said.

Adopting new management practices are only as good as how well they are implemented, Nolan said.

“If we invest in a new management practice, but do not implement it correctly we lose the benefit of adopting that practice,” Nolan said. “It’s important to train, re-train and train again to make sure we’re using the management practices correctly.”

“When it comes to the cost of production, we can’t control what we can’t measure,” he dairy said. “So, if we don’t know the total cost of production, that makes it harder to make decisions to get more out of our milk check.”

By knowing the cost of production, dairymen can also compare themselves to other producers and forecast for the future of their operation.

“When it comes to forecasting, last year would have been very hard with the peaks and valleys to make decisions,” Nolan said. “But in normal years when we see peaks and valleys of milk prices we know when we can adopt new management practices.”

Dairymen have tools already available at the U of I website — www.dairyfocus.illinois.edu.

“The dairy efficiency calculator will tell you how efficient you are for income over feed costs,” Nolan said. “The somatic cell count calculator tells you the total impact of somatic cell counts on a farm.”

The benefit of these tools, Nolan said, is they allow dairymen to enter their own farm information.

“The results are specific to the farm which helps us make more educated decisions on the farm,” he said. “We’ll have more tools this summer that look at the cost of somatic cell count, the cost of total mastitis to a farm and the economics of mastitis treatments.”

For more information about the Illinois Milk Producers Association, go to www.illinoismilk.org.