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Extension > Agriculture > Dairy Extension > Business tools and budgeting > Strategies to maximize profit in your herd

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Strategies to maximize profit in your herd

Jim Salfer

What is your strategy to maximize profit? Focus on maximizing milk production, minimizing costs or something else? Each of these can be successful if your herd management aligns with your strategy.

Every year there is a wide variation in profitability between farms. The table below shows the comparison of 2014, a very profitable year, and 2016, a low-profit year. Even in 2016, the top 40% of farms made over $500 per cow. The herd dynamics of the profitability cohorts vary between years, depending partly on milk prices. Not surprisingly, in years with high milk prices like 2014, farms with high production were the most profitable with over 5,000 pounds more milk per cow for the high profit compared to the low-profit herds. In 2016, production per cow was less important for profit with less than 1000 pounds more milk sold per cow for the high-profit herds. Interestingly, in 2016, the highest 20% cohort for profit (data not shown in the table) actually had slightly lower milk production per cow (24,175 vs 24,583) than the average of all farms. Cost control is important in all years, but especially in years with low milk price.

When adjusting for unpaid labor and management, the average farm lost $85 per cow in 2016. Even though net return over direct and overhead expenses were similar across all herd sizes, when adjusted for labor and management charges, the 51- to 100-cow herd size was substantially lower. I suspect this is because many of these farms house cows in less labor-efficient stall barns. The good news is all sizes of herds had farms in the high-profit cohort group.

Every year Farm Credit East publishes a Northeast Dairy Farm Summary. The top 25% of herds for profit are divided into five categories based on characteristics in which the manager excels. They are high production per cow, labor efficient, better milk price, low cost of production, and balanced. For example, “labor efficient” are herds that excel at producing high amounts of milk per worker. “Balanced” are herds that don’t fit neatly in any of the other categories. In 2016, the high production and labor efficient herds were much larger than the other three categories averaging 568 cows per herd. The smallest average herd sizes were for the low cost (154) and balanced herds (162). These data are similar to the Finbin data. The reason is likely that larger herds tend to have specialized labor focusing on cow management and larger more labor efficient parlors, while smaller herds may have a higher percent of family labor with older facilities.

How can these data be used to better understand herd profitability? Here some of my thoughts as I synthesize the data:

  1. There are profitable herds of all sizes and management styles.
  2. Low cost of production is a winning strategy every year. It is not always possible to have the lowest cost of production. Major new investment is required to bring in a new partner or replace old facilities. However, carefully planning investments that are proven to have a high return such as better cow cooling and cow comfort will help keep cost of production low.
  3. Higher production usually results in higher profit, but achieving maximum production may not always be the best strategy in low priced years. The most profitable herds in low milk price years achieve good production but are even better at controlling costs. In a year with anticipated low milk prices, it is important to examine all spending and determine if there are areas to cut without affecting cow health or performance. Focus your labor and capital in areas that are likely to yield rapid returns like better transition cow management.
  4. Understand your management strengths and develop a style that complements them. There are managers who have the facilities and skills to achieve consistently very high production. Average production can be profitable as long as you are excellent at controlling all your costs.
  5. In order for small farms to remain profitable, they need to commit themselves to having above average production and must be a low-cost farm. Some ideas for smaller farms to be competitive include:
    • Partner with other farms to take advantage of scale. This could be sharing equipment or purchasing commodities in bulk.
    • Consider value-added opportunities such as marketing genetics or converting to organic.
    • Rely on off-farm income to help support family living and provide benefits.
    • Diversify the farm and add other enterprises to add to the profit mix. This can be risky if other enterprises are not profitable. Low-risk enterprises might include contract hog finishing or poultry barns.
    • Minimize debt. Small farms must focus on minimizing debt and being very efficient with capital purchases such as purchasing used equipment.

One great attribute of the dairy industry is that many types of farms can be profitable. It is important for you to capitalize on your facilities, land and skills to maximize profit potential.

Profitability cohorts in 2014 and 20161
  Profitability
  Bottom 40% Middle 20% Top 40%
Year 2014 2016 2014 2016 2014 2016
Milk/cow, lb. sold 20,707 24,146 23,726 24,620 25,864 24,872
Direct expenses, $/cow 3688 3228 3947 3016 3847 2798
Direct COP, $/cwt 17.83 13.38 16.64 12.25 15.38 11.25
Direct + Ovhd expenses, $/cow 4302 3905 4673 3653 4407 3463
Direct + Ovhd COP, $/cwt 20.89 16.18 19.70 14.84 17.61 13.88
Net return, $/cow 509 -380 1101 72 1759 524
Net return over labor & mgmt,
$/cow (all herds)
  -561   -123   325
Net return over labor & mgmt,
$/cow (51- to 100-cow herds)
  -650   -196   200

1University of Minnesota FINBIN data from Minnesota state farm business management associations. Data excludes organic herds.

June 2017

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