Margin Management Is The Key To Profit

Margin Management Is The Key To Profit

All business run according to certain rules and, although a dairy farm is different to running a bakery, certain rules apply to both. A Baker buys flour, sugar, meat and other ingredients to make bread, cakes and pies which he tries to sell for profit. In a dairy farm, a farmer buys fertiliser, seed, sometimes spray water in the hope of growing a lot of feed for the cows. The farmer usually also buys grain/pellets and hay to top up the home grown feed in an effort to produce more milk. The thing both businesses have in common is that they both buy raw materials to produce items they can sell, and hopefully at a price that is greater than the cost of producing them.

The real challenge is to buy it and sell it at a profit. What makes a Dairy Farmer different to a Baker is that the Dairy Farmer has little control over the price they receive for the milk – although they can control cell counts and through breeding and feeding influence the components of his milk. The Baker can charge what he likes but if he is too expensive no one will buy his stuff anyway. A big advantage a Dairy Farmer has is that you can sell as much milk as you produce every day. The tanker driver never says “stop I’m full, I will only take half of what you produced today”. Not only this but the Dairy Farmer has no marketing costs. Unlike the Baker, you don’t need to advertise on the radio to sell your milk and Dairy Farm-ers don’t employ check-out chicks to collect the money. The poor old Baker has to try to guess how many pies, cakes and sausage roll he will sell each day and hope people walk through his door. If there are not enough cream buns customers get peeved and if there are too many it is waste.

So as Dairy Farm you can produce and sell as many litres as you like, the only issue is the cost of producing those litres and the price you will get paid for them – Margin Management. It is entirely possible to work out the cost of home grown feed and conserved fodder. This is done by counting up the cost of owning the farm, applying seed, water and fertiliser and measuring it against the amount of feed grown. It varies from year to year but most people would agree 15 cents to grow a kilo of grass and 20 cents for hay/silage is pretty close to average. When the Autumn break does come and the cows are fresh again how much milk they produce? The cost of producing that milk will determine your in-come over feed costs.

Using the numbers above and assuming 10 kg of grass and 5 kg of hay it would cost $2.50 to feed a cow that and nothing else. The table below assumes the same farm inputs mentioned previously with 4, 8 & 12kg of a $400/ton grain/pellet and assuming a 40 cent per litre milk price in a typical black and white herd.

If you look at the cost of producing a litre of milk, then a diet based purely on home grown feed does look marginally cheaper but you don’t produce very many litres. This is not the end of the story. There are other costs on the farm like dairy detergents, rates, wages, bank loans, feeding dry cows & young stock, electricity, farm repairs, diesel and so forth. These costs remain the same no matter how much milk the cows are making. Let’s assume 200 cows and overhead costs of $4,000 per week. We are still assuming milk to be 40 cents per litre.

So, as you can see, feed costs per litre are not greatly affected when extra food is given to produce more litres. This is because even though the total cost of feed rises as you offer more you are simultaneously dividing it by a larger volume of milk so to some extent one cancels out the other. As the table above shows the contribution of overheads to the cost of a litre is dramatically affected by the volume of milk produced. Happily this is not the end of the story. If all the above is fairly close to right (and it is) then we must remember that as well as making a better margin per litre after overheads are taken into account, that the higher grain feeders also produce more litres at a bigger margin. What happens when we put the two graphs above together to look at the big picture? We are assuming 40 cents per litre.

So there you have it. Dairy Farmers have little control over how much they get paid for their milk but they do have a large say in how much they produce and how much each individual litre costs to produce. You can control both your margin and the volume of milk produced by your cows. Unlike most manufacturers you are free of marketing costs and the hassles of maintaining a sales force. The milk factory will always take your milk no matter how much you produce. If you are interested in increasing your cows’ milk production and making more money, then Reid Stockfeeds can help you achieve it. Our Pellets and Grain come with a free on farm service component to advise you on how to improve your milk production. We are here to help all you have to do is ask.

If you’d like to increase your livestock farming gains and get professional feeding advice. Call 1300 REID FEED or enquire here >