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Milk and Feed Cost
News & Information Notice Subject: - Milk
and Feed Prices
Milk and feed prices are extremely volatile from one
month to the next and can have an adverse impact on
a dairy farm’s gross profitability. If milk prices fall
and feed costs rise, farm profits can be squeezed. In
some years, milk prices can be very low, resulting in
a need to more carefully monitor feed costs to maintain
profits. In other years, milk prices could increase
as a result of market spikes in feed costs, which also
require careful monitoring since milk prices may not
rise fast enough to keep up with higher feed costs.
Despite common knowledge, dairy producers control milk
prices and feed costs. Both milk prices and feed costs
can be forward contracted through a milk cooperative
and a feed grain supplier. Farms that are large enough
can also directly contract for milk and feed costs through
a commodity broker. In addition, dairy producers are
responsible for developing a feed budget, purchasing
feed inputs, and delivering that feed to their herd
in an economically efficient manner. Thus, feed costs,
which are between 40 and 60 percent of the total cost
of producing milk, are clearly controlled by the dairy
farm manager. The key is to develop a system to monitor
and budget milk prices and feed costs in order to have
some degree of control over gross profits. In this report,
two measures are developed to monitor milk prices and
feed costs.
One is called income over feed costs (IOFC), which
is measured in dollars per cow per day. The other is
called the milk margin (MM), which is measured in dollars
per hundredweight (cwt) per day. Both reflect the difference
between the price of milk and the cost of the feed to
make that milk. While IOFC is on a per-cow, per-day
basis, the milk margin is on a per cwt basis. Dairy
producers probably will be more inclined to monitor
and measure IOFC, whereas other market participants
(e.g., those trading futures contracts in Chicago, processors,
government) will be more interested in the milk margin.
That said, one is simply a mathematical transformation
of the other; when one goes up, so will the other. Thus,
for purposes of exposition, the rest of this publication
will focus on IOFC.
Measuring Milk and Feed Costs
There are various ways to measure milk and feed costs.
USDA has a measure called the milk-feed ratio. According
to USDA, the milk feed ratio is the number of pounds
of 16 percent protein-mixed dairy feed equal in value
to 1 pound of whole milk. The methodology uses major
raw feed component prices from Agricultural Prices,
published by USDA's National Agricultural Statistics
Service (NASS). The major feed components of corn and
soybeans account for 83-91 percent of the total ingredients
in the rations. The formal definition for this formula
is as follows:
FV = (51/56) x PCorn + (8/60) x PSoy + (41/2000)
x PHay Milk-feed ratio = PMilk/FV
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