Feeding cows profitably A marginal approach Dairy Tas

Feeding cows profitably A marginal approach Dairy. Tas Focus Farm Field Day 5 th December 2018 Basil Doonan, Farm Consultant

Content • Business design – Seasonal management – Daily management • Diminishing marginal returns – Timeline (long vs short run) – Fixed vs Variable costs • Maximising profit – What is profit? • Marginal cost vs marginal revenue • Managing at the margin (examples) – Uncertainty and risk 2

Designing a business • Design a robust business – Designed on average (Milk price, inputs and season) – 30% variation in milk price from average • Breaks even (very robust) • Net profit (highly robust) – Generally exceptional management deployed • Update annually/seasonally – Milk price/Input price/Seasonal conditions • Manage daily – Marginal analysis 3

Diminishing returns • One response curve for one level of pasture offered! 0. 4: 1 2. 3: 1 Average product 4

Marginal analysis • What is marginal analysis? – What does “marginal” mean? • ONE MORE – If we already have 3 pies then which one is the marginal one • THE NEXT ONE • Marginal thinking is about making a decision • Marginal analysis is evaluating the decision 5

Common examples • • • Nitrogen Silage Grain Agistment Cull/dry-off 6

An example - Feeding • We have a herd of cows and we are interested in maximising profit – We have conducted a feed budget and can allocate 11 kg grass/day and 5 kg grain to get 13. 7 litres of milk – Milk price is 40 c/litre (Marginal revenue) – Grain price is 35 c/kg (Marginal cost) 7

Questions • Should we feed more gain? – That is one more kilogram • How much more? – When do we stop? 8

Diminishing response • One response curve for one level of pasture offered! 0. 4: 1 2. 3: 1 9

Diminishing returns Marginal Product (MP) Marginal cost Marginal revenue Return on extra capital Grain (Litres/cow) Average Product 5 13. 7 2. 8 6 16 2. 7 2. 3 0. 35 0. 94 168. % 7 17. 8 2. 6 1. 8 0. 35 0. 74 111% 8 19. 2 2. 4 1. 4 0. 35 0. 54 54% 9 20 2. 2 0. 8 0. 35 0. 34 -3% 10 20. 4 2. 0 0. 4 0. 35 0. 14 -60% 11 20. 3 1. 8 -0. 1 0. 35 -0. 06 -116% What does this mean? 1. Using MC v MR - Stop when? 2. Using average product – Stop when? 3. Using GP to MP at 1: 1 – Stop when? 10

MC v MR whole of business! • Culling (a very powerful marginal decision) – MOFC herd – MOFC cow – MC v MR – Lets say we have a farm that has: • 100 cows producing 1. 9 kg MS – Milk price $6. 00/litre • Diet 10 kg irrigated grass and 5 kg concentrate – Irrigated grass cost is $0. 10/kg. DM – Concentrate cost is $0. 50/kg. DM 11

Example - culling • Culling MOFC herd – 100 cows at 1. 9 kg. MS at $6. 00/kg. MS = $1, 140 – 100 cows at 10 kg grass = $100 – 100 cows at 5 kg grain = $250 – Feed cost is $350 – MOFC is $790/day and life's good 12

Example • Culling MOFC cow No cows Prodn/cow Income/cow Feed cost Margin 25 cows 4. 1 kg MS $24. 60/day $3. 50 $21. 10 25 cows 2. 25 kg MS $13. 50/day $3. 50 $10. 00 25 cows 0. 75 kg MS $4. 50/day $3. 50 $1. 00 25 cows 0. 4 kg MS $2. 40/day $3. 50 ($1. 10) So you would cull 25 cows and drop grain from 500 kg to 125 kg Increase profit by $202/day (decrease in grain and no loss on 25 cows) That means 25% of the cows are losing money Cash from culls is in the bank We have saved other “per cow” costs 13

Example • Culling MC v MR – If I remove 1 cow from the herd how much less feed do I need? – 15 kgs – If I remove 1 cow from the herd then I will feed how much less grain? – 15 kgs – If I remove 1 cow from the herd how much less will I spend? – $7. 50 14

Example • Culling MC v MR No cows Prodn/cow Income/cow Feed cost Margin 25 cows 4. 1 kg MS $24. 60/day $7. 50/day $17. 10 25 2. 25 kg MS $13. 50/day $7. 50/day $6. 00 25 0. 75 kg MS $4. 50/day $7. 50/day ($3. 00) 25 0. 4 kg MS $2. 40/day $7. 50/day ($5. 10) So you would cull 50 cows and increase profit by $502/day and feed no grain! $502 is avoiding the loss and saved grain That means 50% of the cows were losing money We have halved our “per cow” costs and got cash in the bank from culls Probably reduced overhead costs 15

Summary • Use a business approach – Marginal cost versus marginal revenue – GP vs MP is useless – MOFC is useless • Culling is far more powerful than feeding – Don’t panic do it 1 cow at a time • Taking Stock is a good opportunity to review – Feeding and culling decisions 16

Thank you Basil Doonan bdoonan@macfrank. com. au Contact Macquarie Franklin: P 03 6427 5300 | F 03 6427 0876 | E info@macfrank. com. au | W www. macquariefranklin. com. au