Stockfeed Manufacturers Association of Victoria

Transcription

1 Stockfeed Manufacturers Association of Victoria Dairy Stockfeed Economic Analysis Report March 2013

2 This report: has been prepared by GHD for Stockfeed Manufacturers Association of Victoria and may only be used and relied on by Stockfeed Manufacturers Association of Victoria for the purpose agreed between GHD and the Stockfeed Manufacturers Association of Victoria as set out in Section 1.1 of this report. GHD otherwise disclaims responsibility to any person other than Stockfeed Manufacturers Association of Victoria arising in connection with this report. GHD also excludes implied warranties and conditions, to the extent legally permissible. The services undertaken by GHD in connection with preparing this report were limited to those specifically detailed in the report and are subject to the scope limitations set out in the report. The opinions, conclusions and any recommendations in this report are based on conditions encountered and information reviewed at the date of preparation of the report. GHD has no responsibility or obligation to update this report to account for events or changes occurring subsequent to the date that the report was prepared. The opinions, conclusions and any recommendations in this report are based on assumptions made by GHD described in this report (refer section 1.3 of this report). GHD disclaims liability arising from any of the assumptions being incorrect. GHD has prepared this report on the basis of information provided by Stockfeed Manufacturers Association of Victoria and others who provided information to GHD (including Government authorities)], which GHD has not independently verified or checked beyond the agreed scope of work. GHD does not accept liability in connection with such unverified information, including errors and omissions in the report which were caused by errors or omissions in that information. GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049 i

3 Executive summary This report is an independent study into the economic benefits the stockfeed industry provides to individual dairy farms and the broader Victorian dairy industry. The study involved: 1. A review of literature relating to supplementary feeding of dairy cattle 2. Analysis of data from the Dairy Industry Farm Monitor Project (DIFMP) conducted by Dairy Australia (DA) and the Victorian Department of Primary Industries (VDPI) 3. An economic impact analysis, assessing the broader contribution concentrates have made to the Victorian Dairy Industry and discussion of future potential. Findings A previous assessment commissioned by VDPI and DA titled The impact of innovation on the dairy industry over the last 30 years (CIE 2011) concluded that the use of concentrates (at an annual rate of 1.5 tonne per cow) directly contributes an additional 1,425 litres of milk per hectare (Ha). This impact has been observed through both a 33% increase in milk production per cow and a 50% increase in stocking rates. Additionally, at least part of the increased milk production from more efficient cows (1,919 litres per Ha) can be attributed to concentrate feeding. Operation Milk Yield (a VDPI extension program) found that concentrates increased milk production through increased cow numbers and increased production per cow which in combination produce an overall response of 1.8 litres of milk per kilogram of concentrate fed. These findings are supported by the results of the DIFMP project (2006/ /12) which found that: Average stocking rates (cows per Ha) increased with average concentrate feeding rates (kg/cow) The ratio of milk income to expenditure on concentrates increased from 3:1 in 2006/07 to around 4.5:1 in 2011/12 Concentrate expenditure was positively correlated with annual return on farm assets. Using data from the DIFMP, DA and Australian Bureau of Statistics (ABS), the impact of concentrates can be extrapolated to assess the impact on milk income, gross margins and operating profit (earnings before interest and taxes), measured on a per Ha, average farm and industry wide basis. The results in Table 1 summarise the annual impact of concentrates and the total benefit to the Victorian Dairy Industry calculated in this report. Table 1 Annual impact of concentrates on dairy productivity and profitability. unit per Ha per farm Victorian Industry Additional milk litres 1, ,000 1,046,064,000 Additional milk solids kg MS ,169 78,769,880 Additional milk income $/annum $ 592 $ 94,771 $ 434,809,735 Additional Gross margin $/annum $ 371 $ 59,404 $ 272,543,783 Additional Operating profit $/annum $ 150 $ 24,036 $ 110,277,831 ii GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

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5 Table of contents 1. Introduction Purpose of this report Methodology Assumptions Literature review Victoria Dairy Industry profile Concentrate feeding in the Dairy Industry Impacts of concentrate feeding on milk production Impacts of concentrate feeding on livestock condition and fertility Impacts of concentrate feeding on dairy farm profitability Data analysis About the DIFMP Analysis Economic impact analysis Historical economic impact Future supply chain impact analysis Conclusions References Table index Table 1 Annual impact of concentrates on dairy productivity and profitability.... ii Table 2 Snapshot of Victorian dairy farm performance... 4 Table 3 Use of grains and concentrates (percentage of producers)... 6 Table 4 Dry matter impacts on milk yields... 7 Table 5 Simulated effects of supplements on pasture intake, milk production and FCE Table 6 Nutritional effects on fertility Table 7 Impacts from increased concentrate feeding in the Victorian Dairy industry Table 8 Accumulated benefit since Figure index Figure 1 Victorian dairy production areas (DPI)... 3 Figure 2 The Dairy Supply Chain... 5 Figure 3 Concentrates, grains and by-products on dairy farms... 5 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049 iii

6 Figure 4 The major components of feed... 7 Figure 5 Factors driving increased milk production per hectare... 9 Figure 6 Stocking and concentrate feeding rates Figure 7 Ratio of milk income to concentrate expenditure Figure 8 Return on assets vs. concentrate feed costs Figure 9 Indicative impact of throughput on milk processing profits Appendices Appendix A Key profit driver study results iv GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

7 1. Introduction 1.1 Purpose of this report GHD was contracted by the Stock Feed Manufacturers Association of Victoria (SFMAV) to complete an independent study into the economic benefits the stockfeed industry provides to individual dairy farms, and the broader Victorian dairy industry Background The outlook for the 2012/13 season presents a challenging scenario for farmers. To manage the situation the market and climate has thrown up this year farmers will need to focus on getting the big drivers in their business right maximizing homegrown feed and making the most of inputs will help maximize profits. Making the most of inputs will require careful assessment, and farmers will need to determine what effect one extra unit of input into or out of the system will cost and what effect this unit of input will have on production, income and profitability Situation Outlook, Dairy Australia The dairy industry is experiencing tight margins at all points along the supply chain, due to depressed milk prices and higher input costs. In this environment farm businesses are seeking to prioritise spending in an effort to reduce costs, without substantially reducing milk production or return on assets. Many dairy farm businesses are reconsidering their spending on feed concentrates, often at the recommendation of milk companies, bank managers and other advisers within the industry. It is important to understand the soundness of this advice. From a supply chain perspective, reduced milk output at the farm level is resulting in plants and infrastructure operating at reduced capacity, therefore eroding financial return on assets and in some cases leading to plant closures (e.g. Murray Goulburn s Rochester plant). Further down the supply chain, milk companies are having difficulty providing reliable supply to key export customers and risk losing market share to other countries. This independent analysis of the economic impacts of concentrate feeding will be an important and timely contribution to the industry knowledge base. The study aims to assist the whole supply chain understand the economic impact of concentrate feeding decisions and provide information on purchasing decisions into the future. 1.2 Methodology GHD completed the following activities to inform the outcomes of this report Literature Review Impacts of concentrate feeding on milk production Impacts of concentrate feeding on livestock condition and fertility Impacts of concentrate feeding on dairy farm profitability Trends in concentrate feeding within the Australian and Victorian dairy industries (cross referenced with trends in dairy productivity, profitability, exports and animal health/fertility measures). GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

8 1.2.2 Data analysis Drawing on data from the Dairy industry farm monitor project (DIFMP), analysis was completed to test and explore the findings of the literature review. Analysis assessed the impact of concentrates on farm gross margins and total profitability. This included reviewing the years of greatest concentrate use (based on a cost per hectare) against the year of highest return (earnings before interest and tax per hectare) Economic Impact Analysis The economic impact analysis assessed the broader impact concentrates have made on per hectare (Ha), per farm and industry wide basis. 1.3 Assumptions The literature review and data analysis sections assume all information and data is accurate. The economic impact analysis assumes the estimated benefit of concentrate feeding can be applied on a per Ha, per farm or whole of industry basis. The analysis also relies on the variables listed in Table 7, drawn from DIFMP and other industry information. 2 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

9 2. Literature review The following literature review provides a compilation of research papers, journal articles, industry reports, research and development (R&D) projects and other data and research relating to the following areas: 1. Trends in concentrate feeding within the Australian and Victorian dairy industries 2. Impacts of concentrate feeding on milk production 3. Impacts of concentrate feeding on livestock condition and fertility 4. Impacts of concentrate feeding on dairy farm profitability The literature review aims to provide clear factual material, drawing on credible and relevant sources providing stand-alone material for SFMAV members to draw upon, while also providing the contextual framework for the subsequent model farm and economic impact analysis (Section 4). 2.1 Victoria Dairy Industry profile There are around 4,500 dairy farms in Victoria, spread relatively evenly between the three major production regions Gippsland, Murray/Northern Victoria and South Western Victoria. In , the Victorian dairy herd totalled around 1 million head. Farm numbers have declined over time as the dairy industry has consolidated and improved economies of scale. Average dairy herd sizes more than doubled between 1980 and 2007, while farm numbers more than halved during the same period (Victorian DPI). Figure 1 Victorian dairy production areas (DPI) Key recent trends include: GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

10 Milk production figures for North Victoria show production increases in for the first time in five years and with that trend continuing into Year to date milk production is 6.4 per cent higher to January 2013 compared to January 2012 in Northern Victoria with statewide production increasing 0.5 per cent over the same period ( sourced 27 March 2013). Victoria produces around 86 per cent of Australia s dairy product exports, worth around $1.96 billion in As a result, returns to farmers are strongly connected to world dairy commodity prices and exchange rates. Table 2 outlines farm performance between 2008 and 2011 (according to the DIFMP) which demonstrates the variability in return on assets due to the cyclical nature of seasonality and volatility of milk prices. Table 2 Snapshot of Victorian dairy farm performance Measure Average milk sold (kg ms*/cow) Average herd size Gross farm income ($/kg ms) Variable costs ($/kg ms) Overhead costs ($/kg ms) Return on assets % (exc. capital appreciation) Return on equity % (inc. capital appreciation) Average equity (%) Source: DIFMP * ms = milk solids 2.2 Concentrate feeding in the Dairy Industry Role of concentrate feeds Livestock concentrates are feeds that contain a high density of nutrients, usually low in crude fibre content (less than 18% of DM) and high in total digestible nutrients (FAO 2012). Concentrates may be high in energy, referred to as energy concentrates, such as cereals and milling by-products, or high in protein, with over 20% crude protein, referred to as protein concentrates. Concentrates may be fed in raw or milled forms as individual feeds, or may be blended or formulated into balanced rations for particular production purposes (compound feeds). The primary role of concentrate feeds is to provide concentrated sources of necessary nutrients for livestock production. These nutrients include not only macro-nutrients of energy and protein but also important specific nutrients such as amino acids, fatty acids, enzymes, vitamins, minerals and others. The benefits that arise from supplementary feeding include higher stocking rates; promotion of growth in heifers and young cows; better body condition score (BCS) and increased lactation length when pasture is less available; improved pasture use; reduced cost per tonne of pasture eaten; flexibility to increase milk production when milk prices are high; and increased milk protein content when the energy content in pasture is low (Kellaway 2004). The dairy supply chain as depicted in the DA Strategic Plan (Figure 2), demonstrates the fundamental role feed inputs play within the industry 4 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

11 Figure 2 The Dairy Supply Chain Trends in concentrate feeding within the Australian and Victorian dairy industries All regions are dependent on concentrates with average proportion of metabolisable energy (ME) sourced from concentrates at 32% for the North, 35% for the South West and 30% for Gippsland (DIFMP 2012). To gain a perspective on the usage of concentrates on dairy farms in Australia, the orange line in Figure 3 illustrates that the quantity of grains and concentrates used per cow doubled between and , from 0.9 tonnes to 1.8 tonnes (Ashton and Mackinnon 2008). Figure 3 Concentrates, grains and by-products on dairy farms Source: ABARES 2012 ABARES Dairy Outlook 2012 shows the average use of grains and concentrates in as 1.47 tonnes per cow nationally, as demonstrated in the Table 3 below. There is considerable variation between states and regions. 1 Dairy Australia Strategic Plan GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

12 Table 3 Use of grains and concentrates (percentage of producers) Measure Less than 0.5 tonnes per cow % 0.5 to 1.0 tonnes per cow % 1.0 to 2.0 tonnes per cow % More than 2.0 tonnes per cow % Average grain and concentrates fed per cow tonnes Australia Northern NSW and Queensland Northern Victoria and Riverina Tasmania Western Australia South Australia Gippsland Western Victoria Southern and Central NSW Source: Adapted from ABARES Dairy Outlook 2012 The spectrum of production systems within Australia is extending from the wholly pasture-based system towards the feeding of partial mixed rations (PMR) or total mixed rations (TMR), such that there are now five recognised farming systems based on feeding practice (DME 2009): 1. Pasture + other forages + <1.0 tonne grain/concentrate per cow (fed in bail) 2. Pasture + other forages + >1.0 tonne grain/concentrate per cow (fed in bail) 3. Pasture + PMR ± grain/concentrate (fed in bail) 4. Hybrid: Pasture + PMR + grain/concentrate per cow (fed in bail) at various times 5. TMR. According to Victorian DPI s Innovation doubles milk production review, RD&E into supplements fell into two streams: The nutrient requirement of cows at lactation The production and utilisation of non-pasture feed supplements to cover feed gaps Extension programs that have focused on feed supplements in Victoria included: Operation Milk Yield ( ): Focused on the response of established herds to concentrate feeding. The aim was to examine the effect on animal productivity and farm profitability Operation Mid Lactation ( ): Used 600 farms across northern Victoria to demonstrate the effect of feed and pasture management on post peak lactation milk yields Target 10 (Phase two ): Aimed to improve feed budgeting skills of farmers when supplementary feed inputs were combined with pasture inputs. The two main areas of investigation in Operation Milk Yield were intensive production and the effect of feeding concentrates in mid to late lactation. The project provided information on the trade-offs involved with more intensive farming. The optimal use of concentrates could allow increased stocking rates and per hectare milk output while maintaining or increasing per cow milk yields. It was a major contribution to the knowledge base on concentrate feeding and subsequent farm production gains The project also provided information on the gains from concentrate feeding in summer and autumn. Lower quality and quantity of pasture in the mid to late lactation period 6 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

13 affected milk yields. The research provided evidence on the yield gains from using concentrates to supplement feed gaps. It showed there were other benefits such as extending the length of lactation, improving cow condition and aiding pasture management. 2.3 Impacts of concentrate feeding on milk production Nutrient requirements for milk production Optimisation of milk production is the key purpose of each cow in a dairy business. Essential to this objective is a diet that enables animals to fulfil the functions of lactating and of reproducing annually (Jacobs 2002). The nutrients required by dairy cows are water, energy, protein, fibre, vitamins and minerals (Figure 4). Figure 4 The major components of feed Source: Jacobs 2002, Feeding Dairy Cows Dry matter contains the nutrients (energy, protein, fibre, vitamins, minerals) required to generate energy (measured as digestible and metabolisable energy). Energy levels are directly related to milk production in that a cow needs to consume a certain required feed intake (measured in kilograms of dry matter per day) to meet the energy requirements (measured in megajoules per kilogram of dry matter) which yield a certain quantity of milk. Table 4 demonstrates the amount of dry matter required daily for cows producing at two levels of milk production. Table 4 Dry matter impacts on milk yields Milk yield (litres/day) Energy requirement (MJ/kg DM) Required intake (kg DM/d) 10 MJ Required intake (kg DM/d) 12 MJ Source: Stockdale 1991 Dairy farmers target a specific milk yield in their herds and aim to meet those yields through optimising each cow s energy intake in the most efficient and cost effective way. Each component of dry matter is assessed to maximise the yield potential and optimise the balance of each element. GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

14 2.3.2 Why concentrate feeding is used in milk production Concentrate feeding is used in the dairy industry to maintain or enhance animal health, performance and ultimately milk production. The decision by a dairy farmer to use concentrate feeding is due to one or a combination of the following factors: A need for a nutrient supplement (energy, protein and/or fibre) The availability and composition of supplements The relative costs of concentrate feeding compared to pasture The practical implications (e.g. facilities for storage and feeding, machinery for feeding out, labour requirements, reliability of supply, etc.) Fulkerson et al (1997) state that concentrates can be given to: fill seasonal feed gaps allow pasture growth and utilisation to be optimised ensure that cows are on a rising plane of nutrition at mating According to Roche and Holmes (2007) responses to supplements (ie concentrates) depend on three main factors (assuming a constant supplement quality): Physical loss of supplements Substitution of supplements in lieu of pasture Partitioning of nutrients These determine the likely milk production, fertility and health response to concentrates, and the profitability of supplement use on dairy farms. These will be explored further in the following sections and the economic benefits (including milk prices) detailed in Section The effect of concentrate feeding on milk production Feeding high-energy concentrate supplements to a milking herd has direct benefits to milk production, and the additional supply of non-fibre carbohydrates - mainly starch - also has the potential to lift milk composition, particularly milk protein (Walker 2005). Concentrate quantity and type affect partitioning into metabolic products which have an effect on the quantity (litres) and quality (protein, solids) of milk produced (Jacobs 2002). Feeding concentrates during the first six weeks post-calving increased energy intakes and tended to increase milk protein production and peak milk and milk solids yields (Phyn et. al. 2012). Over the last 30 years the increased use of supplements to 1.5 tonnes of dry matter per cow means that the 2010 cow now consumes 33 per cent more non-pasture dry matter per year than the 1980 cow which translates into a 950 litre increase in milk per hectare relative to the 1980 situation. However, combined with a 50 per cent increase in stocking rate, on a per hectare basis the increase translates into a total increase of 1,425 litres of milk per hectare from supplements (CIE 2011). Figure 5 also highlights the increased productivity (1,919 litres or 34%) gained from more efficient cows. More efficient cows refer to genetic improvements and larger framed cows. 8 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

15 Figure 5 Factors driving increased milk production per hectare Source: CIE 2011 The CIE report (page 45) adds genetics has potentially a very large contribution to observed increase in yields per cow but less impact on yield per hectare basis without concomitant increases in feed without more feed (particularly supplements) modern cows would require stocking rates to fall to obtain the increase in output per cow. It makes little sense to select for higher yielding cows without initiatives that support higher levels of nutrition. Accordingly, concentrate feeding is essential to supporting higher levels of nutrition. In addition to the direct benefit of supplements (1,425 litres per ha), part of the increased milk production from more efficient cows (1,919 litres per ha) can be attributed to concentrate feeding supporting higher levels of nutrition. The CIE report shows the proportion of observed increases in yield per cow is explained by supplementary feeds alone. The most significant factor is due to filling seasonal nutrition gaps resulting in an increase in feed conversion efficiency. When offered in feed deficit situations and when fed to high genetic merit dairy cows each kilogram (kg) of concentrate will result in an increase of 1 to 1.25 kg of milk production (Roche, and Holmes, 2007). They add that milk production responses are dependent on the substitution GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

16 rate, the quality of the supplement relative to the grazed forage, and the proportion of additional energy that is directed into milk relative to body tissue gain and conclude that by supplementing cows that would otherwise be underfed, the extra dietary energy can produce more milk by one or all of the following: Increasing milk yield per day Increasing the number of days in milk Increasing the number of cows grazed per hectare. Various literature reports discuss the limit of milk response to increasing concentrate levels and the likely optimal level of concentrate feeding (Fulkerson et al 1997). Their key finding is that feeding concentrates leads to increases in stocking rates which indirectly increases productivity and that the direct benefits of feeding concentrates are minor. Other evidence suggests differences in individual cow response to concentrates such that it is possible to achieve more milk production from the same amount of total concentrate fed each day by allocating feed individually compared with fixed rate feeding (Garcia 2009). Milk yields of cows that received concentrates based on individual cow requirements was 9% higher than the cows fed a fixed rate (Garcia 2009). Using concentrates also allows an increase in the stocking rate that can allow more efficient use of excess pasture availability. Operation Milk Yield (see Section 2.2.2) found the effects of increasing stocking rates in conjunction with concentrate feeding on four Victorian farm over three years were (Kellaway et al 2004): Increased production of milk through: Increased cow numbers Increased production per cow Combining both of these factors, the study found the overall response was 1.8 litres of milk per kilogram of concentrate. Improved use of pasture. Increased stocking rates resulted in reduced substitution, less wastage and improved quality of pasture Increased lactation length. Concentrate feeding increases milk yields in late lactation and extended lactation length by an average of 14 days Increased proportion of milk produced in autumn (which corresponds with late lactation) Greater flexibility in pasture management, allowing for rotations to be extended. In addition to Operation Milk Yield in Victoria, the TasMilk60 study in Tasmania provided the following key findings: Protein to fat ratio is generally higher on farms where more concentrates are fed Feed conversion efficiency (FCE) was generally higher on farms where higher amounts of concentrates were fed Farms feeding moderate to high levels of concentrates tended to achieve higher increases in profit than the low concentrate feeding category. The report concluded milk income per cow and per hectare was generally higher on farms where more concentrates were fed, but varied substantially within each concentrate feeding category (high, medium and low). It also noted that any concentrate feeding level or production / feeding system can be profitable in any year, given an appropriate mix of management, milk price and input costs. 10 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

17 Table 5 below outlines the simulated effects of supplements on daily pasture intake, milk production and FCE based on ME concentrate (11.5 MJ ME/kg) and amount of concentrate supplement (12 MJ ME/kg DM) supplied on pasture intake (Beever and Doyle, 2007). Table 5 Simulated effects of supplements on pasture intake, milk production and FCE Supplement per day* 0 kg 2 kg 4 kg 6 kg Pasture intake Milk production Feed conversion efficiency (FCE) Impacts of concentrate feeding on livestock condition and fertility In addition to optimising milk production, livestock condition and fertility are key considerations to animal health and performance in the dairy industry. Nutrition levels are recognised as one component affecting both livestock condition and fertility. Others include managerial, environmental and genetic factors Livestock condition An FAO report, Balanced Feeding for Improving Livestock Productivity notes that concentrate feed ingredients are required to meet the nutrient requirement of animals for body maintenance and milk production. Additionally, lactating animals need extra feed above maintenance, depending upon the quantity of milk they produce and the percentage of fat in the milk. Transition management is important to make a cow or heifer s transition from being dry and heavily pregnant to fully lactating (three weeks either side of calving) as smooth and stress-free as possible. Concentrate supplements are required to provide enough energy and protein to meet the needs of cows close to calving, which play an important part in improving early lactation milk production (VDPI 2011). Concentrates contribute to meeting the needs of the cow and the developing calf, prepare the rumen for the milker ration and help prevent metabolic diseases such as milk fever. While concentrates do not influence BCS loss during the first six weeks of lactation, concentrate supplements thereafter will reduce BCS loss and increase the rate of BCS gain (Roche and Holmes 2007) Fertility and health The fertility of the Australian dairy herd has been in constant decline over the past 20 years (Woolaston and Shephard 2011). Nutrition is just one component which impacts on fertility rates in dairy herds with the effects summarised Table 6 (Jacobs and Hargreaves 2002). Table 6 Nutritional effects on fertility Nutritional requirement Energy Effects on fertility Effects of energy intake on: Submission rates Conception rates GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

18 Protein Excess protein Protein deficiency Minerals, trace elements and vitamins Lack or imbalance of: Calcium Magnesium Phosphorus Selenium Detecting deficiencies Energy is the major nutrient required by adult cattle and inadequate energy intake has a detrimental impact on reproductive activity (Santos 2001). Diets which promote increases in plasma glucose and insulin improve the metabolic and endocrine status of cows in early lactation by having a positive influence on energy levels and consequently improvements in fertility. High protein diets or protein deficiencies can cause fertility problems. A report by the UK Milk Development Council, Economic Feeding for High Fertility, highlights a number of issues regarding fertility in dairy cows, concluding extremes of body condition, less than 1.5 or greater than 4 (BCS), will reduce reproductive performance. Although a high protein diet alone is not always an issue, when in combination with sub-optimal energy supply it can compromise fertility. Butler (1998) observed poor fertility in high producing dairy cows reflects the effects of negative energy balance or postpartum health problems that is further compromised by the effects of urea resulting from intake of high dietary protein. Cows supplemented with concentrates around the time of mating had higher conception rates than unsupplemented cows (McClure 1970). In herds producing around 8,000 litres per cow/lactation, cows allocated to receive a high-energy supplement from 40 days after calving for around five weeks had increased conception rates to first service relative to unsupplemented herd mates (Pehrson et al 1992). One of the key recommendations of a 2011 report for the Gardiner Foundation prepared by Woolaston and Sheppard, Improvement of the reproductive performance of Victorian dairy herds, was: Cost-effective nutritional supplement programs that can improve herd reproductive performance are needed, together with practical strategies for monitoring herd nutritional and/or metabolic health in a grass-based production system. The report suggested research was required which: Leads to an understanding of the physiological mechanisms that cause the observed relationship between milk protein concentration and fertility Identifies and quantifies the key relationships between nutrition and reproduction. It should focus on nutritional strategies and solutions applicable to the pasture-based system and should include consideration of genetic, metabolic, and endocrine interactions with nutrition. The aim is to develop a greater understanding of the pathways, interactions and time dependency between nutrition and reproduction Identifies effective nutritional management programs that are able to limit BCS loss and negative energy balance (NEB) in cows with high genetic merit for milk production. This work effectively asks if dietary management can effectively be used to redirect nutrients away from milk production towards other essential processes (thereby preserving BCS and limiting NEB) in cows of high genetic merit for milk production. Effective metabolism- 12 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

19 modifying diets should be investigated for their impact on endocrine pathways operating at the ovarian and uterine level. 2.5 Impacts of concentrate feeding on dairy farm profitability Economic benefits Kellaway and Harrington (2004) conclude that a realistic assessment of the benefits of feeding supplements would include the economic benefits arising from the following factors: Higher stocking rates are possible, increasing the milk income per hectare When the stocking rate is increased pasture use is improved as the cows consume a greater proportion of what is grown. This reduces the cost per tonne of the pasture eaten The growth of heifers and cows that have not reached mature size is promoted. This increases their appetite and milk production potential in future lactations, as well as in the current one Cows fed supplements maintain better BCS when pasture availability is low. This increases their ability to reach their milk yield potential and helps reduce the time to their first oestrus after calving When milk prices are high, feeding supplements can increase net milk income Feeding supplements when pasture availability is low can increase lactation length Appropriate supplementation can increase milk protein content when the energy intake from pasture is low. To assess the economic benefits of concentrate feeding, it is important to measure the marginal income and marginal costs associated and also assess the impacts on nonconcentrate feed costs as well as the additional benefits (such as increased stocking rates). The TasMilk60 study concludes that given the appropriate mix of management, milk prices and input costs, concentrates can increase profits at all usage levels. Section 4 contains an economic impact analysis which explores economic benefits further using data from the DIFMP, DA and ABS The contribution of concentrates to profitability The synopses of available literature points towards concentrates or feed supplements, when used correctly and in combination with other best management practices, as having a positive effect on the profitability of dairy farmers and the dairy industry as a whole. The report A Study of Key Profit Drivers in the Victorian Dairy Industry (Moran et al 2000) finds increasing farm profitability to be generally associated with larger area, larger herd size, higher stocking rate, greater milk yield per cow and higher milk price. The more profitable farmers fed higher levels of concentrate per cow and achieved higher pasture consumption per hectare thus harvesting a greater proportion of the total dietary energy as milk and also milked more cows per labour unit. This led to increasing milk yields per total and grazed hectare and more milk produced per kg of total feed DM consumed. Additionally, the study found cows must be provided with sufficient concentrates to overcome the more frequent and severe energy gaps across the year associated with higher stocking rates (refer to results in Appendix A). The Queensland DPI fact sheet Economics of concentrate feeding, concluded a high rate of concentrate feeding is profitable if coupled with maximum production and utilisation of homegrown forage, a balanced ration and high milk production per cow. GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

20 Cutting back on the use of concentrates is noted as having a long term decline on lifetime performance and longevity. According to an article published in the Farmers Guardian (UK) titled Cutting back on concentrates is a false economy (February 2011) Trident's Dr Michael Marsden stated that "cutting back concentrate inputs for yearlings and delaying service may appear to be a way to save money, but will nearly always be a false economy in the long-run. For in-calf heifers, there's simply no option but to properly support pregnancy and make sure they calve down as close to target weight as possible." CIE (2011) summarises the three key drivers to increased profitability in the dairy industry as being a combination of increased pasture production and utilisation, increased supplementary feeding and more efficient cows. 14 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

21 3. Data analysis This section uses raw data from the DIFMP to analyse trends of concentrate feeding rates and prices against production and profitability measures over the six year period in which the program has been running. 3.1 About the DIFMP Since 2006, the DIFMP has been collecting data from 56 farms from across three regions of Victoria: Northern Victoria, South West Victoria and Gippsland. Participants have been selected with the objective of representing a distribution of farm sizes, herd sizes and geographical locations within each region 2. The project provides annual data on concentrate feeding as well as economic performance of farms. 3.2 Analysis Impact on stocking rates Over the period average concentrate feeding rates have increased, along with stocking rates. Figure 6 indicates a correlation between concentrate feeding and stocking rates, although multiple other factors can contribute to variations in both. Figure 6 Stocking and concentrate feeding rates Return on concentrate investment Average net milk income compared to average expenditure on concentrates has increased from a ratio of 3:1 in 2006/07 to around 4.5:1 in 2011/12, as demonstrated in Figure 7. 2 Refer to GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

22 Figure 7 Ratio of milk income to concentrate expenditure Impact on return on assets There is also a degree of correlation between annual average return on assets against the average cost of concentrate feed on a dollar per cow basis (Figure 8). Return on assets was highest in and this coincided with the highest average expenditure on concentrates ($800/cow/year) while return on assets was low in which coincided with the lowest average expenditure on concentrates ($500/cow/year). Figure 8 Return on assets vs. concentrate feed costs Individual farm performance Comparing the performance of individual farms within the DIFMP survey provides insight into how investment in concentrates correlates with profitability. During the six years the project has been running, 46 sample farms have participated in four or more years. 16 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

23 Of these 46 farms: 48% recorded their highest earnings before interest and taxes (EBIT) per ha, in the year in which they made their largest outlay in concentrates per ha. A further 24% of farms recorded their highest EBIT in the year in which they made their second largest outlay in concentrates per ha 8.6% of properties recorded their highest EBIT in the year in which they made their lowest outlay in concentrates per ha. GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

24 4. Economic impact analysis 4.1 Historical economic impact As discussed in section above the feeding of supplements has been responsible for 33% of the production increase in the Australian dairy industry since This equates to an additional 1,425 litres of milk per ha. Using data from the DIFMP, DA and ABS, this impact can be extrapolated to assess the impact on milk income, gross margins and operating profit (earnings before interest and taxes), measured on a per Ha, average farm and industry wide basis. The results (Table 7) demonstrate that as a result of concentrate feeding the industry is today annually producing: Per Ha: an additional 1,425L (107 kg MS), which equates to an additional $592 of milk income, $371 of gross margin and $150 of operating profit Per Farm: an additional 228,000L (17,000 kg MS), which equates to an additional $95,000 of milk income, $59,000 of gross margin and $24,036 of operating profit. Victorian Industry: an additional 1.05 Billion L (79 million kg MS), which equates to an additional $434M of milk income, $273M of gross margin and $110M of operating profit. These results are based on average concentrate feeding of 1.5t per cow, however in and the average feeding rate was over 2t per cow. This suggests the productivity and profitability benefits may in fact be higher. Table 7 Impacts from increased concentrate feeding in the Victorian Dairy industry unit per Ha per farm Victorian Industry Additional milk litres 1, ,000 1,046,064,000 Additional milk solids kg MS ,169 78,769,880 Additional milk income $/annum $ 592 $ 94,771 $ 434,809,735 Additional Variable costs $/annum $ 221 $ 35,367 $ 162,265,952 Additional Gross margin $/annum $ 371 $ 59,404 $ 272,543,783 Additional Overheads $/annum $ 221 $ 35,367 $ 162,265,952 Additional Operating profit $/annum $ 150 $ 24,036 $ 110,277,831 Variables Litres/kg MS ratio Average farm size Ha 160 Milk price c/litre Milk price $/kg MS $5.52 Farm numbers No Variable costs $/kg MS $2.78 Overhead costs $/kg MS $2.06 Assuming the benefits of concentrate feeding have accumulated at a steady rate since 1980, the accumulated benefits on a per Ha and per farm basis are extrapolated in Table GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

25 Table 8 Accumulated benefit since 1980 Per Ha Per farm Victorian Industry Additional milk (litres) 23,513 3,762,000 17,260,056,000 Additional milk (kg MS) 1, ,283 1,299,703,012 Additional milk income $9,773 $1,563,723 $7,174,360,627 Gross margin $6,126 $980,160 $4,496,972,422 Operating profit $2,479 $396,596 $1,819,584, Future supply chain impact analysis Maintaining milk supply remains a high priority for Victorian milk processing companies. The 2011 Murray Goulburn Co-Operative Prospectus 3 lists milk supply as the top risk to the company s performance. Currently many milk factories and supply chain assets are running at less than full capacity on account of reduced supply volumes. Given the high fixed costs associated with maintaining and operating these assets, reduced throughput is particularly damaging to operating profits. Milk processors are particularly interested in lifting throughput in order to take advantage of export opportunities. Export customer loyalty to Australian suppliers is being tested by the high Australian Dollar. Failure to offer customers consistent supply volumes would result in a loss of market share to other suppliers. GHD modelled the potential impact of changes in throughput to the profitability (EBIT) of a typical milk processing company. The results (Figure 9) suggest that a 5% increase in throughput will produce a 148% increase in EBIT. Figure 9 Indicative impact of throughput on milk processing profits 3 Murray Goulburn Co-Operative Co Limited, 2011 Prospectus, GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

26 5. Conclusions Concentrate use in the Victorian Dairy Industry has increased so that usage now contributes between 30-35% of total metabolisable energy requirements (DIFMP 2012). Concentrates have been responsible for: Increased milk production: estimated at 1,425 litres of additional milk per Ha (CIE 2011) Improved livestock condition and fertility by; o providing required energy and protein during calving and lactation (VDPI 2011). o improving BCS in mid and late lactation (Roche and Holmes 2007). o increasing submission and conception rates (through the provision of energy) and reducing nutrient imbalances (through the provision of protein, minerals, trace elements and vitamins) (Jacobs and Hargreaves 2002) Increased profitability: by contributing to higher milk yields per cow, higher stocking rates and a higher overall herd size (Moran et al 2000). Overall, GHD calculations indicate that concentrates increase the average annual operating profit of Victorian dairy farms by $150 per Ha or $24,036 per farm, equating to an annual benefit of over $110 million (without accounting for additional multiplier supply-chain benefits). 20 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

27 References Ashton, D and Mackinnon, D Australian dairy industry: Use of technology and management practices on dairy farms, Research report 08.12, Canberra, December Beever, D and Doyle, P Feed conversion efficiency as a key determinant of dairy herd performance: a review. Australian Journal of Experimental Agriculture, 47, Biggadike, H, Laven, R and Bull, R Economic Feeding for High Fertility, Milk Development Council, Gloucestershire UK. Centre for International Economics (CIE), The impact of innovation on the dairy industry over the last 30 years: Evaluating the contribution of industry and government investment in pre farm gate RD&E, Canberra and Sydney. Dairy Australia Findings from the TasMilk60 study, Performance, Profit and Risk. Victoria. Dairy Industry Farm Monitor Project (DIFMP), Department of Primary Industries Victoria and Dairy Australia Dairy Moving Forward: A National Research, Development and Extension strategy report, Victoria. Dharma, S Australian dairy: Financial performance of dairy producing farms, to ABABES, Canberra. FAO, 2012, < FAO Balanced feeding for improving livestock productivity Increase in milk production and nutrient use efficiency and decrease in methane emission. M.R. Garg. FAO Animal Production and Health Paper No Rome, Italy Farmers Guardian: Cutting back on concentrates is a false economy, 11 Feb 2011, UK Fergusson, M Relationships between concentrate intake, milk income and costs for Tasmanian dairy herds. Tasmanian Institute of Agriculture. Fulkerson, B, Blacklock, M and Nelson, N Managing Pastures, Dairy Link, NSW Department of Primary Industries and Dairy Research and Development Corporation. Garcia, Y Feeding concentrate: flat rates vs. individual rates, Future Dairy, University of Sydney, Australia. Jacobs, J and Hargreaves, A A Feeding Dairy Cows: A manual for use in the Target 10 Nutrition Program, Department of Natural Resources and Environment, Victorian State Government, Melbourne, Victoria, Australia Kellaway, R and Harrington, T Feeding Concentrates: Supplements for Dairy Cows, Dairy Australia and Ridley Agriproducts, Collingwood, Victoria. McClure TJ An experimental study of the causes of a nutritional and lactational stress infertility of pasture-fed cows, associated with loss of body weight at about the time of mating. Research in Veterinary Science 11: Moran J, Drysdale, G Shambrook, D and Markham, N A Study of Key Profit Drivers in the Victorian Dairy Industry. Department of Natural Resources and Environment, Victoria Phyn C, Kay J, Clarke D and Dalley D Grazing cows milked once- or twice-daily have similar milk production responses to energy supplements during early lactation. Dairy NZ. GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/

28 Pehrson B, Forshell KP and Carlsson J 1992, The effect of additional feeding on the fertility of high-yielding dairy cows. Journal of Veterinary Medicine. Series A 39: Roche J, and Holmes C Milk production, body condition score and reproduction responses to supplementation in grazing dairy cows. University of Tasmania, Australia and Massey University, New Zealand Santos, J Dietary Ingredients and Nutritional Management Impact Fertility in Dairy Cattle. Veterinary Medicine Teaching and Research Center, School of Veterinary Medicine, UC Davis, USA. Stockdale, C Feeding supplements for dairy cows. In Dairying and Feed Supplements: How do they Fit Together? Ed. Glen Donahue. Department of Agriculture, Victoria. Victoria Department of Primary Industries, Innovation doubles milk production, viewed November 2012 < Victoria Department of Primary Industries, Transition Cow Management. Wilson GF, Mackenzie DDS and Holmes CW Blood metabolites and infertility in dairy cows. Proceedings of the New Zealand Society of Animal Production 45: Woolaston, R and Shephard, R Improvement of the reproductive performance of Victorian dairy herds, Gardiner Foundation 22 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

29 Appendices GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

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31 Appendix A Key profit driver study results Results from A Study of the Key Profit Drivers in the Victorian dairy Industry 24 GHD Report for Stockfeed Manufacturers Association of Victoria - Dairy Stockfeed Economic Analysis, 21/22049

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33 GHD 133 Castlereagh St Sydney NSW T: F: E: sydmail@ghd.com.au GHD 2013 This document is and shall remain the property of GHD. The document may only be used for the purpose for which it was commissioned and in accordance with the Terms of Engagement for the commission. Unauthorised use of this document in any form whatsoever is prohibited. G:\21\22049\WP\ docx Document Status Rev No. Author Reviewer Approved for Issue Name Signature Name Signature Date Joe Lane Joe Lane 12/3/13 0 Seamus Hoban 1 Seamus Hoban Joe Lane Joe Lane 27/3/13

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