What s Driving Dairy Profitability. Greg Bethard, Ph.D. GPS Dairy Consulting, LLC Blacksburg, VA

What s Driving Dairy Profitability Greg Bethard, Ph.D. GPS Dairy Consulting, LLC Blacksburg, VA gregbethard@gpsdairy.com

Concepts Benchmarking is a bad idea Goal Setting and tracking makes a lot of sense The lowest cost/cwt typically wins Most Dairies have 3 enterprises Replacement, Farming, Milking Cows Economics trumps Biology Margins matter, ratios don t

Norwood MO Dairy Sale Holstein Springer 7-9 Months Bred $2,500 $2,300 Selling Price $2,100 $1,900 $1,700 $1,500 $1,300 $1,100 $900 Jan- 08 Mar- 08 May- 08 Jul- 08 Sep- 08 Nov- 08 Jan- 09 Mar- 09 May- 09 Jul- 09 Sep- 09 Nov- 09 Jan- 10 Date of Sale Mar- 10 May- 10 Jul- 10 Sep- 10 Nov- 10 Jan- 11 Mar- 11 May- 11 Jul- 11 Sep- 11 Nov- 11 Jan- 12 Mar- 12 Supreme Approved

Land, People, Water US China India PopulaBon 300 million 1.3 billion 1.2 billion % of world 4.5% 20% 17% Arable land, ha 179 million 135 million 169 million % of world 12.3% 11.7% 9.3% per capita 0.60 0.10 0.14 Water, km 3 /yr 2,071 2,830 1,908 % of world 4.7% 6.5% 4.4% per 100K populalon 0.69 0.22 0.16 Note: Water resources from fao.org

How do you prepare for a downturn? Build a cushion: Have enough equity to absorb a $3.00/cwt loss for 12 months? How much equity should a dairy have? Is the dairy budgeting (projecting P&L s)?

Top Three Costs of Producing Milk 1. Feed cost/cwt 2. Replacement Cost/cwt 3. Labor cost/cwt Do you know your cost per cwt?? Does your accounting system put expenses in the proper buckets?

Problem with Cost/cwt Ignores income Holstein versus Jersey Premiums Is cull cow income part of income? should be part of replacement cost Is milk hauling a cost? Best Single Number? Breakeven milk price, considering basis (relative to Class III)

2 Key Drivers of Financial Success.. Cwts Milk Sold Marginal milk sold each day trumps marginal milk per cow Herd Health

Winning Formula Ship a lot of milk from facility Outstanding herd health Generate lots of pregnancies (cows and heifers) Strong replacement herd Cull aggressively Maximizing these will minimize the Big 3 costs

How Many Pounds Should a Dairy Ship? Pound sold/parlor stalls/24 Example 1 (Double 60, 6050 cows, 75 lbs) 450,000/120/24 = 156

How Many Pounds Should a Dairy Ship? Pound sold/parlor stalls/24 Example 1 (Double 60, 6050 cows, 75 lbs) 450,000/120/24 = 156 Example 2 (60 rotary, 4200 cows, 70 lbs) 294,000/60/24 = 204

What is the best reproductive measure? What is the industry benchmark?

How Many Pregnancies Does a Dairy Need?

How Much is Better repro worth? Improving Pregnancy Rate: Improves lactation distribution i.e. more cows in early lactation Bethard and DeVries (2012) Improved repro reduced costs $0.37 to $2.16/cwt High Milk herds benefited the most

Good to Great Avg to Good Poor to Avg Poor to Great

Replacement Cost: #2 cost of producing milk Only item on financial statement that is at alltime low

Replacement Cost Accountants are required to calculate Not unique to dairy industry; common to insurance and other industries Manufacturing Businesses: cost of keeping productive assets needed to produce desired volume of product.

Question?? Does a Dairy Herd Depreciate?

What does replacement cost really mean to a dairy? The Cost of Maintaining Herd Size and Structure Two methods: 1. GAAP (Generally Accepted Accounting Principles) 2. Cash Method

Cash Method Cost of Replacements - Value of Sold Cows Cwts milk sold

Cost of Replacements Cost of purchasing springing heifers Major driver when springers are expensive Typically an advantage to home-raised Feed and other rearing costs for heifers Age at First Calving Number of replacements needed

Distribution of Heifer Calving Ages 23 month age at first calving

Distribution of Heifer Calving Ages 24 month age at first calving

By Times Bred from 9/27/10 through 9/27/11 Bred Number 95% CI %Conc #Preg #Open Other Abort Total %Tot SPC ==================== ====== ===== ===== ===== ===== ===== ===== ==== ==== 1 50-54 52 1666 1544 225 39 3435 68 1.9 2 58-63 60 707 463 * 136 7 1306 26 1.7 3 45-59 52 99 93 * 47 0 239 5 1.9 4 21-59 38 8 13 * 11 0 32 1 2.6 5 6-79 33 1 2 1 0 4 0 3.0 TOTALS 53-55 54 2481 2115 420 46 5016 100 1.9 499 non-ai breedings were omitted

21 day pregnancy risk Wait Period 395 Date Br Elig Bred Pct Pg Elig Preg Pct Aborts ======== ======= ==== === ======= ==== === ====== 10/19/10 389 259 67 388 195 50 5 11/09/10 352 228 65 352 163 46 6 11/30/10 337 222 66 336 152 45 6 12/21/10 328 223 68 328 151 46 5 1/11/11 346 230 66 345 149 43 5 2/01/11 351 226 64 351 138 39 2 2/22/11 383 275 72 383 184 48 2 3/15/11 393 258 66 393 166 42 0 4/05/11 437 295 68 437 175 40 1 4/26/11 415 288 69 414 210 51 1 5/17/11 335 204 61 335 132 39 0 6/07/11 359 235 65 358 149 42 0 6/28/11 390 269 69 387 164 42 1 7/19/11 424 283 67 421 173 41 0 8/09/11 385 251 65 * 300 82 27 0 8/30/11 430 293 68 * 242 4 2 0 9/20/11 391 252 64 0 0 0 0???? Preg Stat 10/11/11 355 197 55 0 0 0 0???? Preg Stat -------- ------- ---- --- ------- ---- --- ------ Total 6054 4039 67 5770 2387 41 34 Wait Period 395

Cash Method Cost of Replacements - Value of Sold Cows Cwts milk sold

Value of Sold Cows Number cows sold death loss condemned Quality of Cows sold Are you selling $800 fat and open cows, or $200 junk cows?

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day Cwts/year Cull rate Death loss $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year Cull rate Death loss $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate Death loss $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate 35% 35% 25% 45% Death loss $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate 35% 35% 25% 45% Death loss 5% 10% 5% 5% $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate 35% 35% 25% 45% Death loss 5% 10% 5% 5% $/cull $500 $275 $500 $500 Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate 35% 35% 25% 45% Death loss 5% 10% 5% 5% $/cull $500 $275 $500 $500 Culls/yr to sell 300 250 200 400 Replacements, $/head # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate 35% 35% 25% 45% Death loss 5% 10% 5% 5% $/cull $500 $275 $500 $500 Culls/yr to sell 300 250 200 400 Replacements, $/head $1200 $1700 $1100 $1200 # replacements Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate 35% 35% 25% 45% Death loss 5% 10% 5% 5% $/cull $500 $275 $500 $500 Culls/yr to sell 300 250 200 400 Replacements, $/head $1200 $1700 $1100 $1200 # replacements 350 350 250 450 Replacement Cost/cwt

Replacement Costs Herd A Herd B Herd C Herd D Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 70 60 85 Cwts/year 217,000 217,000 186,000 263,000 Cull rate 35% 35% 25% 45% Death loss 5% 10% 5% 5% $/cull $500 $275 $500 $500 Culls/yr to sell 300 250 200 400 Replacements, $/head $1200 $1700 $1100 $1200 # replacements 350 350 250 450 Replacement Cost/cwt $1.24 $2.42 $0.94 $1.29

High Culling, more milk low cull price 35% 50% Low beef$ Low beef$ Herd Size 1000 1000 Milking Cows 850 850 Milk lbs/cow/day 70 75 Cwts/year 217,000 232,000 Cull rate 35% 50% Death loss 5% 5% $/cull $500 $500 Culls/yr to sell 300 450 Replacements, $/head $1200 $1200 # replacements 350 500 Replacement Cost/cwt $1.24 $1.61

High Culling, more milk low cull price 35% 50% 35% 50% Low beef$ Low beef$ High beef$ High beef$ Herd Size 1000 1000 1000 1000 Milking Cows 850 850 850 850 Milk lbs/cow/day 70 75 70 75 Cwts/year 217,000 232,000 217,000 232,000 Cull rate 35% 50% 35% 50% Death loss 5% 5% 5% 5% $/cull $500 $500 $1000 $1000 Culls/yr to sell 300 450 300 450 Replacements, $/head $1200 $1200 $1200 $1200 # replacements 350 500 350 500 Replacement Cost/cwt $1.24 $1.61 $0.55 $0.64

When does high cull rate make sense? Low trade-in value Excellent herd health (low deads, high value for cull cows) Internal growth PREGNANCIES exceed hard count by 10% Low DOA Low calf death losses 80+% of calves born survive to calving

Startup Dairy Begin with Heifers or buy a Mature Herd?

Startup- Heifers Startup- Cows Herd Size 1000 1000 Milking Cows 850 850 Milk lbs/cow/day Cwts/year Cull rate Death and condemned loss $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Startup- Heifers Startup- Cows Herd Size 1000 1000 Milking Cows 850 850 Milk lbs/cow/day 65 70 Cwts/year 201,000 217,000 Cull rate Death and condemned loss $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Startup- Heifers Startup- Cows Herd Size 1000 1000 Milking Cows 850 850 Milk lbs/cow/day 65 70 Cwts/year 201,000 217,000 Cull rate 20% 40% Death and condemned loss 10% 8% $/cull Culls/yr to sell Replacements, $/head # replacements Replacement Cost/cwt

Startup- Heifers Startup- Cows Herd Size 1000 1000 Milking Cows 850 850 Milk lbs/cow/day 65 70 Cwts/year 201,000 217,000 Cull rate 20% 40% Death and condemned loss 10% 8% $/cull $200 $400 Culls/yr to sell 100 320 Replacements, $/head # replacements Replacement Cost/cwt

Startup- Heifers Startup- Cows Herd Size 1000 1000 Milking Cows 850 850 Milk lbs/cow/day 65 70 Cwts/year 201,000 217,000 Cull rate 20% 40% Death and condemned loss 10% 8% $/cull $200 $400 Culls/yr to sell 100 320 Replacements, $/head $1700 $1700 # replacements 200 400 Replacement Cost/cwt

Startup- Heifers Startup- Cows Herd Size 1000 1000 Milking Cows 850 850 Milk lbs/cow/day 65 70 Cwts/year 201,000 217,000 Cull rate 20% 40% Death and condemned loss 10% 8% $/cull $200 $400 Culls/yr to sell 100 320 Replacements, $/head $1700 $1700 # replacements 200 400 Replacement Cost/cwt $1.59 $2.54

Conclusions Economics trumps biology Components have huge value Margins matter, ratios don t Manage and monitor the Big 3 costs

Questions?