“Profit is generated by the milk price minus the cost of production (farm working expenses (FWE)/kg MS) multiplied by the number of milksolids produced,” de Klerk said. “The power of multiplication should not be forgotten.”
He questioned whether FWE was a good economic metric to determine the most profitable farm systems.
“Farms which have FWE/kg MS at $4 can be less profitable than farms with expenses at $4.20.”
He said chasing the lowest FWE/kg MS was not what farmers should be concentrating on, especially if they had high interest costs. Overall profit was the most important thing.
“Today, about 25% of dairy farm costs are interest and they are a fixed cost. Diluting overhead costs can help increase profitability, as seen on the Southland Demonstration Farm.”
However, he said every farm had a sweet spot where they performed the best.
“Maximum profit occurs at optimum production, not maximum production. Each farm should be operated at their optimum level of production to maximise profit.
“Production below this level is not optimum and production above this level is simply buying production. Neither side of the sweet spot is where you want to be.”
He said farmers needed to be aware of the law of diminishing returns.
“Put simply, the bang for your buck decreases with each additional input. Initially the response is good but gets less and less and you can end up buying production for more than it’s worth.
“Each farm has its own optimum level of production, there is no one-size-fits-all. When production per hectare drops too low, interest and other semi-fixed costs per kg MS increase rapidly. Increasing production dilutes fixed costs but when maximum production is chased, farms are usually overstocked and large amounts of feed are being bought in, and grass is no longer the main part of each cow’s diet
“This is not supplementary feeding but rather the total feeding of the extra cow per hectare.”
He said farmers needed to find that optimum level of production where production and costs were balanced and profit per hectare was at its greatest.
Finding a farm’s sweet spot was determined by pasture growth and appropriate stocking rate.
“Although the average sweet spot in Dairy NZ Economic Survey data appeared be 1500kg MS/ha, it will be different on different farms.
“Assuming a cow can eat 18kg DM/day and has a lactation of 275 days that means she has a total DM intake of 4950kg of grass during the lactation period. But if you don’t know how much grass your farm is growing then you don’t know how many cows you can farm per hectare and find the sweet spot where pasture utilisation is maximised.
“Some level of substitution is inevitable but if the farm is properly stocked and supplements used strategically this can be a positive – like preventing over-grazing at times when demand exceeds pasture growth rates.
“There are also times when grass growth rates will exceed demand and harvesting the grass to use in future is necessary.
“The main aim of feeding supplements should be to increase drymatter intakes, or more precisely, energy intakes. Over-stocking and buying in that extra cow’s feed requirement is not supplementary feeding. This can be profitable under certain circumstances but depends heavily on the milk price to feed cost ratio. This is a high-risk business and was not what I am recommending.”
He said cows could efficiently produce 100% of their liveweight in milksolids – a 500kg cow could produce 500kg MS/year.
“Based on DairyNZ figures, a 500kg cow would require about 6500kg DM a year based on average feed quality. Deduct 1000 to 1200kg DM for the dry period means DM offered should be about 5300 to 5500kg DM/cow/lactation.
“If the cow can only realistically graze 4950kg DM during the lactation period (18kg DM/day) then the shortfall would be 350 to 550kg DM/lactation which could be bought-in supplement.
“People think it’s dangerous buying in feed in a low payout year but the data does not support this. In 2003 Westpac, using Dexel data, showed how the top 10% farmers with higher inputs made proportionally more profit than lower input farmers as the milk price decreased – up to 84% more profit. Today’s data shows the very same thing if supplements are used strategically to enhance profitability.
“Cutting back on feed inputs invariably lowers production and if dropping production and income occurs faster than the saving achieved, profitability will actually be reduced.
Cutting costs on the farm
With target milk production at 340,000kg MS for the year, FWE have been cut from $4.22 to $3.98 at the Southland Demonstration Farm following the fall in payout.
Farm business manager Stacy McNaught said savings would be made mainly in fertiliser and feed.
“We found the wiggle room in buying supplements by challenging,” he said.
“It’s important to buy feed based on the cheapest cost per unit of energy down the throat. SDF is using a blend of palm kernel and barley to lower the cost per unit of bought-in energy.
Making the most of product pricing variations for fertiliser has helped, as has targeting paddocks based on soil analysis
“We have been whole farm soil testing for the past two seasons which has enabled us to now put fertiliser where it is required. Paddocks which are at optimum levels already are receiving only maintenance fertiliser and we’re using more on others that need more.”
Some non-essential track maintenance had also been deferred.
Production was so far 8% up on target, which was less than at this time last year when the target was the same.
New this spring was feeding lifted sugar beet to the lighter cows while on pasture.
The sugar beet was not washed when lifted and was stored in windrow piles until fed out in the paddock using the silage wagon. It was eaten within a couple of months of lifting and staff did not see any deterioration in the bulbs.
“It’s just something we’re trying. If we do it again we’ll do some fine tuning but it seems to have worked well,” farm manager Barry Bethune said.
