What drives operating profit? Part 1
We’re all gaining perspective and knowledge that we need to follow best practice within the dairy industry to improve animal performance and animal welfare. We also know all too well that the market price we receive per kilogramme of milk solids has a larger bearing on dairy business profitability than any other single factor.
When milk solids price is strong, we do well. When milk solids price is depressed, so are we (financially, emotionally and relationally).
Then we overlay the complexity of operating systems and financial structures, only to discover that there is no single solution or script to follow that will ensure that every business has the capacity to return an operating profit.
However, we would all agree that there are some basic principles that we must have in order to be in the black. They are:
- Grow as much high quality forage/pasture per hectare as is physically possible
- Utilise as much high quality forage/pasture per hectare as is physically possible and efficiently convert it into kilogrammes of milk solids (kg MS)
- Increase kg MS output per kg of liveweight
Growing high quality pasture
Outside of these three key points, most other variables can have a positive or negative impact on operating profit, depending upon your specific circumstances. Regarding point a, soil type, soil temperature, drainage and daylight hours are environmental factors that we have either little or no control over. They set the context of forage dry matter growth per hectare.
Then, there are the management factors of fertiliser application, renovation, cultivar selection, stocking rate and post grazing residuals that also influence growth positively or negatively. Of these, the influence of stocking rate on post grazing residuals and relative rate of regrowth should be firmly in our focus when targeting increased pasture growth.
Efficiently converting pasture into milk solids
Maybe less considered is the impact of stocking rate on how efficiently we convert consumed kilogrammes of pasture into kilogrammes of milk solids, point b and c.
To illustrate this, consider a 90ha dairy platform runs 300 cows (3 cows/ha) and wants to hold a 30 day rotation.
Daily allocation will be 3ha
Pre-grazing mass is 3,200kg DM/ha
Post-grazing mass is 1,500kg DM/ha
Meaning we have 5,100kg DM pasture available.
This equates to 17kg DM/cow available, but there will be some wastage/spoilage, let’s assume the actual consumed number is 16kg DM/cow.
Outcome: Potentially, this could provide sufficient nutrient for 522kg MS daily. Feed conversion efficiency (FCE) is 9.2kg DM consumed per kg MS produced.
If we take the same scenario, but increase the stocking rate to 380 cows (3.8 cows/ha), our actual consumed pasture intake will decrease to just below 13kg DM/cow.
Depending on cow liveweight and environment, 6-8kg DM/cow of this intake fuels maintenance and activity before we provide nutrient for milk solids production.
Outcome: Potential production is 450kg MS daily and FCE is 10.7kg DM consumed per kg MS produced.
Because a higher percentage of nutrient intake is being utilised for maintenance and activity, FCE is reduced, which is effectively driving up the cost of each kg MS produced. However, there are some situations where increased capital value in stock may be the primary focus. Know what pays in your situation and be aware of the implications of increased stocking rate on potential operating profit.
Know what pays in your situation
Our first conclusion in this series is to grow as much high quality forage/pasture as is physically possible in your part of the world, giving consideration to your environmental situation and opportunities for improved management and grazing techniques. Linking these with with suitable stocking rates to support increased FCE and optimising kg MS produced (revenue) per kg DM consumed, we can effectively reduce the fixed costs associated with each kg of MS produced.
Supplements can then be used to strategically support post grazing outcomes, increased productivity and improved animal health and reproductive performance. In a well-managed dairy business, this can lead to significant increases in operating profit and return on assets (ROA).
We explore these ideas further in What drives operating profit? Part 2
For more information on reducing the fixed costs associated with producing each kg of MS, talk to your local Ingham Dairy Nutrition Specialist.