What drives operating profit? Part 2

In What Drives Operating Profit? - Part 1 link to Part 1 we explored effectively reducing the fixed costs associated with producing each kilogramme of milk solids through feed conversion efficiency and managing the combination of growing high quality forage or pasture, improved management, grazing techniques and suitable stocking rates.

Supplements can then be used to 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).

Responses to supplement options

It’s often assumed that low-cost purchased supplements are an essential prerequisite to improving operating profit. However, we owe it to ourselves to dig a little deeper and consider the marginal response to each kilogramme of supplement we offer. There’s potential for a very diverse range of responses due to factors such as nutrient delivery or cow genotype.

It’s often helpful to look at the ration on offer over a 300-day lactation. Let’s do this within the context of a herd with an average liveweight of 500kg per cow and growing 15 tonnes of pasture dry matter (DM) per hectare. On the back of a strong payout during the 2013/14 season, we used what we considered to be a conservative payout of $6.90/kg MS to run the following models.

Indicative ration models and responses:

	Option 1	Option 2	Option 3
Grazed pasture	3,510kg	3,900kg	3,700kg
Pasture silage	300kg	300kg	300kg
Pasture hay	100kg	100kg	100kg
Maize silage	120kg	120kg	120kg
PKE	300kg	300kg	300kg
Compound feed	-	-	400kg
Totals (consumed)	4,330kg	4,720kg	4,930kg

Stocking rate	3.3 cows/ha	3.0 cows/ha	3.2 cows/ha
Kg MS/cow	360kg	412kg	435kg
Kg MS/ha	1,187kg	1,236kg	1,391kg
Total Operating Revenue	$850,000	$881,000	$990,000
Total Operating Expenses	$592,000	$620,000	$699,000
*Operating Profit	$258,000	$261,000	$291,000
*Operating Profit/ha	$782	$873	$909
*Operating Profit Margin	30%	30%	29%
FCE p.a. (kg DM/kg MS)	12.02	11.46	11.33

*excludes imputed labour, interest, tax and depreciation

What these models (conservative as they may be) highlight, is the impact of increasing the amount of feed available per cow, over an entire lactation, at a flat rate of payment. As total dry matter intake (DMI) increases over the lactation, we see favourable trends in feed conversion efficiency (FCE). Please note that this response is not linear and does have limits linked with the genotype of the herd. However, with total feed intake under 5,000kg/cow, we are not going to trouble the upper limits.

Options 2 and 3 still have the potential for even greater financial returns if they are spring calving herds. Spring calvers have lower rates of post peak decline and, by default, increase milk sales during the higher returning autumn months.

Option 3 incorporates 130 tonnes of a good quality compound feed, which is largely responsible for the rise in total operating expenses (TOE) of over $100K from Option 1. For many people, the thought of spending that amount of money on feed can be daunting and should always be well considered before proceeding.

Balancing productivity and productivity

While there can be body condition and reproductive benefits associated with compound feeds, the primary purpose must be increased milk solids production that yields a positive financial return without compromising liquidity of the business.

Operating profit margin (OPM) is a key performance indicator which shows the percentage of total revenue that remains in the business as operating profit, meaning it is a good measure of solvency. In Option 3, we see a 1% fall in OPM on the back of rising expenses. However, this is a normal trend in higher input systems and does not indicate a poor result. In fact, it highlights that the increased spend on feed is very sustainable.

In a low payout season

Given the lower rates of return per kg MS over the past couple of seasons, we felt it would be prudent to see how these numbers stack up in a reduced revenue situation.

One of the first things to remember when payout falls is the bleeding obvious: revenue decreases, but fixed costs do not. You have less cash coming into the business to cover wages, animal health, electricity, shed running costs, veterinary, machinery, fuel, R & M, administration, rates, ACC, financial commitments... This places a serious squeeze on operating profit. It is nigh unto impossible to make any significant reduction to the fixed cost of doing business. Maybe the only true variable costs are feed and fertiliser; however, these are both linked to MS production and revenue. We need to find the most efficient application of feed and fertiliser, but cut them at your own peril…

This is what these models look like when we use a payout of $4.50/kg MS with two adjustments:

we have flattened the stocking rate, and then
more than doubled the offering of compound feed to show the longer term benefits associated with really driving per cow production.

Or in other words, if you start down the path of in-shed feeding, is it a foregone conclusion that you will sink in a low payout period…

	Option 1	Option 2	Option 3
Grazed pasture	3,510kg	3,560kg	3,590kg
Pasture silage	300kg	300kg	300kg
Pasture hay	100kg	100kg	100kg
Maize silage	120kg	120kg	120kg
PKE	300kg	550kg	300kg
Compound feed	-	-	990kg
Totals	4,330kg	4,630kg	5,400kg

Stocking rate	3.3 cows/ha	3.3 cows/ha	3.3 cows/ha
Kg MS/cow	360kg	391kg	523kg
Kg MS/ha	1,187kg	1,291kg	1,725kg
Total Operating Revenue	$565,646	$612,757	$807,852
Total Operating Expenses	$551,600	$622,000	$770,300
*Operating Profit	$14,046	-$9,243	$37,552
*Operating Profit/ha	$140	-$92	$376
*Operating Profit Margin	2%	-2%	5%
FCE p.a. (kg DM/kg MS)	12.04	11.83	10.34

What experience and production system models tell us is consistent with these two sayings, “You can’t save your way to millions”. You will require a significant uplift in revenue at some stage… And, “You can’t starve a profit out of a cow.” While none of the above models are particularly exciting, they do illustrate the point that pursuing increased per cow productivity is the most likely scenario that will yield financial, social and environmental sustainability during low milk solids payout periods. Then as payout increases, you are well placed to make the most of the opportunity and reap the benefits of significant operating profit increases without needing to make any changes to your production system.

Food for thought.

For more information on increasing per cow productivity, talk to your local Ingham Dairy Nutrition Specialist.