Sunday, October 29, 2017

Part II - How a Producer can Increase Revenue, Profit, and Cash Flow

In part one of this two part series, the impact of changes in cheese and butter prices were analyzed economically.  The analysis showed that butter, and therefore butterfat price changes have little impact on the Class III milk price.  However, cheese price changes have a huge impact on the Class III milk price.  Increases in butter prices simply shift payment from milk protein to butterfat with little impact on the Class III price.

However, there is not much a producer can do to impact Federal Milk Marketing Order (FMMO) milk prices. This post will cover a subject that a producer does have control over and can impact his revenue, profit, and cash flow.

There are many variable such as nutrition, genetics, cow comfort, etc. that can influence the productivity of a herd.  Due to the complexity of comparing actions and results, some actions that seem appropriate, may actually have a negative impact on profitability and cash flow.  One of the often-sited mistakes is cutting all possible costs.  In some cases the changes can reduce milk component productivity.  Some specific cost cuts may seem appropriate, they may reduce revenue by more than the cost savings.  If so, cash flow will be reduced.

There is another often seen practice that can hurt cash flow.  In many cases, producers and their nutritionists try to constantly adjust nutrition with the ever-changing FMMO prices.  When many variables are changed at once, it is difficult to determine which have a positive impact on cash flow and which have a negative impact on cash flow.  While this may occasionally work, staying with and fine-tuning specific practices can produce more accurate measurements of any changes.

To illustrate this, the analytics below measure the economic impact of changes in milk component levels at different cheese and butter prices.  The changes in component levels used in this analysis are based on a recent publication by Dr. Brian Sloan.   The data used by Dr. Sloan is based on precisely calculated changes from many past trials involving nutritional changes.  It covers many years of trials in various geographical locations and in summary averages results from thousands of cows.  His combined results show an average increase of .14% in milk protein and .16% in butterfat with his suggested nutritional changes.  The economic analysis shown below compares the change in revenue when milk protein increases from 3% to 3.14% and butterfat increases from 3.5% to 3.66%.

The tables below measure the economic impact of achieving higher component levels as cheese and butter prices fluctuate.   In Table I it shows the economic results at the component levels discussed in the previous paragraph.  Table II shows what the top component increases can produce.  In other words, the first table uses precisely the averages from Dr. Sloan's trial compilation and the second table shows what the better herd can achieve.

Table I shows that the increase in milk revenue can vary from $.50/cwt. to $1.00/cwt. when components increase from the nutritional changes Dr. Sloan analyzed.  The impact is much smaller when cheese prices are low, but doubles when cheese prices are high.  The change in butterfat prices has very little impact on the increase in revenue.   This is consistent with the analysis in Part I of this series.

Table I - Increase in Milk Revenue with Increases of
.14% in Milk Protein and .16%in Butterfat
Table II shows the potential increase for the best performing herds.  It is not a "dream" table but a accurate portrayal of what has happened at the best performing herds.

Table II - Increase in Milk Revenue with Increases of
.21% in Milk Protein and .24%in But
The increases in milk revenue with the nutritional changes studied by Dr. Sloan may increase feed costs.  However, in many cases there is no increase in feed cost.  Quoting Dr. Sloan, "If care is taken to not over supply some key nutrients and if the power of non linear optimizers in modern software programs are used, it will ensure that revenue will increase sufficiently to provide a positive and continuing increase in cash flow."  Chasing the market prices with constantly changing nutritional diets is not a best practice.   

Some nutritionists have tried minor nutritional changes to increase butterfat only.  Although these nutritional changes may a cost little less, the results are significantly less as well.   As shown in Table III, the only time this might be slightly advantageous is at the extreme when butter is at $3.00/lb. and cheese is at $1.20/ lb.  This has  never happened.  

Table III - Increase in Milk Revenue with Increases of
 .16% in Butterfat
Milk component increases are the heart of the future for dairy.  The growth categories in dairy are all dependent on components.  Therefore, chasing components is key to success in the dairy business.  This is not a seasonal concept or a concept that will change with FMMO prices.  The amount of improved cash flow may change, but increasing components will always be economically advantageous.

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