Economy

Expenses in milk production

The costs involved with milk production are often divided into fixed costs and variable costs.

From a long-term perspective, all milk production costs are variable costs. For example, in the long run the useful life of a solid stone barn comes to an end and it has to be replaced. It is, however, convenient to regard some costs as fixed in the short, or even medium, term.

Buildings are often regarded as fixed costs. The labour costs and capital costs of machinery and equipment are often interchangeable.

When you invest in effective machinery, labour costs will be reduced. Feed is a fixed cost at a given level of production, but since the price varies and turnover is fast, it very often fluctuates. With different milk yields in a herd of a given number of cows, feed costs vary greatly.

The relationship between different expenses in the dairy cow business can be represented as follows:

Costs for housing and labour for feeding and milking often account for about 50% of total expenses. The major part of the other half is feed costs.

How is the economy of dairy cows measured?

Milk minus feed

One of the most common ways of estimating the economy of milk production is “milk minus feed”.

A better measure is reached if total feed costs (concentrate and roughage) are included. Often, only milk income minus the costs for bought feeds are measured. This is due to the fact that production costs for home-grown feed (including machines, cultivated area, etc.) are more difficult to measure. The margin per cow of .milk minus feed. generally increases with increased milk yield (see picture below).

The margin over milk income minus feed costs with increasing milk yield per cow.

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Costs per produced litre

This measure shows the production costs per litre milk. It is a good measure, because the farmer is paid per litre.

When comparing costs per produced litre of milk between different herds it is important to know the production level. A high yielding herd can have higher feed costs per produced litre of milk, but the total margin can still be higher than for lower yielding herds.

How much can feed cost?

The net margin over milk income minus feed costs can be altered, either by increasing milk income or by decreasing feed costs. The picture above shows how much you can afford to spend on feed.

A high yielding herd can have higher feed costs per produced litre of milk while still maintaining the same profit. If very cheap feeds are available, it is also possible to increase profit even though milk yield is not so high.

The table in the picture above shows several ways of making a profit from milk production. Of course, the figures in the table vary depending on the milk price and the fixed costs.

*The margin over total feed cost per cow should cover the costs for: labour; interest and depreciation for building; equuipment; and profit. Fixed cost per cow per year: 965 CHF.
Milk price: 0.58 CHF per kg.
Source: Hans Samuelsson (Svea husdjur, Sweden).

In the example used to produce the specific figures in the table above, fixed costs per cow were set at 965 CHF per cow per year. This includes a replacement rate of 33%, and consequently an income of 1/3 cow to slaughter and the cost of raising 1/3 heifer. Also included is the income from 1 calf per year.

Furthermore, 965 CHF covers the costs of artificial insemination, official milk recording, veterinary treatment, medicine, washing powder, service and spare parts for milking equipment, electricity, insurances, telephone and all other expenses related to the dairy business.

When the costs of recruitment, AI, vet, electricity, insurance and administration are fixed, feed costs can be monitored for different milk yields (see picture above). You can see here that if you require a net margin to cover labour and capital costs of 1 800 CHF, your feed costs must not exceed 0.23 CHF per kg of milk, if the annual production level is 8 000 kg per cow. If you increase the production level to 8 500 kg your feed can cost 0.25 CHF in order to reach the same margin per cow. You can also see that if you manage to get hold of cheaper feeds, so that it will only cost 0.21 CHF/kg milk, you can decrease production to 7 500 kg without loosing money.

Alternatively, if you manage to maintain the production level, you will make another 200 CHF per cow per year.

Quota production

To counteract a surplus of produced milk, many countries have a quota system. This means that each farm is allowed to produce a certain quantity of milk. When the total amount of milk is reached, other ways of improving the economy of the herd must be found.

One way to adapt your production in a quota system is to increase your yield and produce your quota with less cows. Profitability calculations with increased production under a quota system most often result in increased profits with increasing production. Yet profitability increases less than a similar calculation without the quota system.

It is commonly said that a quota system reduces motivation to increase the milk yield by about half. The reason is often that each increase in milk sets free the type of farm capacity that has low alternative use, e.g. harvest and storage capacity for home-grown feeds, and animal housing capacity.

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