The authors are with Penn State's Dairy Alliance Risk Management Team. Producers have various opportunities to manage their risk. Exerting control requires that you know your breakeven income over feed cost (IOFC) and your milk margin breakeven. Knowing these costs will help dairies adapt to changing conditions of current and future milk and feed markets.
The first step in managing risk is monitoring the operation's income over feed cost. This can be done in one of two ways:
1. Use market prices for all home- raised feeds and the price paid for purchased feed.
2. Use the farm's cost to grow all home-raised feeds plus the purchased feed costs. To accomplish the latter, you need a completed cash flow plan.
Most producers start out by monitoring IOFC using the market approach. The table summarizes daily IOFC for 21 Pennsylvania herds for the month of May 2010. All the data presented in the table is using May's market prices for all home-raised feeds. There are some take-home messages that emphasize why making decisions cannot be based solely on milk price, feed cost, or milk income. For example, the table illustrates that:
- The highest milk price does not necessarily result in the highest IOFC.
- The highest milk production does not necessarily result in the highest IOFC.
- The highest milk income does not necessarily result in the highest IOFC.
- The lowest feed cost does not necessarily result in the highest IOFC.
To view the chart or read the entire article, see our October 25, 2010 issue on page 719.
