I have noticed lately in a few conversations with clients that we have wondered whether an ingredient we were discussing was $250 per ton or $350 per ton. This confusion is certainly not the norm.
For as long as I have been formulating dairy rations, most ingredients have a price range that would seem normal for each ingredient. However, in recent months, who knows what any one ingredient might cost. If it weren't so financially painful, it would be comical.
One of the challenges in formulating rations in recent months has been how to compare rations with current prices or even old contract prices to rations now using new crop prices. I don't think I can ever remember a time where a dairy’s contract price for an ingredient is as different from the spot price as it is today. It has been a roller coaster.
So, what to do when a dairy has canola meal contracted at $270 per ton but only booked enough to cover about 75% of their needs? It's important to be careful that as you compare a current ingredient to other options, that you let the spot price of your current ingredient compete with the spot price of the option. The risk of not doing this correctly is to make the wrong choice as well as potentially feeding through a contract too quickly.
In recent times, as feed ingredient prices have become more volatile, suppliers are offering less flexibility on pulling ahead or dragging contracts. So, in the frequent situation where a dairy does not book 100% of their needs, there is this constant tension between spot market and contract price. The best ration solution may be different with the contract verses the spot price.
Now, since we make milk out of nutrients and not ingredients, why does it matter if we change rations to save money for a short period of time using a different ingredient?
We all know that the art of feeding cows would suggest that ration changes for short periods of time are probably not an overall positive. So, it could be that the correct choice is to feed the higher priced ingredient and ration to meet the inventory or contract needs as opposed to changing the ration.
Making true comparisons
Another complication that exists with these volatile markets is how on-farm forages compete with other ingredient options, primarily by-product ingredients. As an example, a small grain forage provides fiber that can also be supplied by a by-product like beet pulp or soybean hulls. We have to be careful that we use correct prices for the by-products and the owned forage to make sure that the difference between a contract price, spot, or new-crop price would not incorrectly influence the decision.
Managing on-farm forage inventories is crucial. Most dairy operations have a forage plan to accomplish a run-out date that fits necessary carry-over, the next harvest date, and storage capacity considerations. So, as I sit behind my computer’s linear program nutrition model, I am thinking not only about the contract prices but also the spot price for those ingredients and for potential alternate ingredients to fill the gap for uncontracted needs.
It is important that I keep in mind this inventory usage plan to be sure that we don't run out of a critical forage too soon or have a silage pit that is not empty when it's time for the next harvest. We know that cows respond to consistent rations, but careful changes can be acceptable when needed. Taking care to be sure that the prices used for ingredients are correctly entered when considering contract, spot, and new-crop market price is critical to make sure that the correct decisions are made.
Every dairy operation has a style and tendency relating to how often they are willing to make ration tweaks to manage feed cost. The job of a good nutritionist is to balance that tendency to be sure that neither extreme ends up hurting the dairy. Being too careful to not make a change, and thus, missing a solid opportunity, or being too quick to change and chasing short-term savings can both hurt the bottom line.