profit drivers for successful grazing dairy businesses
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Profit drivers for successful grazing dairy businesses
Herd size to earn the average national wage
1980 1985 1990 1995 2000 2005 2010 2015 20200
20406080
100120140160180200
Average
Year
No
of
cow
s
Herd size to earn the average national wage
1980 1985 1990 1995 2000 2005 2010 2015 20200
20406080
100120140160180200
AverageTop thirdPossible
Year
No
of
cow
s
Skill before scale!It is important to know the
drivers of profit of your business
“If you don’t like change, you’ll like irrelevance even less!”
Gen. Eric Shinseki
Get the priorities rightFine tuning
80% of potential gain made by
getting the system right
System
Too many people get it wrong
Finetuning
System
No increase in productivity with a 100% increase in inputs
Operating surplus has not increased in line with revenue
What drives profit?
What drives profit?• Milk price• Milk yield/cow• Milk yield/ha• Feed price• Milk to feed price ratio• Cost of production
– Variable cost– Fixed cost
Greater milk price increases profit
25.0 30.0 35.0-2500
-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = 48.3515728708254 x − 1337.81020934238R² = 0.0391067728024164
Milk price, p/L
Ne
t m
arg
in,
£/h
a
What drives profit?• Milk price• Milk yield/cow• Milk yield/ha• Feed price• Milk to feed price ratio• Cost of production
– Variable cost– Fixed cost
No relationship between milk yield/cow and profit
3000 4000 5000 6000 7000 8000 9000-2500
-2000
-1500
-1000
-500
0
500
1000
1500
Milk yield, L/cow
Ne
t m
arg
in,
£/h
a
P = 0.92
Milk yield/cow is an output of a system, not a driver of a successful dairy system!
What drives profit?• Milk price• Milk yield/cow• Milk yield/ha• Feed price• Milk to feed price ratio• Cost of production
– Variable cost– Fixed cost
Increased profit with milk yield/ha (?)
5000 10000 15000 20000-2500
-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = 0.0422131207956796 x − 400.379339542199R² = 0.0549261468124552
Milk yield, L/ha
Ne
t m
arg
in,
£/h
a
Profit increases with stocking rate
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = 277.955449179605 x − 386.615954304277R² = 0.0820284982031116
Stocking rate, cows/ha
Ne
t m
arg
in,
£/h
a
What drives profit?• Milk price• Milk yield/cow• Milk yield/ha• Feed price• Milk to feed price ratio• Cost of production
– Variable cost– Fixed cost
Feed price not related to profit
150 200 250 300 350 400 450 500-2500
-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = − 0.782805241975192 x + 294.805813237885R² = 0.00677972870180199
Feed price, £/t
Ne
t m
arg
in,
£/h
a
What drives profit?• Milk price• Milk yield/cow• Milk yield/ha• Feed price• Milk to feed price ratio• Cost of production
– Variable cost– Fixed cost
As Milk-feed price ratio increases, profit increases
0.0 0.5 1.0 1.5 2.0-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = 885.790528484989 x − 791.863721468584R² = 0.0944023189667991
Milk-feed price ratio
Ne
t m
arg
in,
£/h
a
What drives profit?• Milk price• Milk yield/cow• Milk yield/ha• Feed price• Milk to feed price ratio• Cost of production
– Variable cost– Fixed cost
Production cost/L strongly related to profit/ha
20 25 30 35 40 45 50-2500
-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = − 99.2983492585733 x + 3172.34988639976R² = 0.795941425511608
Total production cost, p/L
Ne
t m
arg
in,
£/h
a
Both variable and fixed costs tied to profit
2 4 6 8 10 12 14 16 18 20 22-2500
-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = − 139.938794219983 x + 1763.41571788743R² = 0.434365384149089
Variable production cost, p/L
Ne
t m
arg
in,
£/h
a
5 10 15 20 25 30 35-2500
-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = − 92.5945012789122 x + 1533.39208663645R² = 0.402793431994463
Fixed cost, p/L
Ne
t m
arg
in,
£/h
a
Production costs drive profit/ha
2011-12 $6.69/kg2010-11 $7.36/kg
2009-10 $6.16/kg2008-09 $5.21/kg
Financial performance
Where does the money go?
Feed
Forage
Vet, med, & AI
Livestock sundries
Labour
Machinery & power
Forage machinery
Property
Overheads
14%
4%
24%
5%
4%
5%
11%17%
10%
6%
Herd Replacement
The more pasture in the diet, the lower the cost of milk production
0 20 40 60 80 1000.00
0.05
0.10
0.15
0.20
0.25
0.30
Percentage of grazed grass in diet, %
Prod
uctio
n co
st, £
/L US traditional Dk GerUK NL
Fr
Ire
AusNZ
The more pasture in the diet, the lower the cost of milk production
0 20 40 60 80 1000.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35f(x) = − 0.0040806137359961 x + 0.448750608865075R² = 0.973317433932874
f(x) = − 0.000629428292206206 x + 0.281902333251893R² = 0.977214094340482
Percentage of grazed grass in diet, %
Prod
uctio
n co
st, £
/L US traditional Dk GerUK NL
Fr
Ire
AusNZ
For every 10% increase in the percent of grazed grass in the diet, Production costs decrease 0.6p/L
For every 10% increase in the percent of grazed grass in the diet, Production costs decrease 4p/L
Production costs decline with increased milk from forage in UK
500 1000 1500 2000 2500 3000 3500 4000 450015.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
f(x) = − 0.00276136276783452 x + 37.7623658393038R² = 0.194527940822812
Milk from forage, L/cow per yr
To
tal
pro
du
cti
on
co
st,
p
/L
For every 1,000 L milk produced from forage,
production costs drop 2.8p
Net margin increases with milk from forage in the UK
0 1000 2000 3000 4000 5000 6000-2000
-1500
-1000
-500
0
500
1000
1500
f(x) = 0.336923179189769 x − 726.465214334733R² = 0.273896680721701
Milk from forage, L/cow per yr
Ne
t m
arg
in,
£/h
a Every 1000 L milk from forage is worth £340/ha
Same in Ireland
R2 = 0.42
0
500
1000
1500
2000
2500
3000
3500
4000
0 2 4 6 8 10 12 14 16
Estimated Grass utilisation t DM/ha
Net
pro
fit
(€/h
a) Every additional t DM/ha is worth €161/ha
Profit drivers in successful dairy businesses
– Milk yield/cow is not a driver of profit– Focus on cost/kg milk or cost/kg MS– Costs decline with increased pasture in diet– Profit increases as milk from pasture increases– Grow and utilise as much pasture as possible
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