Most people using the dilution phrase are making one of three assumptions:
- If you get more production per cow, you dilute the cow’s maintenance needs – so it must be more profitable.
- If you produce more milksolids (MS) per hectare, you dilute fixed costs – so it must be more profitable.
- If you produce more MS per hectare, you dilute your debt per kilogram of MS – so you’re better able to repay it.
Does more production/cow increase profit?
For a cow at New Zealand’s average MS production level (approx. 380kg MS), and average liveweight (approx. 455kg LW), about 45 percent of their energy intake goes to maintenance, walking and pregnancy requirements.
If the cow produced 20 percent more (approx. 455kg MS), it dilutes the share of energy in maintenance, and so only 40 percent of the energy is used for maintenance.
This seems like a win. However, the higher milk production can come from two places: higher pasture harvest or higher offered supplement. Only one of these, pasture harvest, is consistently and positively associated with profit. Imported supplement adds feed cost and associated costs of feeding, leading to increased costs per kg of MS.
Supplements add to profit only with high standards of pasture management and cost control. Dilution of maintenance isn't enough to increase profit.
Does more production/hectare dilute cost?
’Fixed costs’ like electricity, repairs and farm maintenance can make up over 25 percent of a farm’s expenses. It’s easy to assume that increasing production dilutes these fixed costs, but really, they should be called overheads.
Published data shows that most overheads increase with intensification, particularly when that is driven by higher use of supplement. So, no win there, either.
Does more production/hectare dilute debt?
Many farmers believe reducing debt per kilogram of MS, by increasing production, is helpful for debt servicing. However, careful thinking is needed here.
In particular, increasing production from supplement is associated with higher expenses per kilogram of MS, which means in lower milk price years, there may be less total profit available to pay interest obligations and principal.
Increasing production per cow or per hectare profitably dilutes cows’ maintenance needs, on-farm fixed costs and/or debt.
The path to profit has, effectively, nothing to do with dilution. There’s a clearer relationship with profit from greater pasture harvest, cost control and careful decisions around capital investment.
This article was originally published in Inside Dairy February 2020