Dairy Sense: Evolution of IOFC

December 2018

Production perspective

The use of income over feed cost (IOFC) per cow has evolved over the past decade. It has gone from being a general metric to one that is very farm specific. The latter has gained momentum over the last couple of years. In the past it was not unusual to have benchmarks for IOFC greater than $7 or $8 per cow as ideal. However, after completing hundreds of cash flow plans this general metric is no longer valid. Dairy Sense's IOFC has value to show trends based on milk price and feed costs. The ultimate objective is for each farm to know their breakeven IOFC so they can evaluate their current position and determine how decisions will impact their cash flow.

The Extension Dairy Business Management team has focused on IOFC per cow because it targets the lactating cow, the money generator, and feed costs specific to her. "Dairy Sense" was started to track milk price and market feed costs to assess the direction IOFC was trending over time. In 2014 IOFC per cow was ranging between $14 to $15, which reflects monies available to pay all expenses minus the lactating cow feed costs. This explains why the earlier benchmarks for IOFC were not appropriate as they would be less than ideal in a year like 2014. Income over feed cost for 2015 through 2018 to date has averaged between $8 and $9 per cow. In today's economy this range is not sustainable since many dairies have a breakeven exceeding $9 per cow. The mobile app "DairyCents" was developed to track IOFC for milk production averaging 65, 75, and 85 pounds. This tool gives the user an idea of where their IOFC should be for a certain level of milk production based on their geographic location, milk price, and feed costs. The next step needed is to determine the dairy's breakeven IOFC and if the current IOFC is sufficient to garner a cash surplus.

For 2016 and 2017, twenty-four dairies were involved in an intensive on farm project titled "Crops to Cow". One of the goals was to monitor IOFC against their breakeven monthly. Over the two-year period individual farms averaged a surplus ranging from $0.26 to $2.45 per cow or a deficit ranging from negative $0.27 to over $2.00 per cow. Feed costs, labor expenses, and loan payments were the three big ticket items straining cash flow. Many of the farms had very reasonable feed costs for the level of milk being produced, the challenging area was having enough inventory to feed the dry cows and heifers economically. Of the three expense areas, feed cost is probably the easiest area to adjust and see improvement. In all cases where labor expense was excessively high there was very little opportunity for cost reduction. This also held true for loan payments. The only realistic strategy to overcome high labor and loan expenses is to increase milk income in an efficient manner. This means taking the resources currently available and generating additional milk income while maintaining reasonable feed costs. Bottlenecks to study would be: feeding management, transition cow performance, milk components, feed efficiency, and possibly reproduction if days in milk exceed 200.

Income over feed cost is not a new concept and it is one of the easier metrics to monitor on a monthly basis. Early on the goal was to calculate this number using market values for home raised feeds and compare the number against a standard developed by Penn State Extension. This was a good first step, but it lacked the farm specific information for making good decisions. In today's environment of market volatility, every dairy operation needs to know their breakeven numbers and make decisions on facts and not guesstimates.

Action plan for monitoring IOFC.

Goal – Determine the operation's breakeven IOFC and monitor it monthly.  

• Step 1: Utilize Penn State Extension's Excel Cash Flow Spreadsheet to determine the farm's breakeven IOFC.    
• Step 2: Monitor IOFC monthly comparing it to the operation's breakeven.
• Step 3: If the farm is showing a deficit per cow monthly, re-evaluate the cash flow plan to assess potential bottlenecks and opportunities for improvement.
• Step 4: Share the IOFC information with the dairy's advisory team and discuss strategies for reducing expenses or increasing income.  

Economic perspective

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows income over feed costs is a good way to check that feed costs are in line for the level of milk production. Starting with July 2014's milk price, income over feed costs was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen® and a mineral vitamin mix. All market prices were used.

Also included are the feed costs for dry cows, springing heifers, pregnant heifers and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.

Income over feed cost using standardized rations and production data from the Penn State dairy herd.

Note: Penn State's November milk price: $18.15/cwt; feed cost/cow: $5.71; average milk production: 83 lbs.

Feed cost/non-lactating animal/day.