DAIRY farmers can still profit from summer milk margins despite paying grain, hay and feed concentrate prices up to 35 per cent higher than last year.
This was the message Western Dairy’s agribusiness operations manager Kirk Reynolds conveyed to farmers attending a recent spring forum in Bunbury.
Mr Reynolds used 2017-18 financial year WA statistics derived from Dairy Australia’s Dairy Farm Monitor Project (DFMP) to demonstrate there is money in margins.
He urged farmers to “tap into” higher incentive prices offered for the next three months by the State’s three main milk processors, by balancing higher supplementary feed costs against a commensurate lift in milk production at a greater financial return per litre.
Unlike previous years, all three processors offered higher farmgate prices over this summer to encourage more milk production at a time when it seasonally declines.
Brownes Dairy offered the biggest increase to the highest plateau – 61 cents per litre – over January and February, but its price is due to drop back after March to below prices offered by Parmalat-owned Harvey Fresh and Lion Dairy and Drinks (LDD).
Parmalat and LDD offered similar summer pricing regimes with broader but lower peaks at about 58c/l, starting from a lower price level than Brownes in December but finishing at a higher level than Brownes in April.
Mr Reynolds said because of the complexity and personal nature of farmgate pricing, it was imperative farmers knew their own actual, rather than average, month-by-month revenue and input costs before they could take advantage of any opportunity short-term margin increases presented.
He said they needed to fully understand the relationship between their own milk prices, production volumes and feed costs each month.
“Come April you should all be asking yourselves do I need to continue to do this (spending more on supplement feed to boost milk production)?” he said.
Mr Reynolds said the late autumn break this year demonstrated what happens when additional feed was used without extra price margin to cover costs.
“We used more grain and we used more purchased hay as well (because pasture growth was delayed) and obviously when the market was running hot (driven by Eastern States’ drought demand) that was at a higher price,” he said.
“It drove up the price of purchased feed by (the equivalent of) 1.4 cents a litre (compared to 2016-17, according to DFMP statistics), or $227 per cow and for the 300-cow farmer, it wiped 70 grand straight off their bottom line.”
Mr Reynolds also had a secondary warning for farmers.
“The higher you push per-cow production, the closer you are to losing money,” he said.
“That’s very different to not spending money (and) I’m not saying it’s losing money, but (you need to) understand it.
“Maximum production is the point where you put extra grain in but you don’t get any extra milk out.
“Maximum profitability is where those marginal costs equal marginal returns – on the cost side it is the amount of extra grain going in, on the milk side it is the extra milk we produce.
“Maximum profitability is always less (milk volume) than maximum production, unless the extra feed is costing you nothing.
“It’s the law of diminishing returns, as you put more and more grain in, you are going to get less and less response to that on the milk side – this is a simple biological fact.”
Mr Reynolds also warned processors they should expect milk volumes from suppliers to diminish significantly after summer pricing ends.
“Yes, the grain price has gone up so our (farmers’) profitability will be further away from maximum production, and I continue to remind processors of that,” he said.
“Profitable farmers will be producing less milk this season, so that has implications for the processors and their demand.”
Mr Reynolds said the time to spend more on feed to produce more milk was when processors were paying more for milk.
He said a simple monthly calculation of dividing the applicable farmgate milk price per litre by the current grain or concentrates price per kilogram will provide a ratio to help determine if it is worth feeding the extra ration to get more milk that month.
“If you end up with a figure of one (one-to-one ratio between price and cost) you can make it work, but 1.2 is better,” Mr Reynolds said.
“If you can’t get to one, the first question you should ask yourself is ‘Why am I putting this grain in?’
“Putting more grain in will drive up the cost of production and increase your risk profile which is why I said you will be closer to losing money.
“If your grain price is secure and locked away and you know what it’s going to be from December or January when you’ve got the summer incentive higher milk price, that’s when your milk price to grain price ratio shifts up and you can afford to feed more grain – that is when you grab the money.”