Basil Doonan, Farm Consultant Feeding cows profitably A marginal approach DairyTas Focus Farm Field Day 5th December 2018 Basil Doonan, Farm Consultant

Content Business design Diminishing marginal returns Maximising profit Seasonal management Daily management Diminishing marginal returns Timeline (long vs short run) Fixed vs Variable costs Maximising profit What is profit? Marginal cost vs marginal revenue Managing at the margin (examples) Uncertainty and risk

Designing a business Design a robust business Designed on average (Milk price, inputs and season) 30% variation in milk price from average Breaks even (very robust) Net profit (highly robust) Generally exceptional management deployed Update annually/seasonally Milk price/Input price/Seasonal conditions Manage daily Marginal analysis

Diminishing returns One response curve for one level of pasture offered! 0.4:1 2.3:1 Average product

Marginal analysis What is marginal analysis? What does “marginal” mean? ONE MORE If we already have 3 pies then which one is the marginal one THE NEXT ONE Marginal thinking is about making a decision Marginal analysis is evaluating the decision

Common examples Nitrogen Silage Grain Agistment Cull/dry-off

An example - Feeding We have a herd of cows and we are interested in maximising profit We have conducted a feed budget and can allocate 11 kg grass/day and 5 kg grain to get 13.7 litres of milk Milk price is 40c/litre (Marginal revenue) Grain price is 35c/kg (Marginal cost)

Questions Should we feed more gain? How much more? That is one more kilogram How much more? When do we stop?

Diminishing response One response curve for one level of pasture offered! 0.4:1 2.3:1

Diminishing returns Grain (Litres/cow) Average Product Marginal (MP) cost revenue Return on extra capital 5 13.7 2.8 6 16 2.7 2.3 0.35 0.94 168.% 7 17.8 2.6 1.8 0.74 111% 8 19.2 2.4 1.4 0.54 54% 9 20 2.2 0.8 0.34 -3% 10 20.4 2.0 0.4 0.14 -60% 11 20.3 -0.1 -0.06 -116% What does this mean? Using MC v MR - Stop when? Using average product – Stop when? Using GP to MP at 1:1 – Stop when?

MC v MR whole of business! Culling (a very powerful marginal decision) MOFC herd MOFC cow MC v MR Lets say we have a farm that has: 100 cows producing 1.9 kg MS Milk price $6.00/litre Diet 10 kg irrigated grass and 5 kg concentrate Irrigated grass cost is $0.10/kgDM Concentrate cost is $0.50/kgDM

Example - culling Culling MOFC herd 100 cows at 1.9 kgMS at $6.00/kgMS = $1,140 100 cows at 10 kg grass = $100 100 cows at 5 kg grain = $250 Feed cost is $350 MOFC is $790/day and life's good

Example Culling MOFC cow No cows Prodn/cow Income/cow Feed cost Margin 4.1 kg MS $24.60/day $3.50 $21.10 2.25kg MS $13.50/day $10.00 0.75kg MS $4.50/day $1.00 0.4 kg MS $2.40/day ($1.10) So you would cull 25 cows and drop grain from 500kg to 125 kg Increase profit by $202/day (decrease in grain and no loss on 25 cows) That means 25% of the cows are losing money Cash from culls is in the bank We have saved other “per cow” costs

Example Culling MC v MR If I remove 1 cow from the herd how much less feed do I need? 15 kgs If I remove 1 cow from the herd then I will feed how much less grain? If I remove 1 cow from the herd how much less will I spend? $7.50

Example Culling MC v MR No cows Prodn/cow Income/cow Feed cost Margin 4.1 kg MS $24.60/day $7.50/day $17.10 25 2.25kg MS $13.50/day $6.00 0.75kg MS $4.50/day ($3.00) 0.4 kg MS $2.40/day ($5.10) So you would cull 50 cows and increase profit by $502/day and feed no grain! $502 is avoiding the loss and saved grain That means 50% of the cows were losing money We have halved our “per cow” costs and got cash in the bank from culls Probably reduced overhead costs

Summary Use a business approach Marginal cost versus marginal revenue GP vs MP is useless MOFC is useless Culling is far more powerful than feeding Don’t panic do it 1 cow at a time Taking Stock is a good opportunity to review Feeding and culling decisions

Thank you Basil Doonan bdoonan@macfrank.com.au Contact Macquarie Franklin: P 03 6427 5300 | F 03 6427 0876 | E info@macfrank.com.au | W www.macquariefranklin.com.au