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

2. 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

3. 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

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

5. 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

6. Common examples
Nitrogen
Silage
Grain
Agistment
Cull/dry-off

7. 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)

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

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

10. 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?

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Thank you Basil Doonan bdoonan@macfrank.com.au
Contact Macquarie Franklin: P | F | E | W