February 17, 2020
I had a conversation with one of my team members the other day about ways to adjust a feed ration to optimize the pay price and premium that a dairy receives from their milk plant. As a financial dairy consultant, I run into the scenario where an owner may not understand their milk check more frequently than one might think. Common questions for me to ask a dairy: What is your basis? Do you know what you are getting per pound of butterfat? Protein? Do you know how your premiums are calculated?
It is not uncommon for the answer to be uncertainty.
I work under the philosophy that if you can monitor something you can manage it. While many dairies think they are held hostage to the announcement milk price, this is not always the case. I believe that a dairy can improve their milk income by changing some of their feeding strategies.
The first thing that I recommend that a dairy start doing is to monitor their basis. For this purpose, the basis is simply the calculation of the difference between their actual price and the announced price. By monitoring the basis of the milk check, one will be able to determine where the majority of their milk income comes from: volume or components. Over recent years, it has become more common to find the basis being positive driven by the components more than the volume of milk. There are some exceptions to this rule, depending on if there are any volume premiums from an individual milk plant.
While a dairy has very little control over the announced price of milk, they do have control over their components. Too often I hear of dairy’s focusing being that 100-pound herd. My challenge to those dairies is to do the exercise of breaking apart your milk check. Look at the what you are getting paid for volume, butterfat, and protein. Once the actual numbers are known, start using those numbers in different scenarios to determine the best course of action for your dairy. In my experience, the best course of action is work with your nutritionist to focus on improving components versus feeding strictly for production.
In addition to the components portion of a milk check, a producer should review the premiums their plant offers, the most common one being your SCC premium. Work with consultants and management team to maximize those premiums. If in doubt about how premiums are calculated, reach out the milk plant for clarification.
My final piece of advice, do not forget to review the deductions and assignments that are being withheld from your milk check. While it is not common, there are times that errors have been found.
While this is not a new topic, I do think that it is a good reminder for all of us. Do not become complacent when looking at your financials. As the last few years have shown us, we must know our financial numbers and be confident in those numbers. Take the time to know yours.