5 Systems, Strategies, and Economic Opportunities

5.1 Future Dairy Systems in Missouri - Strengths, Weaknesses, Opportunities, and Threats Profile (SWOT) Based on the extensive competitive audit contained in this report which highlights the comparative economic advantages, disadvantages, value drivers, opportunities, and challenges for the Missouri dairy industry, the authors have identified production systems we project will have the greatest opportunity for success in Missouri. In addition, observations of dairy production systems in the United States, surrounding states, and also in Missouri have resulted in the following conclusions. Future Missouri dairy production systems will be described by one of six basic production systems

• System # 1: Pasture Based Dairy
• System # 2: Partial Confinement Dairy Using Family Management and Labor
• System # 3: Full Confinement Dairy Using Family Management and Labor
• System # 4: Full Confinement Dairy Using Family Management with Additional Hired Labor
• System # 5: Full Confinement Dairy Using Hired Management and Hired Labor
• System # 6: Professional Dairy Heifer Grower

Each basic production system has different labor, management, land, and capital requirements. These production systems are basic components of the dairy production industry of the future. Several of the basic systems may serve a particular niche in the dairy production industry. These basic dairy production systems each have different SWOTs. A description and SWOT profile for each basic dairy production system follows.

5.1.1 System # 1: Pasture Based Dairy

Description:

Pasture based dairy systems use pasture forage as the basic ration component with cows kept on pasture. Stored forage supplements are used to augment pasture during dry periods and winter months. These dairy production systems generally include herds which do not have construction costs. Some-pasture based dairies use intensive rotational grazing to reduce investment costs associated with dairy facility construction. Seasonal grazing dairy systems dry all cows during the winter months and require minimal facility investment.

Strengths:

• Low capital investment of approximately $2,500 per cow is required for new pasture-based dairy production systems.
• Pasture production is an acceptable use of land resources in many of Missouri's traditional dairy production areas.
• Milk production from well-managed intensive rotational grazing systems has been near Missouri's average milk production level providing equal income with less investment.
• Pasture-based dairies must focus on managing cows and producing quality pasture forage. Pasture-based dairy management allows for fulfillment of desired family goals for some dairy producers.
• Pasture-based dairy systems may be more aesthetically acceptable to neighbors in suburban areas.
• Pasture-based dairy production systems may have reduced cow cull rates and a potential to increase cash flow from selling surplus heifers.

Weaknesses:

• Pastures must be managed to produce high quality forage. Poor quality forage will limit milk production and result in reduced profitability.
• Pasture damage from animal traffic during wet periods and the winter season may limit the scale of pasture-based dairy operations.
• The distance cows can walk between the milking center and the pastures may limit scale of pasture-based dairy operations.

Opportunities:

• Lower capital investment requirements facilitate the startup of new pasture-based dairies.
• Existing dairy farms with partial confinement facilities that are not in use may be leased or purchased by pasture based dairymen wanting to enter the industry.
• The seasonal grazing dairy at the University of Missouri-Columbia Southwest Research Center near Mt. Vernon provides a focus for the pasture based dairy industry. This demonstration farm is partially intended to attract pasture-based dairies to Missouri.

Threats:

• Environmental regulation may become more stringent if large areas have vegetative cover destroyed during the winter months. Cows must be restricted from primary drainage areas.
• Seasonal pasture-based dairying can present milk-balancing problems for dairy processors. Different milk marketing strategies would need to be developed if large numbers of seasonal grazing dairies began production.
• Winter storms and severe weather are special risks for dairies without cow housing facilities. Drought is also a risk because pasture-based dairies usually have limited capacity for storing forage.
• Nearby farms must fill a 50,000-pound tanker load to control hauling costs and maintain long-term viability of the industry.

5.1.2 System # 2: Partial Confinement Dairy Using Family Management and Labor

Description:

The partial confinement dairy operation is currently the most common dairy production system in Missouri. While these dairies range in size from small to large, these are usually moderate in size and family operated. Cows stay in pasture areas much of the year. Pastures produce forage during the lush spring and fall forage growth periods. Pastures also serve as cow exercise areas. Cows are fed concentrated rations and stored forage at times when pasture forage is not available.

Strengths:

• The main strength of partial confinement dairy production systems is that they are already in existence on many Missouri dairy farms.
• Family labor and management are committed to operate the dairy.
• Reduced risk during periods of severe weather because partial confinement systems have cow housing facilities and storage for some harvested forage.
• Labor required to handle manure is reduced because cows are kept in pastures during warm and dry weather periods.

Weaknesses:

• New partial confinement dairies will likely have high fixed costs associated with building construction and maintenance and investments in pasture with low productivity.
• The economics of partial confinement dairy systems require milk production levels greater than the production from the low cost pasture based operations. Partial confinement production systems may not achieve the high levels of milk production of the well-managed total confinement dairies that provide total mixed rations and managed cow comfort.
• Labor efficiency may not be as high as in total confinement herds with high production.
• Scale of operation is usually limited by available family labor.
• Income required for family living has driven expansion of many partial confinement dairy operations to the maximum size that can be supported by the current natural resource base and effectively served with family labor.
• Labor shortages that compete for a manager's time forcing him toward non-strategic but necessary tasks usually lead to poor management decisions and reduced milk production.
• Cow numbers are such that they might cause environmental problems with existing facilities, but do not justify investments in more modern manure management systems.

Opportunities:

• Many partial confinement dairy operations may be able to continue production at the current level until the current generation retires from dairying unless the production cost/milk price squeeze forces the business to cease operation.
• Some partial confinement dairies may be able to transition to a larger scale confinement dairy or to a pasture-based dairy system. The ability to transition is specific to each site, the available financial resources, and the business plan for the operation.

Threats:

• Partial confinement dairy producers have not managed to optimize milk production or reduce production costs in many cases. High production costs and low milk production has likely convinced many to sell their cows and leave the dairy production industry.
• Long hours and limited rewards have discouraged many young dairy family members from pursuing a career in dairy production.
• Maintaining environmental regulation compliance is an increasing concern to partial confinement dairy production systems.
• The level of milk production per cow may be limited by the cow environment and the management skills of the partial confinement dairy operator.

5.1.3 System # 3: Full Confinement Using Family Management and Labor

Description:

Full confinement dairy production systems that use family management and labor are the second most common dairy production system currently used in Missouri. These systems have often evolved from pasture-based systems to partial confinement systems to full confinement systems. Family operated confinement dairies usually determine maximum cow numbers based on the natural resource capacity to assimilate manure nutrients and also that can be operated with family labor.

Strengths:

• Family operated confinement dairy operations often represent the most successful dairy farms in Missouri.
• Family labor and management are committed to operate the dairy.
• Labor efficiency is usually good with modern facilities and family members are available to provide specialized labor and input into different components of the operation.
• Risks from severe weather periods are reduced because cow housing and stored forage facilities are part of the confinement system.

Weaknesses:

• Scale of operation is limited by available family labor.
• Family is not willing or capable of managing non-family hired labor.
• Everyday labor and management commitments may generate "burnout" leading to milk production and/or milk quality problems.

Opportunities:

• Family operated confinement dairy production systems have the ability to expand if family members are committed to developing management skills and using hired employees to operate the dairy.
• Managers must develop a "track record" of meeting changing management challenges as the dairy expands. Lenders will likely require a solid track record of effective management skills before granting access to expansion capital.

Threats:

• Reduced net farm incomes may limit the ability to attract young people for careers in dairy production.
• Time pressures on dairy production managers may lead to milk production and quality problems. The short-term result is lower profitability of the dairy operation and a lack of long term planning to keep the operation viable.

5.1.4 System # 4: Full Confinement Using Family Management with Additional Hired Labor

Description:

Full confinement dairy production systems using family management with additional hired labor is another common dairy production system in Missouri. These dairy production systems have evolved from pasture-based systems to partial confinement to full confinement operations. When family managed dairy confinement systems expanded cow numbers or when the family labor pool was not adequate, these operations hired employees to operate the dairy.

Strengths:

• Family managed confinement dairy production systems represent many successful dairy operations in Missouri.
• Family labor and management are committed to operate the dairy.
• High labor efficiency can be realized with modern facilities.
• The family labor pool does not limit the scale of the operation.

Weaknesses:

• Family managers may have difficulty identifying and delegating tasks to hired labor.
• Family managers must be committed to develop and apply business management skills to compliment dairy management experience.
• Every day management and labor commitments may generate "burnout" leading to milk production and/or quality problems.

Opportunities:

• Family managed confinement dairy operations have the ability to expand if family members are committed to develop and apply management skills and to use hired employees to operate the dairy.
• Managers must develop a "track record" of meeting changing management challenges as the dairy expands. Lenders will likely require a solid track record of effective management skills before granting access to expansion capital.

• Family managed dairy operations that require only management positions may limit the ability to attract young family members to dairy production careers.
• Family managed confinement dairies may be stocked to the maximum cow numbers that can be supported by the natural resource base at that site.
• Additional training in business skill areas such as labor management, time management, and financial management are necessary for further expansion.

5.1.5 System # 5: Full Confinement Using Hired Management and Hired Labor

Description:

Full confinement dairy production systems using hired management and hired labor are a growing segment of the dairy industry. Management and labor are hired to operate the dairy while owners oversee or manage the business. These large-scale dairy production operations are usually owned by successful dairymen, private milk processors seeking larger quantities of high quality milk, outside investors, or crop producers seeking to add value to crops. Total confinement commercial dairies integrate economies of scale by shipping tanker loads of milk and purchasing large volumes of feed.

Decisions required for locating large dairy production units and how to construct the production facilities follow the pattern of other industrial development projects. Designs are based on the results of preliminary feasibility studies. Local and regional costs of milk production, milk price projections, and any economic development incentives are evaluated.

Strengths:

• Large scale confinement dairy units are usually well planned and engineered.
• The scale of operation allows opportunities to negotiate lower construction and feed costs, higher milk prices, and an ability to spread fixed capital investment costs.

Weaknesses:

• Manure nutrient management issues may limit potential sites for large dairies in Missouri.
• Quality management costs for large dairy production units may require a large minimum number of cows to make the operation viable.
• Recruitment and retention of quality labor and management personnel is a necessity for continued viability of the business.
• Capital risks are high for new large confinement dairy units given the leverage required .

Opportunities:

• Large confinement dairy operations do not depend on existing local dairy infrastructure for service or as a milk market outlet.
• The large confinement dairy scale of operation can provide substantial economic impacts to rural communities.
• Quality and quantity of milk shipped may allow local processing plants to remodel and remain in business.
• Feed demands of large confinement dairies may provide market opportunities for local crop producers and co-product producers. Products such as dried distiller grains, wet brewers grains, and cotton co-products can be profitably used.
• The scale of operation allows specialized labor and management personnel to be hired.

Threats:

• The publicity generated by construction of large confinement dairy operations may lead to opposition from local groups.
• Large confinement dairies may be viewed as a threat to the future of existing dairy production operations by some, including current producers.

Description:

The professional dairy heifer grower system offers opportunity for the Missouri dairy industry. Larger dairy production operations in other states are seeking to outsource raising heifers. A mild winter climate and available pasture acreage makes Missouri an ideal area to grow heifers. These large dairies will contract with Missouri growers after the heifer grower has demonstrated the ability to grow a productive heifer to specification. Larger dairies may produce several thousand heifers every year.

Missouri has several established professional heifer growers. The Show Mo Heifer Growers Association promotes the industry and has developed standards for Missouri grown heifers. These efforts were made to insure future growth in the heifer raising industry and serve to carve out a branded specialized productive niche to newer production system models.

Strengths:

• Missouri has been a leader of organized reproductive management programs for heifer development.
• Missouri has large numbers of pasture farms.
• Missouri has a mild climate allowing heifers to be raised outside reducing facility investments.
• Dairy heifer growing provides the potential for increased profitability when compared to beef cow/calf operations.
• Missouri has an established dairy heifer market.
• Missouri has a small core of professional heifer growers who meet the industry's exacting standards to lead the heifer growing industry.

Weaknesses:

• Dairymen who outsource heifer growing trust the grower with the future of their dairy herd. Heifer growers must be committed to total quality in all aspects of the business to earn the dairy producer's confidence.
• Many Missouri dairymen have not demonstrated the ability to raise their dairy heifers to meet the high industry standards.
• Current heifer growers do not have the capacity to accommodate the large numbers of heifers placed by large dairies thus reducing their attractiveness.
• Returns are delayed for two years when young heifers are purchased and growing costs may require financing leading to cash flow problems.

Opportunities:

• Missouri has the forage production capacity and farm operators to grow thousands of dairy heifers.
• Many dairy operations seek to outsource heifer growing to professional heifer growers who specialize in growing large groups of heifers.
• Heifer growers must produce total quality heifers at a competitive price.
• The Show Mo Heifer Growers Association could organize smaller growers and accredit those growers who demonstrate the ability to produce quality heifers and thus promote the industry in Missouri.

Threats:

• Missouri heifer growers must not return problem heifers to the outsourcing dairy operations if the heifer growing industry in Missouri is to be maintained.
• The cost of growing heifers in Missouri must be competitive with the cost of growing heifers in western feedlots.

5.2 Strategies to Improve Profitability on Missouri Dairy Farms

Based upon the information reported and analysed in this audit, the authors identified two basic strategies for developing a more profitable and sustainable dairy industry in Missouri. These strategies include:

1. increasing production efficiencies
2. increasing the scale of new or existing dairy production operations.

The first strategy is for the Missouri dairy industry to retool and reinvest in the existing on-farm infrastructure. This reinvestment must incorporate modern dairy production facilities and concepts with technologies that complement management of the dairy operation. When investments in technology complement management objectives, there are viable opportunities to improve profitability of the operation. The second strategy is to gain the benefits of efficient management of scale.

Six dairy production and management systems were previously discussed in this report. Existing dairy production operations must invest in appropriate production technologies and implement management techniques that complement these technologies. Investing in appropriate technologies and implementing the complementary management techniques, that match particular dairy production systems, allows producers to improve their competitive position, increase milk production per cow, lower feed costs and increase profit margins.

New dairy production operations must incorporate the appropriate technologies during design and construction of the facility. The new operation will need to implement management techniques that complement those adopted production technologies. The following eight tactics identify specific methods for Missouri dairymen to determine what technology areas and complementing management techniques need to be incorporated into existing operations to accommodate the benefits of the two strategies mentioned above.

• Tactic 1: Reduce summer heat stress
• Tactic 2: Better care of replacement heifers
• Tactic 3: Focus on forage quality
• Tactic 4: Improve milk quality
• Tactic 5: Increase use of bST
• Tactic 6: Improve dry matter intake
• Tactic 7: Better reproductive management
• Tactic 8: Economies of scale

Each tactic is explained below including a brief description of the problem identification of the resulting lost income and action steps to overcome the problem.

5.2.1 Tactic 1: Reduce Summer Heat Stress

The way we do it now

Milk production, due to summer heat stress in lactating cows, declines when systems to cool cows are not operated effectively. Milk production reductions due to heat stress are expected in dairy herds with tank averages of 40 or more pounds of milk per cow per day.

Dairy herds that experience decreased milk production during hot weather have a heat stress problem and will benefit from heat reduction strategies. Heat stress can reduce milk production 20 to 25 pounds per cow per day depending on the herd's cool weather milk production level. High producing herds will normally experience the greatest declines in milk production if heat reduction strategies are not implemented.

Money left on the table

Milk production losses from heat stress experienced during hot weather can be as high as 25 pounds of milk per cow per day. During a 120-day hot weather period, lost milk production of 3,000 pounds per cow may be realized. This calculates an income loss of $360 per cow when the milk price is $12 per cwt. Heat stress will also contribute to depressed cow health and poor reproductive performance.

Action steps to fix the problem

Heat stress reduction will not increase milk production above cool weather production levels. Heat stress reduction allows a herd to maintain production during hot weather. Milk production inputs such as forage quality, dry matter intake, and access to a quality ration must be properly managed to realize the benefits from heat stress reduction actions.
These actions include:

1. Drinking water access
   • Inadequate drinking water access will depress water consumption and result in depressed milk production.
   • Drinking water should always be available in cow feeding and resting areas.
   • Waterer space should allow up to one third of a cow group to drink at one time.
   • Drinking water access should be located near the exit of the milking parlor and be large enough to allow one parlor exit group to drink at one time. Providing drinking water near the exit of a milking parlor can increase milk production per cow up to four pounds per day.
2. Shade
   • Shade should be provided over the feed bunk, holding pen, and cow resting areas. Shade blocks the sun's ray and reduces heat stress in cows. Without access to shade, cows are hot and experience greater milk production declines than cow with access to shade.
3. Installation of fans and sprinklers
   • When outside temperatures exceeds 85 to 90 °F, fans to provide supplemental air movement and sprinklers to provide increased evaporative cooling should be operated.
   • Fans and sprinklers should first be installed in the holding pen area followed by the feeding and resting areas.
   • An increase of five pounds of milk production per cow per day during the summer heat period will pay the cost of purchase, installation and operation of fans and sprinklers.

Dairy operations that effectively incorporate heat stress reduction strategies with quality feed rations and water access should experience only minimal milk production decline due to heat stress.

5.2.2 Tactic 2: Better Care of Replacement Heifers

The way we do it now

The Missouri Dairy Herd Improvement Association (DHIA), reports the average age at first calving for Missouri dairy herds is about 27 months. The Missouri Dairy Heifer Project was designed as a pilot research and educational program to evaluate and promote dairy heifer development. This project was supported by the Missouri Dairy Association and conducted in 2000. Project objectives were:

1. Identify and quantify problem areas on Missouri dairy farms that contribute to extended age at first calving.
2. Implement management changes that would correct these problem areas.
3. Develop working relationships between producers and allied industry personnel so the program would have a sustainable impact.

Seven participating dairy herds were evaluated every 8-10 weeks. Cumulative growth data from the herds was compared to industry standard growth data derived from the scientific literature.

Table 14. Percentage of Heifers Meeting Minimum Growth Targets

Heifer Age (months)	% Meeting Minimum Requirement for Age
4 8 12 15 24	55.3% 62.5% 35.5% 29.3%4 1.7%

Data in Table 14 indicates that 65-70% of the heifers are undersized at the desired 12-15 month breeding age. Many of the participating producers indicated that breeding is delayed until the heifers have achieved adequate size therefore increasing age at first calving.

Money left on the table

Raising dairy replacement heifers constitutes a major investment in a dairy enterprise. Replacement heifer development commonly accounts for 15% of the variable expenses of a dairy operation⁴¹.

Life-time milk yield, 305-day lactation yields, and life-time profit of replacement heifers are maximized when the heifers calve for the first time at 23 to 25 months of age.

Heifers that calve at ages older than an average of 24 months exhibit the following:

• Decreased productive life of the heifer which delays returns of income from milk sales.
• An increased inventory of replacements needed to maintain herd size. As age at first calving and/or cow cull rate and/or calf mortality decrease, fewer animals are required to maintain herd size. Surplus replacements can be used for herd expansion or sold for added revenue. Assuming a given cull rate and a 0% calf mortality, each month increase above 24 months for first calving of replacement heifers will increase required heifer inventory approximately one heifer per 100 cows to maintain herd size.
• Greatest increases in 305-day lactation yields are seen in replacements heifers calving for the first time from 20 to 26 months of age.
• A positive relationship of body height and weight at first calving to milk production has been established.
• First lactation milk yields for Holstein heifers increased about 2,000 lb when the heifers weighed 1,350 to 1,400 pounds at first calving compared to heifers weighing 900 pounds at first calving. The most rapid increase in milk production occurs for heifers first calving between 1,000 and 1,200 pounds.
• The combined economic impact of these can accumulate to more than $600 per heifer over her productive life.

Current recommendations are to calve Holstein heifers weighing 1,200 to 1,250 pounds at 24 months of age. Standard growth curves for replacement heifers that establish target weight and height from birth to 24 months have been validated.

Action steps to fix the problem

Evaluation of replacement heifer management practices on the demonstration farms identified the following problem areas which when corrected can contribute to the economic benefit mentioned:

• The primary factor contributing to inadequate heifer growth was a failure to provide high quality forage rations in sufficient quantities to maintain the desired growth of the heifer.

Additional factors included:

• Inadequate bunk space and bunk management to provide access to feed.
• Inadequate access to good quality water.
• Inappropriate heifer groups leading to disparity in the size of the heifers within the group.
• Lack of facilities for handling heifers at critical intervention points.
• Lack of a planned breeding program.

5.2.3 Tactic 3: Focus on Forage Quality

The way we do it now

Many Missouri dairy operations develop rations based on the following:

• Feed the feedstuffs that are "on hand" or buy feed as cheap as possible.
• Harvested forage is not well preserved. Covers are not installed on bunker silos.
• Rations often contain moldy forages because of a failure to separate the moldy silage from good silage.
• First cutting of alfalfa is difficult to harvest in Missouri because of the humid and wet May weather and also competition with row-crop planting.
• Low-quality forage reduces dry matter intake due to a gut fill factor. Milk production is reduced due to the lower dry matter intake and reduced energy available in the feed consumed by the cow.

Money left on the table

Feeding 10 pounds of early bloom alfalfa hay with a relative feed value of 150 verses 10 pounds of full bloom alfalfa hay with a relative feed value of 100 would provide an additional 0.5 Mcal of net energy lactation. This is enough energy to produce an additional 1.6 pounds of milk worth about $0.19 per cow per day without consideration of any additional results from feeding the better quality alfalfa hay which would increase dry matter intake. The higher quality alfalfa hay would also be about 4% higher in crude protein. The additional 0.4 pound of protein could replace about 0.8 pound of soybean meal in the ration at a cost savings of $.05 to $.10 per cow per day.

Feeding the moldy silage from the top 6-12 inches of an uncovered bunker or pit silo has been shown to reduce the digestibility of the good silage in the dairy cow rations.

Action steps to fix the problem

Understand the value of producing or purchasing higher quality forage for dairy production rations. Specifically:

• Harvest alfalfa as haylage or baleage in order to avoid the problems associated with drying alfalfa for hay.
• Harvest alfalfa when the first blooms appear.
• A few days delay in harvesting alfalfa drastically reduces quality and total yield potential. However, short delays in planting row crops have minimal effect on crop quality or yield.
• Encourage producers to purchase good quality hay.
• Require a forage sample before purchasing hay. Sample all forages prior to feeding so that rations can be balanced.

5.2.4 Tactic 4: Improve Milk Quality

The way we do it now

Value available in milk through quality is primarily associated with bacteria and somatic cell count (SCC) level. Grade A milk must meet minimum standards according to the Pasteurized Milk Ordinance (PMO) to legally qualify as Grade A milk. According to the current PMO, raw bulk tank milk must be less then 750,000 SCC per milliliter and less than 100,000 bacteria per milliliter to meet the minimum legal standard.

Grade A milk must also be free of inhibitors, contain no added water, and appear to look and smell like fresh milk at the time of pick up from the farm. Unclean odors or off color are reasons for a determination of abnormal milk.

Bacteria and SCC levels significantly less than the legal minimum are associated with a high-quality product that has an extended shelf life. Low somatic cell count milk is also associated with higher solids and a greater cheese yield.

The use of Grade A milk will influence how improved quality adds to the value of the milk. Superior quality Grade A fluid milk will have an extended shelf life. A low bacteria count is more important than low SCC. Improved taste and desired texture of the manufactured product also add value to the milk.

Money left on the table

For the purposes of this example, consider adjustments available to dairy producers marketing to Dairy Farmers of America, (DFA) Central Region for somatic cell level which range from a positive $0.65/cwt of milk to a deduction of $0.90/cwt of milk. This SCC spread is between 0 and 750,000 SCC/ml. Bacteria adjustment measured as PI (preliminary incubation) count range from positive $0.25/cwt to a deduction of $0.50/cwt. The bacteria spread is between 1,000 and 200,000 bacteria/ml. Quality premiums available to producers then is a combined spread of positive $0.90/cwt to a deduction of $1.40/cwt or a spread of $2.30/cwt of milk in this example.

Assuming average Missouri DHI production of 17,500 pounds of milk per cow per year, a dairy producer could earn a theoretical bonus of $157.50 per cow. It is reasonable to expect to maintain the SCC level at less than 200,000 SCC/ml, which equates to $0.41/cwt adjustment and also to receive the maximum bacteria adjustment of $0.25/cwt, which would net a producer an additional $0.66/cwt or $115.50 per cow per year. Low-quality milk could result in a deduction of $1.40/cwt or a loss of $245 per cow per year.

Milk marketed by DFA, Southern Division has a greater Class I usage and the only quality incentive is a premium of $0.10/cwt bonus and a $0.25 deduction applied to milk PI count. No quality incentive is offered for milk with a low SCC level in that marketing region.

Action steps to fix the problem

A significant portion of milk quality problems discussed above can be improved by providing a clean dry resting environment for the lactating cows. The tactics and/or investments needed for a specific operation depend on the current milk quality status and the desired dairy production system to be used.

5.2.5 Tactic 5: Increase Use of bST

The way we do it now

The adoption rate for the use of bST in Missouri is below the national average.

Money left on the table

A case study reported by Hardin and Bailey indicated that net returns per cow per year increased by $97 for a herd using bST.⁴²

Action steps to fix the problem

Evaluate the potential to use bST as part of the dairy production management system.

5.2.6 Tactic 6: Improve Dry Matter Intake

The way we do it now

Cows are often fed feedstuffs that are "on-hand". Feed is rated as good by many producers if the cows eat it. Feed that cows don't eat is thus rated bad. Consider the following feed management mistakes:

• Feed bunks are rarely checked or cleaned out and old feed is allowed to accumulate and spoil. Spoiled feed in the bunk lowers feed intake.
• Dry matter intakes are rarely calculated so many producers do not really know how much feed cows are consuming.
• Many feed bunks are not covered which exposes the feed to the weather elements and allows feed to deteriorate faster in the summer. Feed exposed to the elements is lower in quality and palatability so that cows reduce feed intake.
• Cows fed in open areas exposed to the weather elements will eat less because cow comfort is lacking.

Money left on the table

Dry matter intake drives milk production. One additional pound of dry matter intake will result in an increase of 2 to 2.5 pounds of milk produced. One pound of feed dry matter costs about $0.05 and milk price is about $0.12 per pound. The consumption of one additional pound of dry matter per day would return about $0.19 to $0.25 per day of added income above feed cost per cow.

Action steps to fix the problem

Strategies to increase dry matter intake are:

• Provide covered feeding areas.
• Check feed bunks and clean feed not eaten from the feed bunks daily.
• Do not feed moldy feed since it reduces feed consumption as well as digestibility of the feed.
• Provide cow comfort facilities and equipment in the feeding area to encourage cows to increase feed intake.

5.2.7 Tactic 7: Better Reproductive Management

The way we do it now

The estimated average calving interval for Missouri dairy herds exceeds 15.4 months. However, many herds in Missouri are achieving 13.5-month calving intervals. Reproductive management requires a basic knowledge of reproduction, skills in heat detection, breeding expertise, and a plan to insure these techniques are implemented in a timely manner. Many Missouri dairy production units fail to consistently implement a sound reproductive plan.

Money left on the table

A direct relationship exists between the length of the calving interval and the average days in milk for dairy herds. Average days in milk directly influences the volume of milk sold. A 30-day increase in the calving interval results in a five-pound decrease in the herd tank average or the daily milk production per cow per day. Extended calving intervals also reduce the number of calves produced each year.

Action steps to fix the problem

The goal is to maintain the average days in milk for the herd at 180 days. This requires good reproductive management. To achieve this goal, the herd manager and/or herdsman must be skilled in heat detection and breeding. Sound nutritional management, installation of environmental systems that maintain cow comfort, and implementation of heat stress reduction strategies are essential.

5.2.8 Tactic 8: Economies of Scale

There are substantial benefits to scale of operation. However, scale of operation provides a substantial increase in profit potential. The use of appropriate scale to match management ability is clearly the main value driver in the dairy production industry. Dairy operations that under utilize investment in scale and have the ability to manage capital and labor efficiently leave profits "on the table". This section of the report outlines benefits of scale and emphasizes how these benefits are lost due to lack of capital investments or managerial abilities.

To aid in evaluating the economic impact of a new dairy startup, four model dairy farms were created using the University of Missouri's Commercial Agriculture Dairy Simulation Model, or CADSIM. Assumptions used in the evaluation were:

• Detailed machinery and investment lists were prepared for each of the four model farms.
• Per cow costs were uniform for each of the different sized units.
• Labor costs were fixed at $8 per hour.
• Land costs were fixed at $1,000 per acre.
• Cows were purchased at $1,400 per head.
• Heifer calves were sold at birth and replacements heifers purchased.
• All four example units started with 60% equity in the operations and with as much of the debt as possible amortized over longer term mortgages.

Table 15 shows the primary financial ratios for analyzing a farm business and the values of each for the four units studied. These financial indicators clearly support scale as a method to add profitability to the dairy production industry. Key indicators including rate of return on assets, profit margin, and return on equity clearly point to larger efficient operations as a more viable business plan given the assumptions of the model. Of course, smaller operations efficiently managed with low debt load can be profitable as well.

Table 15. Summary of Financial Ratios for New Dairy Farms by Scale of Operation

	150 Cow	300 Cow	500 Cow	1000 Cow
Liquidity
1. Current Ratio	3.73	4.67	4.67	4.67
2. Working Capital	52,072	140,721	234,535	469,070
Solvency
3. Debt/Asset Ratio	41.3%	40.7%	38.6%	37.3%
4. Equity/Asset Ratio	58.7%	59.3%	61.4%	62.7%
5. Debt/Equity Ratio	0.70	0.69	0.63	0.60
Profitability
6. Rate of Return on Assets	-1.9%	5.1%	6.5%	8.6%
7. Rate of Return on Equity	-11.4%	4.2%	6.5%	9.9%
8. Operating Profit Margin Ratio	-4.5%	7.7%	8.9%	11.5%
Financial Efficiency
9. Asset Turnover Ratio	0.49	0.66	0.73	0.75
10. Operational Ratios
a. Operating Expense Ratio	84.2%	76.0%	76.9%	75.5%
b. Depreciation Expense Ratio	20.4%	16.3%	14.2%	13.0%
c. Interest Expense Ratio	5.7%	4.0%	3.4%	3.2%
d. Net Farm Income from Operations Ratio	-10.2%	3.8%	5.5%	8.3%
DuPont Identities
11. Profit Margin	-10.2%	3.8%	5.5%	8.3%
12. Asset Turnover	0.5	0.7	0.7	0.8
13. Financial Leverage	1.7	1.7	1.7	1.6
14. Return on Equity	-8.0%	4.4%	6.7%	10.2%
Dairy Profitability Ratios
15. Total assets per cow	5,919	4,520	4,123	3,991
16. Total debt per cow	2,398	1,787	1,551	1,457
17. Assets per cwt	29.47	20.82	19.09	18.54
18. Gross milk margin	57.0%	59.6%	59.6%	59.6%

Economies of scale may also be reached by implementing other management structures using current, or moderately augmented, assets. There are many examples of management clusters in production agriculture which provide such a framework. The clusters include strategic partnerships with fellow producers, input suppliers, and market channels. Each cluster is designed to increase the efficiency of the combined partners by managing all or part of the collective resources jointly to establish a structure which accomplishes their previous separate activities jointly allowing greater profits to the cluster system and its' partners. We suggest exploring such opportunities in the Missouri Dairy industry.

Economic Opportunities

The purpose of this study is to identify economic opportunities available to Missouri dairy producers and the Missouri dairy industry. Strategies and their associated implementation tactics identified outline management practices to increase income and profitability. In addition to economic activity generating profits on the farm, increased profitability also has an impact on the communities in which those farms reside.

Table 16 shows the estimated economic benefit to the state of increasing the state average milk production per cow (PPC) by 1,000 pounds per year and increasing the number of cows milking in each Missouri county by 100. The economic value to the state of increasing the average production per cow by 1,000 pounds is $35 million when the multiplying effect of the increased production value is calculated. This additional economic activity would generate and sustain an additional 370 jobs in the state. In addition, we outlined opportunities for producers to profit from greater economies of scale. Each 100-cow expansion of Missouri's milking herd at the current milk production per cow will provide a total economic activity increase of $343,000 as well as generate and sustain almost four additional statewide jobs after the multiplier effect is applied.

Table 16. Economic Impact of Increasing Production and Cow Numbers in Missouri Counties

	Economic Value of each		Jobs Created by each
County	1000 lb PPC increase	100 cows at Mo average PPC	1000 lb PPC increase	100 cows at Mo average PPC
Adair	$72,124	$264,371	0.8	3.0
Andrew	$264,224	$258,270	2.4	2.3
Atchison	N/A	$264,371	N/A	1.9
Audrain (est)	N/A	$250,135	N/A	1.6
Barry	$816,943	$252,169	6.9	2.1
Barton	$133,152	$260,303	0.9	1.7
Bates	$250,492	$262,337	2.0	2.1
Benton	$213,043	$260,303	2.3	2.8
Bollinger	$17,338	$254,202	0.2	2.7
Boone	$48,545	$284,707	0.6	3.3
Buchanan	$121,709	$274,539	1.2	2.7
Butler	N/A	$270,471	N/A	3.1
Caldwell	$53,677	$262,337	0.6	2.8
Callaway	$144,248	$264,371	1.3	2.5
Camden	$185,858	$272,505	2.5	3.6
Cape Girardeau	$502,788	$294,875	5.3	3.1
Carroll	$106,522	$260,303	0.8	1.9
Carter	N/A	$244,034	N/A	3.8
Cass	$166,024	$270,471	1.7	2.8
Cedar	$127,188	$266,404	1.3	2.8
Chariton	$55,757	$272,505	0.4	2.1
Christian	$498,072	$270,471	6.8	3.7
Clark	N/A	$270,471	N/A	2.4
Clay	N/A	$282,673	N/A	5.0
Clinton	$55,757	$272,505	0.5	2.5
Cole	$164,776	$268,438	1.7	2.8
Cooper	$143,138	$262,337	1.1	2.0
Crawford	$36,062	$264,371	0.6	4.1
Dade	$154,442	$266,404	1.4	2.3
Dallas	$1,021,664	$258,270	13.0	3.3
Daviess	$68,795	$252,169	0.5	1.9
DeKalb	$119,906	$270,471	1.2	2.7
Dent	N/A	$266,404	N/A	3.8
Douglas	$1,278,259	$260,303	19.4	4.0
Dunklin	N/A	$343,459	N/A	3.6
Franklin	$384,476	$268,438	4.3	3.0
Gasconade	N/A	$264,371	N/A	3.3
Gentry	$33,565	$246,068	0.2	1.6
Greene	$900,579	$307,077	11.2	3.8
Grundy	$88,768	$260,303	0.8	2.2
Harrison	$75,453	$276,572	0.6	2.4
Henry	$144,248	$264,371	1.1	2.0
Hickory	$374,496	$249,584	3.4	2.2
Holt (est)	N/A	$245,696	N/A	2.7
Howard	$53,693	$262,416	0.5	2.4
Howell	$1,058,926	$282,290	12.8	3.4
Iron	N/A	$343,459	N/A	3.6
Jackson	$41,024	$300,748	0.4	2.7
Jasper	$379,325	$278,083	3.9	2.9
Jefferson	$167,265	$272,493	2.5	4.1
Johnson	$213,627	$261,016	2.0	2.5
Knox (est)	N/A	$245,151	N/A	1.8
Laclede	$1,400,693	$270,223	16.9	3.3
Lafayette	$189,448	$277,769	1.6	2.3
Lawrence	$1,501,059	$260,456	12.8	2.2
Lewis (est)	N/A	$246,829	N/A	1.8
Lincoln	$231,827	$261,465	2.0	2.3
Linn	$139,441	$255,560	1.1	1.9
Livingston	$49,007	$287,417	0.4	2.5
Macon	N/A	$264,368	N/A	3.0
Madison	N/A	$256,292	N/A	8.5
Maries	$102,556	$250,612	0.9	2.3
Marion	$144,245	$264,365	1.2	2.2
McDonald	$304,585	$248,102	3.0	2.4
Mercer	$43,402	$254,545	0.4	2.4
Miller	$61,472	$257,517	0.5	2.0
Mississippi	N/A	$260,719	N/A	2.8
Moniteau	$234,836	$255,049	1.8	1.9
Monroe	$121,363	$254,202	0.9	1.8
Montgomery	$17,476	$256,236	0.2	2.3
Morgan	$318,982	$259,828	2.5	2.1
New Madrid	N/A	$250,705	N/A	2.8
Newton	$753,414	$256,897	7.4	2.5
Nodaway	$71,628	$262,553	0.6	2.2
Oregon	$228,842	$258,098	2.4	2.7
Osage	$169,630	$248,712	1.6	2.4
Ozark	$735,389	$256,721	9.8	3.4
Pemiscot	N/A	$343,459	N/A	3.6
Perry	$258,793	$252,962	2.6	2.6
Pettis	$186,553	$273,524	1.4	2.1
Phelps	$37,324	$273,620	0.5	3.8
Pike	$36,593	$268,264	0.3	2.5
Platte	N/A	$283,685	N/A	2.3
Polk	$1,354,822	$268,438	13.0	2.6
Pulaski	$42,902	$251,609	0.5	3.0
Putnam	$63,808	$267,299	0.7	2.8
Ralls	$17,294	$253,570	0.1	1.8
Randolph	$58,657	$286,674	0.6	2.9
Ray	$18,057	$264,746	0.2	2.7
Reynolds	N/A	$238,745	N/A	4.1
Ripley	N/A	$343,459	N/A	3.6
Saline	$35,430	$259,737	0.2	1.6
Schuyler	$78,204	$254,807	0.8	2.7
Scotland	$259,977	$254,118	2.1	2.1
Scott	N/A	$286,976	N/A	2.0
Shannon	$50,549	$247,050	0.8	3.8
Shelby	$8,308	$243,631	0.1	2.7
St Charles	$175,633	$271,067	1.5	2.4
St Clair	$126,305	$264,554	1.1	2.2
St Francois	$67,632	$283,319	1.1	4.8
St Louis	N/A	$343,459	N/A	3.6
Ste Genevieve	$25,798	$252,169	0.3	2.9
Stoddard	N/A	$266,865	N/A	2.9
Stone	$538,571	$254,727	9.3	4.4
Sullivan	$50,176	$245,225	0.5	2.2
Taney	$56,189	$274,617	0.8	3.7
Texas	$1,383,995	$260,156	16.0	3.0
Vernon	$195,284	$260,296	1.4	1.8
Warren	$43,297	$253,926	0.4	2.2
Washington	N/A	$246,847	N/A	3.8
Wayne	N/A	$249,240	N/A	4.3
Webster	$1,885,765	$268,438	25.3	3.6
Worth	N/A	$343,459	N/A	3.6
Wright	$2,520,215	$259,308	31.2	3.2
Unassigned	$439,075	$343,459	4.6	3.6
Statewide	$35,207,944	$343,459	369.9	3.6

⁴² Hardin, D.K., K. Bailey and J. Spain: 1995. Recombinant bovine somatotropin: What’s the profit potential? Veterinary Medicine, Food Animal Practice.