Nutritional economics

A commodity bay and brewer's grain

Brewers grain in a commodity bay: this by-product of beer brewing can contain up to 80% water.

Nutritional economics are important when managing a dairy farm as feed-related costs can make up over 60% of costs on-farm. Costing on a dry matter (DM) and nutrient basis allows you to assess which feeds are of most value to your herd. Effects of drought and international markets may limit the availability of certain feed supplies and, consequently, increase the cost of buying that feed. It then becomes important to forward contract so that prices do not rise to uneconomical levels.

Costing on a DM basis

By calculating the cost of feed on a DM basis, you can determine whether the feed is an economical nutrient source compared to other feeds.

Formula

Price of feed as fed ($/tonne) ÷ DM % of feed

Example

Citrus pulp at $50/tonne containing 20% DM

50 ÷ 20% = $250/tonne DM

Example

Grain at $285/tonne containing 91% DM

285 ÷ 91% = $313/tonne DM

Once you work out the total DM cost of a feed, you can then determine what feeds are of most value to your herd and your budget. Low DM feeds such as citrus pulp sound cheap on an as-fed basis, but do not cost much less than grain on a DM basis.

Costing on a nutrient basis

Work out how much the feed costs in dollars per DM kilogram ($/kg DM) as shown above. Then calculate the nutrients that are in that feed (look in feed tables for averages) - access the feed cost calculator.

Costing on a metabolisable energy or ME (MJ/kg DM) basis

Formula

(Cost of feed $/tonne DM ÷ 1000) ÷ Amount of ME in MJ/kg DM

Example

Brewers grain contains 12.7 MJ/kg DM of ME at $265/tonne DM

(265 ÷ 1000) ÷ 12.7 MJ/kg DM =$0.02/MJ of ME

Costing on a protein, starch, sugars and neutral detergent fibre or NDF (% DM) basis

Formula

(Cost of feed $/tonne ÷ 1000) ÷ (Amount of nutrient % DM ÷ 100)

Example

Soybean meal contains 52% DM of crude protein at $650/tonne DM

(650 ÷ 1000) ÷ (52 ÷ 100)

$0.65/kg ÷ 0.52 kg CP/kg DM = $1.25/kg DM of protein

Forward contracting

A forward contract is a legal agreement between a feed supplier and a feed buyer that can reduce the feed price risk. Remember that 60% of operating costs on dairy farms can come from feed costs.

A forward contract is where the farmer (feed buyer) agrees to buy a specific quantity of feed at a ´locked-in´ price until a predetermined time in the future.

There is usually a storage fee on top of the ´locked-in´ price, but this is generally quite small in relation to the variation in feed costs.

Some advantages and disadvantages of forward contracts

Advantages

  • The price is constant over a 12-18 month period.
  • Price fluctuations occurring within the market are avoided.
  • The contracted feed can be defined by the farmer´s specific requirements in terms of feed quantity and quality according to the feed budget.
  • There is little to no costs to sign a contract.

Disadvantages

  • Fluctuations in the market may mean the normal price recedes dramatically below the ´locked-in´ contract price.
  • The grain is required to be delivered as stated in the contract.
  • There is a risk involved if product does not meet the required expectations.
  • The delivery must be accepted from contracted supplier and the contract cannot be offset.
  • If the supplier does not meet expectations, then the buyer´s only recourse is through legal action.

Case study

Grain was contracted at $270/tonne in August 2002 for 12 months. It can be seen in the figure below that by initiating a forward contract a farmer can save a lot of money even when the market prices fall below the contracted price in April, May and July.


Diagram of a forward contract price compared to market price of grain
Figure 1. A comparison of a forward contract price for grain and the fluctuations in the market price of the grain

Margin over feed costs

  • The margin over feed costs (MOFC) is the amount of total farm income left over after paying for all of the feed costs.
  • It becomes important to monitor your feed costs as MOFC is a major driver of farm profits.
  • Aim to keep feed-related costs below 60% of total farm receipts.
  • It is influenced by input costs (fertiliser, seed, concentrates), environmental variables (weather), milk and other farm income, cow feed conversion efficiency and overall management.

There are two ways that you can increase MOFC:

  1. Grow and utilise as much high quality forage as possible.
  2. Use concentrates where necessary to balance the diet and increase production per cow.

Understanding how nutritional economics can improve dairy farm profitability is an important aim in enhancing profitability. Forward contracting may prove to be beneficial, particularly when a ´locked-in´ price is well below market driven prices.

Further information

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Last updated 05 March 2013