Farm Decisions Related to rbST use in Michigan

Dairy January 04, 2008 Print Friendly and PDF


This article is aimed at supplying information to assist dairy producers relative to the decision to use rbST and how to proceed if the decision made is to cease use. As revenues and costs are farm specific, a budgeting approach is discussed with the intent farms will substitute their own values.


Author Information

Christopher Wolf, Michigan State University

Introduction

For the past couple of years, an increasing number of retailers and, thus, processors and cooperatives have moved away from recombinant bovine somatotropin (rbST) use in their milk supply process. The movement started in 2005 with Tillamook Cheese in Oregon which required producers to supply milk from cows not supplemented with rbST (“rbST-free”). The trend then spread to the Northeast US and more recently to states such as Michigan. Kroger and other retailers first approached cooperatives that market milk in Michigan (and more generally in the Mideast Federal Milk Marketing Order (FMMO)) about supplying rbST-free milk in 2006. Recently, these Michigan retailers demanded all their fluid (beverage) milk sales be rbST free by February 1, 2008. Meeting this demand requires producers currently supplying Michigan fluid markets to cease rbST use no later than January 1, 2008.

Current rules require Cooperatives to qualify a certain amount of milk into the Class I (fluid) market in order to keep all milk which that cooperative sells qualified to earn the FMMO pool value. Thus, when fluid buyers requested rbST free fluid milk supplies, Cooperatives had little choice but to provide the retailers with rbST-free Class I milk in order to qualify all their milk onto the and share in the total FMMO pool value. Even though the Mideast Order-wide Class I utilization has averaged around 35 to 40 percent in recent years, the Cooperatives cannot simply convert that percentage of production. The average Mideast Order utilization ignores important time and space considerations in the Class I market. Class I utilization changes by large amounts over the year and even within a week depending on market conditions. There are periods when Michigan Cooperatives send 75 percent or more of milk production to Class I use when retailers run large promotions. With no way to predict these market movements and economically segregate milk supplies to meet Class I demands, Cooperatives essentially must have rbST-free milk available at all times.

Cooperatives in Michigan have chosen a variety of ways to implement the change to rbST-free fluid milk supply. Michigan Milk Producers Association (MMPA) decided producers may continue to use rbST but those doing so will receive the Class III price rather than the uniform pool price for their milk. This decision apparently reflects the fact milk from cows supplemented with rbST will not be eligible to service the Class I market. Dairy Farmers of America (DFA) has decided the cost of finding a market for milk from cows supplemented with rbST will be born by those producers. That is, the milk may potentially lose volume, quality, and over-order premiums and perhaps incur extra costs. However, the actual value losses or cost increases will depend upon how much rbST-free milk is supplied and the market dynamics. Thus, the higher the quantity of milk produced with rbST, the larger will likely be cost and price penalty on that milk. DMS which markets milk produced by Michigan farms, recently mandated that their supplying farms be rbST–free for the Michigan fluid milk market effective the same date. Foremost Farms program is similar to MMPA in that producers using rbST will receive the Class III price and may have increased hauling costs to find a suitable processing plant.

This article is aimed at supplying information to assist dairy producers relative to the decision to use rbST and how to proceed if the decision made is to cease use. As revenues and costs are farm specific, a budgeting approach is discussed with the intent farms will substitute their own values.

Economic Implications of Discontinuing rbST

Partial budgeting examines only the changes from the management decision. In this case, the status quo is using rbST and the alternative (challenger) is discontinuing use. We assume that anyone not currently using rbST will not choose this time to begin using the technology. Partial budgeting groups the revenue and cost changes and nets out the difference. The revenue and cost changes one might expect from discontinuing rbST are in Table 1 and discussed in detail below. The net effect is (A+B) – (C+D). To be clear, the decision is only for farms currently using rbST. The management change is whether to stop for a year as of February 1, 2008. Those farms that stop will have a higher milk price for all of their milk but forego the profit available on the milk produced with rbST during that period.

Table 1: Example of Partial Budget Implications of Discontinuing rbST use1
A. Increased Revenues C. Decreased Revenues
(Increased Premium + PPD) X Milk production without rbST Plll X Lost Milk Production


B. Decreased Expenses D. Increased Expenses
# rbST doses X price per dose Increased culling???
Decreased feed X price of feed
Decreased labor X price of labor
Decreased marketing and hauling costs
Decreased utilities cost
Any other variable cost decline




















1Prices will be specific to the cooperative and herd in question. Quantities will be specific to the herd. Producers should use their own values.


Increased Revenues

Dropping rbST will entitle the farm to an additional over-order premium. Michigan cooperatives were given a commitment for a 75 cent/cwt premium to provide rbST-free milk for a one year period. This money will be part of the over-order premium. It will be weighted by the Class I utilization meaning it will be in the neighborhood of 25 to 30 cents per hundredweight on top of the existing over-order premium which is about 10 cents for a total of perhaps 40 cents per hundredweight.

The other milk price implications vary by cooperative. Since the MMPA decision is more transparent, we examine that case. MMPA decided herds that continue utilizing rbST will receive the Class III milk price plus any herd quality and volume premiums. In contrast, MMPA herds not using rbST after the deadline will continue to receive the producer price differential (PPD) from the federal order in their check as well as the over-order premium. The PPD is the pool value in excess of Class III. In some years, the PPD is quite small. In fact, when Class III prices increase rapidly as they have in 2007 (and did in 2004), the PPD can even be negative. Figure 1 presents the PPD from the Mideast Order from January 2000 through July 2007 with a projection of the PPD for the remainder of 2007 and 2008. The year in question is 2008 as farmers will necessarily stop rbST by January 2008. Coming off the record high prices of 2007, the PPD is expected to be wider in 2008. The average Mideast Order PPD over the approximately seven and a half year period (2000-July 2007) was about $0.70 per hundredweight with a maximum of $3.34/cwt and a minimum of -$3.78/cwt. A negative PPD occurs in times of rapid increase in the Class III price as occurred in 2004 and again in 2007. This will likely not happen next year as we are currently sitting at very high milk prices which are expected to continue for a few months before declining. Current futures prices would predict a Class III price above $15/cwt for all of 2008. The Class I price uses the higher of Class III or IV price from the previous month thus the Class IV price may drive Class I prices for a period in 2008. If this is the case, then the PPD will be large. Using current futures prices, the predicted PPD for the Mideast Order is $1.75 to $2.00 per hundredweight for calendar year 2008.

Thus, the total increase in revenue of both the added over-order premium and the PPD for 2008 from dropping rbST is $2.10 to 2.40/cwt on all milk produced. In an attempt to be conservative, in the example below we use $2/cwt.


Figure 1. Producer Price Differntial in Mideast Order, (Acutal January 2000 - July 2007 and Projected 2008

Table for rbST


Decreased Expenses

Stopping rbST use also results in decreased costs. The most straightforward cost savings is the cost of rbST itself. Cost is $5 to $6 per dose that lasts 2 weeks. Thus, the cost savings is around $0.40/cow/day.

Other costs saved include labor for giving the shot, feed to produce the additional milk production, labor for supplying additional feed and longer milking period, milk marketing costs, milk hauling costs, and utilities (energy for milking and milk cooling).

The feed cost savings are a function of feed price and the amount of feed required to produce an additional pound of milk times the quantity of milk produced from rbST. Using the representative USDA ration of corn, hay and soybeans, NRC guidelines specify it takes 0.48 lbs DM of feed to produce each pound of milk when maintenance needs are already met. Feed cost is estimated as a function of corn, hay and soybean prices. It was assumed the dry matter content of corn is 85% (number 2 yellow corn which is the price); the dry matter content of hay and soybeans are both set at 90%. Prices used were $3.25/bu for corn, $110/ton for hay, and $8/bu for soybeans which reflect the outlook for Michigan in the next year. These assumptions result in a $0.26 per cow daily cost to produce 10 pounds of milk with rbST.

Labor is saved from not giving the injections, from not supplying the feed and handling the manure, and from eliminating additional milking time that accompanies the additional milk produced with rbST. Assuming $10/hour to give the injection, multiplying by the expected time to inject gives cost per injection. The time to inject includes time to get the rbST, sort and lock down cows, give injections, and dispose of the syringes. For example, if it takes and average of 2 minutes per cow, this translates to $0.33/cow for a dose that lasts two weeks. In addition, the labor to feed, milk, and handle manure in the 2005 Michigan Farm Business Analysis Summary averaged more than $2/cwt in 2005.

Milk marketing and hauling costs are direct functions of the amount of milk produced. The average from the 2005 Michigan Dairy Farm Business Analysis Summary was $0.82/cwt (note that hauling costs rose in 2006 so this may be a low value). In addition, while we are ignoring the potential for increased hauling costs if a herd remains on rbST, it is possible that hauling costs will be even higher if the milk has to move long distances to find a market.

We might also expect other variable expenses of production to decline with the decline in production. Some rbST budgets recognize only rbST cost, feed cost and a very small charge for labor to give the injection. This assumes there is no additional cost of, for example, providing additional feed, increased time required for milking, and increased electrical costs for cooling more milk. Although small, these costs are real, but if one is comfortable with the assumption these costs are trivial, they may perform the analysis including only the major costs.

Decreased Revenues

The decline in revenue includes the lost additional milk production from rbST multiplied by the value of that milk. The value will be the Class III price plus any other premiums but not including the PPD. With an expected PPD plus rbST-free over-order premium of $2/cwt, the value of milk with rbST must be this much lower.

The quantity of milk produced is the number of treated cows times the average milk production response. Label use includes beginning treatment after 9 weeks of lactation. First calf heifers are very persistent to begin with and respond less than older cows so they are often not treated. Previous research indicates an average response of about 8 pounds per cow but there are reports of 10 or 12 pounds per cow on average. Below we use 10 pounds per cow to avoid underestimating the effect of rbST.

Increased Expenses

There are not necessarily any increased expenses from discontinuing rbST. One increased expense might be an increased cull rate if the operation was using rbST in conjunction with extended lactations. In this case, the operation will have increased cull rates as they lower the calving interval (the non-rbST milk average production per cow will increase as the calving interval declines). The cost of the increased cull rate will depend on cull and replacement prices as well as how much the calving interval declines. The increased expense will only be the portion of cull expenses that are due to the change in the lactation length.

Example herd calculation

While managers will want to use their own values to make this decision, a example calculation is in Table 2. The example farm milks 200 cows and treats 70 percent of them (140) at any given day during the year. This is a high percentage of cows treated and many herds will have a smaller percentage as not all eligible cows are treated. The farm expects 10 pounds per cow daily response from rbST. This herd expects average daily milk production without rbST to be 58 pounds (which translates to 21,170 pounds of milk sold per cow per year). Note this is a fairly large milk production response to rbST in percentage terms. Milk value for 2008 is expected to be $17.50/cwt without rbST (with all premiums and the PPD) and $15.50/cwt with rbST. The $2/cwt difference—rather than the milk price level itself—is the key in the decision.

The decision is clearly to drop rbST in this case. The key aspect of this decision is that, while rbST is profitable under the assumptions above, using rbST means that the farmer foregoes $2/cwt on ALL milk production not just the additional milk produced using rbST. With all other factors equal in the example, any price premium more than $0.56/cwt will result in a gain when rbST is dropped.

The decision is not particularly sensitive to the specific cost assumptions used above. Even with only rbST and feed costs included, the net gain is still $38,781 for the year.

Other Implications

Even after a herd has decided to go rbST-free, there are still decisions to be made. These include whether to start newly eligible cows on rbST in the meantime and when to take cows off (they will need to come off by January 1, 2008).

There is little formal scientific evidence but conventional wisdom holds that the treated cows will revert to their unadjusted (non-rbST) lactation curve when they are taken off of rbST. If this is correct, it means that there is little penalty to putting cows onto rbST for a period and then pulling them off when the price differential takes effect. If the cows will “crash” below the untreated lactation curve, then it may not be profitable to start new cows if they will come off in a couple of months. It takes about four weeks for the effects of rbST to come fully into being so that it may not pay to put cows on rbST after December 1, 2007 with a stop date of January 1, 2008. Milk prices are near the historic highs so taking cows currently using rbST off prior to December is likely not desirable. This decision may also be affected by existing farm stocks of rbST and the individual farm situation.

According to Dairy Records Management Services, about 25% of cows are beyond 300 days in milk. Cows beyond 300 days on rbST and not pregnant are candidates to be culled when they come off rbST. If the number of these cows is significant, it could temporarily depress cull cow prices, although beef prices are strong so this price depression may not be large.

Conclusions

Because the cooperatives must qualify a certain quantity of milk into the Class I market in order to have all of their milk eligible for the Mideast Federal Milk Marketing Order, they were very responsive to the demand for rbST-free milk to service the Class I market. Even with the conservative calculation illustrated here, it did not make sense for the example herd to continue rbST with the large revenue implications that decision entails.


Table 2. Example of 200 Cow Farm Considering Discontinuing rbST Use
A. Increased Revenues C. Decreased Revenues
(Increased Premium+ PPD) * Milk production without rbST = ($2.00/cwt)X(.58 cwt/cow/day/) * (365 days) * (200 cows) =
$84,680.00
PIII X Lost milk production = ($15.50/cwt) *
(0.1 cwt/cow/day) * (365 days) * (140 cows) =
$79,205.00
Subtotal $84,680.00 Subtotal $79,205.00


B. Decreased Expenses D. Increased Expenses
# rbST doses * price per dose = (140 cows) * (26 doses/year)
* ($5.50/dose) = $20,020.00
None
Decreased feed * price of feed = (140 cows) * ($0.26/cow/day)
* (365 days) = $13,286.00

Decreased labor for shots* price of labor = ($0.33/dose) *
(140 doses/cow) * (26 doses/cow/year) = $1,201.20

Decreased labor for feeding, milking and manure handling
* price of labor = ($2.00/cwt) * (0.1/cwt/cow/day) * (140 cows) * (365) days
= $10,220.00

Decreased marketing and hauling costs = ($0.82/cwt) * (0.1/cwt/cow/day)
* (140 cow) * (365 days)= $4,190.20

Decreased utilities cost = ($0.25/cwt) * (0.1/cwt/cow/day) *
(140 cows) * (365 days) = $1,277.50

Subtotal $50,194.90 Subtotal $0.00


Net (A+B) – (C+D) $55,669.90

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.