WOOSTER, Ohio – In a perfect world, milk prices follow a seasonal pattern, but current milk prices don’t exhibit a normal seasonality. In any given year, that seasonality can deviate considerably, according to Kevin Dhuyvetten, technical consultant for Elanco and keynote speaker for the 2022 Northeast Ohio Dairy Conference.

“Is the futures market offering a pricing opportunity, or is this the year that isn’t going to follow the normal pattern,” Dhuyvetten said.

Dhuyvetten shared several important economic concepts for producers’ consideration.

He said producers need to look at fixed versus variable costs and economies of scale versus fixed costs. They also need to look at short run versus long run cash versus economic costs, price versus costs which implies profits, that marginal revenue is equal to or greater than marginal costs and partial budgets versus whole farm analysis, the time value of money and the comparative advantage of revealed preferences, both time and wealth.

Dhuyvetten defined profit in simplified terms. “Dairy farm revenue comes from milk, calves and cull cows, while costs include feed, labor, energy and overhead costs,” he said. “Obtaining more milk is typically a profitable decision for individual dairies.”

Dhuyvetten said in general this happens because the value of the milk surpasses the incremental cost. This can be done by adding cows or increasing the production from existing cows, but the answer varies depending on the dairy’s constraints.

So, if producers want to increase profits, how can they accomplish that goal?

Dhuyvetten said there are several ways producers can make incremental changes such as increasing revenue and decreasing costs, increasing revenue by more than cost increases, or decreasing revenue by less than the decreases in costs or lowering costs through a more efficient use of fixed resources.

But at the same time, feed costs per cow are not necessarily a good indicator, nor are herd replacement cost or cull rate good indicators of profitability.