Feed strategies in dairy production : economic implications of using by-products in the feed ration

Sammanfattning: An increased competition on the world market of dairy products and a price setting process highly influenced by the world market price have led to drop in profitability for the Swedish dairy farmers. This creates interest for cost saving opportunities in the dairy production among dairy farm managers. The single most expensive cost in dairy production is the feed cost. Hence, the subject of this thesis is the profitability of feed strategies in dairy production. The study focuses on the determining factors of the competitiveness associated with farm feeding operations. This study employs income over feed cost, IOFC, as a valid evaluation tool for profitability of specific feed rations. Further, the study focuses on the possibility to cut feed costs via utilization of two by-products, HP-pulp and liquid stillage. Also, the study considers the significance of feed ration composition on feed strategy profitability. The study aims to investigate financial effects originated from the employment of feed by-products. The impact on profitability is evaluated. Also, implications on resource allocation represent a core part of the thesis. A key feature of the study is the evaluation of implications for both production systems of the traditional dairy farm. The theoretical perspective of the study bases in agricultural production economics. An adequate mathematical program is designed with basis in the work performed by Flaten (2001). It is complemented with research data and relationships from nutritional animal science to design the optimization model of the study. This study employs a quantitative approach. The empirical work is based on existing data in the form of statistics. The statistics is utilized in the formation of the fictional case farms of the study. The objective of the study is to produce generalizable results that will serve as a guideline for farm managers in their cost saving efforts. The study employs an own developed mathematical model in the empirical work to give an example of an optimal behavior. A key result is that the utilization of by-products has the opportunity to lower feed cost with 0,23 SEK per Kg ECM of produced milk. Which corresponds to an increased profit of 739 000 SEK per year in the case of a dairy farm with 300 cows and a production level of 10 000 Kg ECM on annual basis. Part of the saved cost originates from the production of feeds at farm level. A higher share of purchased is observed to lower operational cost of produced feeds since opportunity cost of grain production decreases. The phenomenon basis in re-allocation of farm resources from feed production to grain production. The study recognizes that the competitiveness of employing feed by-products is dependent on the transportation distance from supplying plants. However, the study concludes that the utilization of by-products in the feed ration is likely to enhance profitability of feeding operations. Given a reasonable transportation distance, the employment of by-products has positive implications on both production systems of the dairy farm. Cost of the feed ration is reduced and grain production is expanded. However, a higher proportion of purchased feed leads to a more vulnerable situation for shifts in market conditions.