Many dairy producers understand that the average cost of a unit of production - a pound or kilogram (kg) of milk - is simply the total cost of production divided by the amount of milk produced. Fewer understand how producing extra, or “marginal milk,” impacts profitability. The production of extra milk incurs only the feed cost of producing that milk and does not require additional labor, lighting or machinery, or at least these costs are so minimal they can be ignored. 

A kg of a typical dairy ration contains enough nutrients to sustain the production of 2.3 to 2.4 kg of milk at standard fat and protein levels for a Holstein cow. Feed is around 12 megajoules metabolizable energy (MJ ME)/kg of dry matter (DM), while milk requires around 5.2 MJ ME per kg produced, and varies a little depending on the fat and protein produced. 

Once the maintenance requirements of the cow have been met, then each additional kg of feed consumed can be diverted to producing milk, which is what the cow is genetically programmed to do in early lactation. The maintenance needs of a Holstein cow require her to eat around 6 kg DM of a typical ration of 12MJ ME/kg DM, so consuming around 70 to 75 MJ ME. Therefore, if a cow eats 20 kg of feed per day, the first 6 kg consumed will be used for her maintenance needs and the remainder will be largely diverted to milk production. 

If a typical Total Mixed Ration (TMR) costs $300 per tonne DM or $0.30 per kg DM, then each kg of milk produced costs $0.30/2.4 kg or $0.13/kg milk. As a rule of thumb, this will be about 40% of the cost of a kg of feed. 

For example, a cow produces 30 kg of milk and the average cost of production for the herd is $0.30/kg milk. If she produces an extra kg of milk, then the extra cost of producing that milk is only $0.13 and not the full $0.30. This is because no additional resources, other than feed, are required. It also follows that if the total cost of producing 30 kg of milk was $9.00 ($0.30 X 30 kg milk), then the cost of producing 31 kg milk from the same cow is actually $9.13 and the average cost of producing that milk is $0.29/kg ($9.13/31 kg). The additional milk output from extra feed consumed begins to dilute out all the other costs associated with production. 

Now, let us say the price received for milk is $0.33 per kg. In this scenario, the income over cost also goes up from $0.03/kg ($0.33 – $0.30) to $0.04/kg ($0.33 - $0.29). From this line of thinking it is also true that if feed intake is reduced by 1 kg, $0.30 is saved in expenses, but it is likely that $0.72 (2.4 kg X $0.30/kg) in revenue from milk sales is also given up. This results in a net loss of $0.42. 

In many circumstances, more expensive rations and a higher feed bill can be justified if it results in an increase in milk produced. The same principal also applies when additional cows are added to the herd. The extra milk produced by that cow does not incur the same expenses as the milk already produced by the herd. For this reason, successful dairies will always strive to operate at full cow capacity.