Understanding the milk-to-feed price ratio as a proxy for dairy farm profitability

Abstract

This research examines the definition, historical pattern, and utility of the milk-to-feed price ratio (MF) as a measure of dairy farm profitability. The MF was generally an acceptable proxy of profitability in an annual sense from 1985 to 2006. The MF was steady at an average of 2.8 from 1985 to 2006 even as average annual milk price in nominal terms increased from $12 to $14/hundredweight. An alternative proxy for profitability is income over feed costs, which is measured in dollars per hundredweight. Comparison with an actual profit measure, rate of return on assets, is used to examine the appropriateness of the proxies. The volatility from 2007 to 2009 resulted in MF being a poor measure of profitability over that period. The implication is that MF is not the preferred measure of profitability when a significant change in the pattern of one or both price series occurs. Income over feed cost is a better measure of profitability in periods of volatility.