Balancing income, expenses challenges dairymen

Dianne Shoemaker

 

How much are you paying for the privilege of milking cows?

Since 1999, I have kept a spreadsheet for Federal Order 33 milk prices. For each month, the Class III milk price and Producer Price Differential are listed and then added together to calculate the Statistical Uniform Price. Monthly MILC payments were listed from 2002 through 2014, with MPP margins taking their place in October 2014. Annual averages for each item summarize each year’s data.

When updating the spreadsheet recently, it was a pleasure to see that the January and February 2017 Class III milk prices were more than $3 per hundredweight higher than they were a year ago. The statistical uniform price for each month was higher than the corresponding month in both 2016 and 2015.

I suspect there were sighs of relief in farm offices across the country. Sadly, more cows and more milk in domestic and foreign markets, as well as a relatively strong dollar and uncertain policy, are threatening this increase in the milk markets.

Stay focused

Controlling expenses will continue to be an important factor in both short and long-term profitability of dairy farms. The challenge continues to be controlling costs without negatively affecting growth, production, reproduction, animal and personnel welfare.

With that in mind, regular review of overall costs is in order.

Reality

The more things change. The more they stay the same.

Feed, labor, depreciation, and supplies were the top four expenses for all farms and the top 20% of farms in 2015 (2016 numbers are being completed now). These were the top four expenses in 2013 and 2014 as well.

What is the take-home message? For most herds, the four highest costs will be feed, labor, depreciation, and supplies.

How much potential — and realistic — savings are there for your farm? We cannot cut costs only to negatively impact current and future health and production.

Depreciation of machinery, equipment, and buildings is a hard number to change. This number (7% of the balance sheet inventory value for machinery and equipment, and 5% for buildings and improvements) represents normal wear, tear, and use of these items in the course of business for the year.

The biggest opportunity to impact that number is before machinery, equipment, and buildings are purchased. Is a purchase a want or a need? Is it realistic to expect cows to pay for this item or improvement? How much will it cost per cwt. or per cow? What benefits and economic returns will it provide?

How do you rank?

The best tools for comparing your farm to other Ohio farms are the benchmark reports included in the Ohio Dairy Enterprise Analysis Summaries, which can be found at http://farmprofitability.osu.edu. Directions on the charts explain their use.

Bottom line, you can see the range of income and expense items for other Ohio farms. Specifically, these allow farms to set realistic goals for trimming expenses.

Combine this review with an evaluation of net return per cow. Is it positive? This has been a challenge for farms in the down price cycle. If it is positive, is it high enough to cover all the demands for principal, family living, income taxes, etc.?

Finding the balance will be the ongoing challenge for today’s dairy farm businesses.

Measure your farm’s financial health

By Dianne Shoemaker

Exactly two years ago, we knew we were heading into a down cycle in the dairy industry following the major high of 2014.

How well each farm would fare through the coming years of substantially lower milk prices would be heavily influenced by the financial health of the farm going in. Cash or near-cash reserves would be tapped.

Cash is cash, but what is near-cash? Here, we are looking at the current assets (CA) of the farm business. These include cash, savings, pre-paid expenses, accounts receivable, crop and feed inventories, supplies, and any market livestock such as bull calves and steers — all items that will be used in the coming year to produce crops and milk.

How do we evaluate the farm’s cash position, or liquidity — the ability to buy what is necessary to grow crops, make milk and pay the bills when they are due?

Three simple measures: current ratio, working capital, and working capital to gross income. These are calculated using a farm’s balance sheet and income statement.

Real farms’ numbers

At the time, we looked at data from the 35 Ohio dairy farms that had completed an analysis of their 2013 business year with the Ohio Farm Business Analysis and Benchmarking Program. Now we can compare 2013 with the years that followed.

Table 1. Liquidity data, Ohio Dairy Farms 2013- 2015, Ohio Farm Business Analysis and Benchmarking Program

Table 1 shows what we expected of dairy farms in 2014. Working capital increased, as did the current ratio. Going into 2015, the 38 farms that participated in 2014 had an average current ratio of 2.53, or $2.53 of current assets for every $1 of current liabilities. This would be considered a strong position.

Working capital increased, however working capital to gross income did not. Why?

Even though working capital increased (which is simply total current assets less total current liabilities), gross revenues were extremely high in 2014, simply because the milk price was at a record high.

2015 was a bad year

What happened next? 2015’s numbers are, not surprisingly, disappointing as they reflect the challenges faced by dairy farmers. Current ratio dropped below 2 to 1.67, or $1.67 of current assets for every dollar of current liabilities.

Working capital declined further, averaging $250,564, and working capital to gross income plummeted to 13.6 percent.

It is important to note that while many of the same farms participate in the program each year, new farms enter and a few farms exit the program each year.

What impact did 2016 have on these numbers? Farms are currently wrapping up their 2016 business year information and completing their 2016 analyses. These numbers will be finalized early this summer.

Know your numbers

Current ratio, working capital, and working capital to gross returns. These are important, basic numbers that each farm should know for their farm business.

If your current system does not allow this sort of analysis, now is prime time to join the Ohio Farm Business and Benchmarking program. Visit http://farmprofitability.osu.edu to view past analyses and find out more about Ohio’s program.

Contact us to talk about what would work well for your farm at 330-533-5538 or shoemaker.3@osu.edu.

Reality: Dairymen are hurting

By: Dianne Shoemaker

The December 2016 final milk check, which will be deposited in cash-starved farm checking accounts this week, brings some small relief to Ohio’s dairy farmers.

With the Class III milk price announced at $17.40 per hundredweight (cwt.), the negative 61-cent Producer Price Differential brought the Statistical Uniform Price (SUP) in at $16.79 per cwt.

The good news is that both the Class III price and the SUP were record highs for 2016. The bad news is that both the Class III and SUP were record highs for 2016.

The Statistical Uniform Price represents the dollars per hundredweight received by all dairy farms shipping Grade A milk with 3.5% fat, 2.99% protein, and 5.69% other solids, also referred to as milk “at test.” We have to go back to 2009, when the SUP averaged $12.11 per cwt. to find a lower annual statistical uniform price.

2010 had a lower average Class III price at $14.41 per cwt., but a generous Producer Price Differential brought the SUP up to $15.84 per cwt. for the year.

Times have changed

Looking at the annual average milk prices (see chart), it is clear that dairy farmers are now operating in a very different market place than their parents or grandparents did.

Milk prices in Federal Order 33, 2009 through 2016

Screen Shot 2017-01-18 at 10.39.05 AM

We have moved from an industry where the actual milk price might be plus or minus 15 cents from an announced support price, to an industry with no support price and price fluctuations of more than $8 per cwt. in the past five years.

Grim bottom line

2015 was a challenge for the majority of Ohio’s dairy farms. 2016 was a bitter blow to everyone.

The net return per cow for all farms in the Ohio Farm Business Summary was $36.42 for 40 dairy enterprises in 2015. While the net return was positive in 2015, it was not sufficient to pay the owner/operators for their labor and management, as well as make principal payments on farm debt, causing farms to use up cash reserves and lines of credit.

Net return per cow will clearly be negative when the 2016 financial analysis numbers are in.

On average, farms cut costs $2 to $3 per cwt. in 2015. While 2016 encouraged even more cuts, substantial savings were difficult to find.

Know your numbers

Looking at 2016 numbers can be discouraging. It certainly doesn’t seem like a good time to start Farm Business Analysis.

On the contrary, I would say it is a critically important time to really look closely at your farm’s numbers, especially if you have not been able to do so in the past. Knowing where you are will give you have a better chance of getting where you want to go, and the resources to help figure out how to get there.

Contact the Ohio Farm Business Analysis Program at 330-533-5538 to talk about how to start with your 2016 farm business analysis.

The complete 2015 Ohio Farm Business Summary dairy and crop enterprise analysis and benchmark reports can be downloaded from the Ohio Farm Business Analysis & Benchmarking Program Website.

Dairy farmers suffer financial pain in 2016

By: Dianne Shoemaker

Like 2016, 2015 was not a kind year for many Ohio farms. The Class III milk price averaged $15.80 per hundredweight (cwt). The Federal Order 33 Producer Price Differential added another 44 cents per cwt to the price received by farmers shipping Grade A milk (the majority of Ohio milk is Grade A,) resulting in an average statistical uniform price of $16.24 for the year.

This is the minimum price that all Grade A shippers should have received for milk at test. 2014 was a much different year, with the average statistical uniform price reaching an unprecedented $23.16 per cwt of milk.12_15 daiy excel chart 1 web

This dramatic drop in milk price resulted in net return per cow dropping from $1,266 per cow in 2014 to $36.42 in 2015 (Table 1). Yes, $36 per cow, a 97 percent decline in net return per cow. That is not a typo.

Different situations

While the upper third of dairy farms generated less per cow in 2015, the return per cow should have been enough to do what it needs to do: make principal payments, pay income taxes and pay the sole proprietor a wage.

Any dollars left after that could be reinvested back in the farm, invested off the farm, or stashed for the next poor year.

The biggest challenge was for the other two-thirds of farms who had low or negative net returns per cow. A nastier punch followed — 2016 milk prices are even worse. Through November, the Class III price has averaged $14.67 per cwt, with the producer price differential averaging 40 cents through October.

With the statistical uniform price hovering below $15 — and dipping into the $13s in March — the pain is felt by all, even the farms in the top third.

One bad year, whether caused by high input costs or low product prices generally causes a serious look at expenses and a push for more efficient production.

Costs were cut in 2015, and reviewed again in 2016. Anything left to tighten has been tightened.

As 2017 approaches, milk markets are looking somewhat better, but are not offering the relief hoped for.

The reason

What is causing this industry-wide bloodbath?

Bottom line is that more milk is available for sale than there are buyers, either domestically or internationally.

In the past, government programs supported a milk price that was sufficient to ensure a plentiful, safe, domestic supply for all citizens of the U.S. and a reasonable livelihood for those that produced it.

The program worked well. Most of us cannot recall a time when there was not enough milk and food for all.

Dairy farmers were not rich, but could work hard and make a decent living for their families. The program did not include any production controls; no American wants to be told what they can or cannot do.

Milk production increased and excess milk moved into the global marketplace. With everyone free-producing milk as they chose, the support program was modified several times to reduce the cost to taxpaying citizens.

It first shifted to a minimum “support” price. Then the 2014 farm bill legislation changed it dramatically, to a program to protect a margin selected by individual dairymen if they chose to pay a premium.

A “catastrophic” margin of $4 per cwt would be available for only $100 per farm, while farmers could choose to purchase additional coverage to up to $8 per cwt. for a set premium.

Total failure

While it sounded okay in theory, it has been a total failure. Trying to devise a plan that could calculate one margin based on feed and milk prices that would be effective for the entire country is an impossible task.

It has been very successful in minimizing payout to reduce taxpayer expense above the dollars generated by the premiums. Farmers who purchased coverage up to the $8 per cwt margin level for 2016 have yet to generate an indemnity payment that would even cover their substantial premiums.

Difficult year

Few dairy farmers would consider 2016 to be anything but catastrophic. We do not have a problem ensuring a sufficient, quality milk supply for our fellow citizens.

However, sustained low prices are wreaking havoc on Ohio’s and the United States’ dairy farms. There are no easy answers, and it is a vicious problem.

Milk prices are low because there is too much milk.

At the industry level, if we produce less milk, prices should go up. But at the farm level, if milk production is cut, the individual farmer loses even more money, threatening years of hard-earned equity and the future of the farm.

Agriculture has been characterized by constant and substantial change over the past 30 years. It will continue to change, but we and all of our fellow citizens need to think hard about how and where we produce food for us, for our children, and for their children and grandchildren.

There are complex and difficult problems without simple answers. Decisions will be made for us if they are not made by us.

Be part of the conversations and the solutions. The complete 2015 Ohio Farm Business Summary and benchmark reports for dairy, crop and whole farm business analysis will be available on the Ohio Farm Business Analysis & Benchmarking Program Website at http://farmprofitability.osu.edu shortly.

The only thing for certain is change

By: Dianne Shoemaker

A tattered 1979 paperback edition of Webster’s New World Dictionary defines context as “-noun, the parts just before a word or passage, that determine its meaning.”

Hop ahead to 2016, and Webster’s on-line definition adds “the situation in which something happens: the group of conditions that exist where and when something happens.”

We have been blessed with beautiful, warm, sunny weather in early November. Trees which held on to their leaves longer than usual combined with a delay in fall coloring has made for an unusual start to the month — appreciated by most everyone.

The exceptions are the gloom and doomers. Instead of enjoying the beautiful weather, they urge anyone who will listen to “enjoy it now, because we are in for a horrible winter.”

Weather

This is where context comes in. WFMJ TV’s Chief Meteorologist Eric Wilhelm recently shared his winter 2016-17 forecast with the Mahoning Valley Landscape and Nursery Association at the Mahoning County Extension Office.

Since they were in a meeting room that is, literally, right outside my office, I pulled up a chair to listen.

Understand, these are guys that make money by putting plows on the front of their trucks and pushing snow all winter, so our hopes about the potential for snow this winter were very different!

Wilhelm does predict that we will have a colder, wetter winter than last year. To put that in context, let’s look at last winter. The Mahoning Valley snowfall recorded at the airport in Vienna (Trumbull County) totaled 45 inches.

This was 15 inches below average, and the lowest snowfall in the area since 2001-02. The average temperature was 5.3°F above normal led by December of 2015 which was 12° warmer than average.

How do meteorologists come up with these forecasts? Wilhelm shared three tools that he uses: analogs, computer models and experience/intuition.

The use of analogs involves evaluating what winter actually looked like in years with similar ocean temperatures and atmospheric conditions leading up to the winter season.

He indicated that computer modeling continues to improve and is a valuable part of the forecasting process.

Finally, personal experience with a region’s weather and with forecasting improves the chances of getting it right. Forecasting the weather and forecasting the price of milk are both challenging.

Impossible

In the case of forecasting a milk price, perhaps impossible.

That said, if we look at the context in which our milk price will be set, we can get an idea if it is likely go up or down, be above average or below. Three factors that heavily influence our milk price are cow numbers, milk per cow and exports.

Dairymarkets.org is an excellent website for all things related to the price of milk. According to their regularly updated graphs, US dairy cow numbers are the highest they have been in at least 4 years at over 9.3 million.

That decimal is very important. Right now we have at least .1 million too many cows. Those too-many cows are also making too much milk. While we are in a typical seasonal decline in milk production, milk per cow is still at its highest level in the past 4 years.

Where does all that milk go?

If price is to be strong and stable, milk has to be purchased. We have more than enough milk to fill domestic demand. To reach and maintain a profitable milk price, we have to export milk or milk products.

Exports

While cow numbers and milk per cow are up, exports are down. The total value of US exports has averaged about $320 million dollars per month in 2016. Of course, these levels are the lowest seen in the last four years.

Contrast current levels with 2014 when exports reached a high of nearly $680 million in March. Even more challenging is that 2016 exports have been remarkably flat.

At this time, there is no hint of future price improvement due to exports trending up. In the context of cow numbers, milk production per cow, and exports, don’t expect a major change in milk prices any time soon.

Farm tax liability a double whammy this year

By: Dianne Shoemaker

2016 will not go down as a stellar year for many farms in Ohio. It has been an equal opportunity year — not particularly good for dairy farms, crop, beef, swine, or poultry farms.

There have been multiple ways for it to be unstellar: wet weather, dry weather, low prices and noxious weeds.

Tax liability

In the stellar years, income tax planning is important, and October is a good month to start that planning process. A profitable farm should have to pay income taxes, but we don’t want to pay any more than we have to. Logically, we shouldn’t have to worry about income taxes in a poor year. However, in some cases, a farm may be struggling to pay bills, yet still have an income tax liability. How could this happen?

Farm income is likely down on many farms. If the farm is current on all of its accounts, then it is highly likely that net farm income will also be down, but hopefully it is still positive. Even if it is positive, it is quite possible that family living draws have been reduced to help make ends meet, and assure that all of the scheduled loan payments were made.

On some farms, it is possible that all loan payments were made, but the farm may have fallen behind on some of the regular bills. Maybe instead of paying the feed bill in full every month, the farm is a month or even several months behind. Maybe the seed and spray bill won’t be completely paid off by the end of the year like it usually is.

Double whammy

The challenge with this scenario is that those normal cash expenses can’t be deducted until they are actually paid (for farms that use cash based accounting for the income tax preparation, which is the vast majority of Ohio farms).

This unfortunate set of events can hit a farm with a double whammy.

Poor cash flow doesn’t allow all of the bills to be paid. This results in an income tax liability because all of the bills haven’t been paid so the expenses can’t be deducted from the year’s income. Nasty all around.

Depreciation to consider

This scenario can be worse if there is limited scheduled depreciation to apply to 2016’s income tax calculations.

Typically the cost of assets like machinery, equipment, buildings and breeding livestock are charged to the operation over a period of years, a scheduled depreciation charge.

Usually a farm has a depreciation schedule, but if most items that could have been depreciated over multiple years were depreciated in one year using section 179 expensing to minimize previous years’ income tax liabilities, there may be little or no help available as a depreciation expense for 2016 taxes.

Don’t ignore it

The best strategy is to address the issue early and head-on. Estimate income and final expenses for the rest of the year.

It is highly likely that income will be down, but are expenses also down? Are there past-due accounts that can be paid off before Dec. 31 to reduce net income? Are there funds to pay off any past-due accounts? Paying bills using a line of credit in 2016 allows those bills to be deductible expenses in 2016.

Is there enough scheduled depreciation to minimize your 2016 tax liability? If not, were any capital purchases or improvements made earlier in the year that qualify for accelerated or Section 179 expensing?

Do not allow yourself to fall into the trap of purchasing something strictly to minimize an income tax liability. While it might be possible to purchase an item with credit, if it is not needed by the farm, is it a good use of the farm’s financial resources?

Bottom line, how will the item increase the profitability of the farm and pay for itself?

Bad years can get worse at tax time. While we don’t automatically think about income tax planning when it doesn’t seem like any money was made, it is very important to budget time to see what direction your farm’s tax liability is heading while there is still an opportunity to change its direction.

Are you prepared for a disaster?

By: Dianne Shoemaker

Watching the national news Sunday evening — not something I get to do very often — a story came on about flooding in Iowa.

The clip showed a number of homes that were already flooded to the eaves. Heartbreaking.

Meanwhile, crews of citizens were busy filling sandbags and building dikes to protect areas that were projected to flood later this week as the river continued to rise.

While the story focused on the people in towns and cities along the rapidly rising Cedar River, as a dairy farmer you have to wonder what is happening in more rural areas.

Because of a similar event in 2008, many in the area had experience in preparing for the floodwaters and had moved belongings to upper floors and sandbagged around their homes before leaving.

I am sure cities and towns had well-developed plans after their experiences with the 2008 flooding. But what about farms?

Dairy

Iowa doesn’t have quite as many cows as Ohio, but it is a significant dairy state. Parts of Minnesota and Wisconsin were also involved in this flooding event.

I suspect that somewhere in that region, at least a few dairy farms were affected.

If we were in the middle of a similar event, or experienced some other disaster which damaged facilities and cut our farm off from the rest of the world, how would we deal with it?

For a dairy farm this question applies to both production and business activities including people, animals, feed, equipment and facilities. How do you cover all of these bases?

Sit around and try to think of the worst things that might happen and how you would deal with them?

Most of us avoid that and just hope nothing bad ever happens. Fortunately, there are some resources to help guide planning for disasters.

Resources

Actually, a good resource is from Iowa State University’s Center for Food Security and Public Health. This website covers a wide range of natural, biological and technological disasters with excellent information and links to additional resources.

While all of us would be concerned about our farm in a disaster situation, resources are available concerning families, homes, livestock, crops and the farm business.

Not so natural disasters

Many of us learn the hard way that computer-based production and financial management systems should be backed up regularly to prevent data loss when the dreaded computer “crash” occurs.

These backups are important and are usually kept on site. Invest in another flash drive or two to keep backups of both the financial and production management systems off-site.

If (God forbid!) a disaster happened at your farm and the on-farm computer and paper files were gone, how would you answer these questions accurately?

How many cows, calves and heifers do you have today? Where are they? Who is due to calve, and when? Who should be bred? Who could be sold if you have to down-size?

How much money is in the checking account? What is in your machinery and equipment inventory? Can you prove ownership of your assets? How much time would it take you to find those answers, and how accurate do you want them to be?

That answer determines how often you should refresh off-site backups. Hopefully you will never need to use that information.

Dairymen, who has your back?

By: Dianne Shoemaker

During this year of financial challenges, it is easy to feel alone. Fact is, you shouldn’t. Dairy farmers and dairy support businesses you don’t even know are feeling challenged right along with you.

With the June Class III likely to settle around +/- $13.20 per hundredweight, the good news is that will be around 50 cents higher than May’s $12.76 Class III.

Currently, milk prices trading in the futures market for the rest of the year are looking more positive, although still below many farms’ full cost of production.

While adverse conditions, whether they are financial or production related, may make any one farm family feel alone, the fact is, as a dairy farmer a lot of people have your back.

Beyond farmgate

This really hit home for me this spring. In May, I had the opportunity to participate in the Large Dairy Herd Management Conference in Chicago, Illinois. The purpose of this meeting was for authors to present the information currently compiled for a new edition of the Large Dairy Herd Management textbook and foster discussion of those topics and others that should be included before the project is completed.

The American Dairy Science Association (ADSA) publishes this text, which is used in dairy herd management classes around the world.

Hundreds of people from universities, technical schools, and industry including researchers, teachers, consultants and farmers gathered. Not only did they come from across the country, they came from around the world. They sat side by side, listening to and discussing presentations in 15 subject areas all relating to what dairy farmers do every day — manage a dairy farm to produce quality milk for people to drink.

This really shouldn’t be a surprise to me. I have participated in the American Dairy Science Association annual meetings for many years. There, hundreds of research, extension and industry folks gather each year to share current research findings. The research ranges from highly technical lab work (I don’t select those sessions!) to on-farm application.

Participants learn what is new, what is proven to work, what doesn’t work (this is important!), and get ideas for new research.

Not alone

Everyone there has a passion for cows, producing milk, and the dairy industry.

While you have to deal with managing the many facets of a dairy farm, they may be highly focused on the mammary gland, rumen function, data management, ovarian function, estrous expression, forage harvest, personnel management, or some other related topic.

But, bottom line, they work to make your work easier or your animals healthier and more productive.

How did you grandfather’s cow become your cow today? Through the research in genetics, reproduction, nutrition, lactation, and management conducted by thousands of people across the country and around the world.

So if you start feeling alone, stressed by the current state of our dairy industry, remember that there are thousands of people around the world who are as passionate about dairy cows as you. They work every day to improve how we manage cows.

They have your back.

Don’t cut your dairy profitability

By Dianne Shoemaker

How is your time best spent? Trying to cut expenses by a dollar per cow or a penny per hundredweight? For every hundred cows you milk, you will save $100 for every dollar you cut in production costs per cow. If each of those cows are putting 24,000 lbs. of milk in the tank each year, finding one cent per cwt in savings will save $240 per year. A penny per cwt. trumps a dollar per cow in 2016.

Sound familiar? That was the closing paragraph from last month’s column, and a good starting point today. Since March, we have not seen any good news in the milk markets. Belt tightening must continue which is particularly worrisome as the time to plant crops rapidly approaches.

As mentioned last month, it is really, really important to look at the long-term, as well as the short term, implications of costs that are cut now on future productivity and potential profitability. Take care not to make knee-jerk cuts in feed costs. As the single biggest cost, it is an easy target, and should not be overlooked. That said, losing pounds of milk, components, and/or condition can exact a toll down the line.

The Ohio Farm Business Analysis Dairy Summary shows time and again that at any particular feed cost per cwt, there will be farms making money and farms losing money. But a look at the data for the last 4 years clearly shows that the farms that achieve the highest net return per cow consistently sell more milk per cow than the rest of the farms. An average of more than a ton per cow per year more over the last 4 years. More milk to spread the feed costs over results in an average feed cost of $1.32 per cwt less for the high 20%.

Table 1. Ohio Farm Business Analysis and Benchmarking data for 2011 through 2014. High 20% based on net return per cow.

2011 2012 2013 2014
Average of all cows
Cows 227 223 259 285
Milk sold/cow 24,250 23,632 24,635 24,217
Feed cost/cwt $12.68 $11.78 $12.10 $13.03
Average of high 20%
Cows 323 238 211 317
Milk sold/cow 26,183 25,434 26,812 27,223
Feed cost/cwt $11.18 $10.45 $11.31 $11.36

While you are working with your nutritionist to be sure there are not ingredients in your ration that have outlasted their usefulness, make sure your components are in line. The class III price is based on 3.5% fat and 2.99% protein. We are in a component – based market in Federal Order 33, so if your components are below these levels, your base milk price will be even lower than the currently pitiful Class III prices. This is an issue that is becoming all too real for many farms.

There are many important decisions to be made as costs must be cut. Tap in to the Dairy Issue Briefs at http://dairy.osu.edu to help identify opportunities to control costs and concerns to consider. The Dairy Issue Briefs were originally developed to help dairy farm families deal with the challenges of 2009’s low milk prices. Time to pull them out again.

Cutting costs on your dairy farm

By Dianne Shoemaker

A penny per hundredweight trumps a dollar per cow in 2016

For the country’s dairy farmers, there doesn’t appear to be anything “sweet” to anticipate in ‘16. On the contrary, slimming down production costs is essential. With a 4-year average total cost of production of $19.66 – which is already adjusted for bull calf and cull cow income –there is a yawning chasm between production costs and milk income per cwt.

Where to start slimming? First, let’s determine “what is”. What are the big players in the list of costs?

Table 1. Top 10 production costs, 2013 and 2014 Ohio Farm Business Analysis Program, average of all farms.

2013

2014
Expense Item % of direct & overhead costs Expense Item % of direct & overhead costs
Feed 57.2 Feed 57
Labor 11.1 Labor 10.7
Depreciation 5.1 Depreciation 4.9
Supplies 3.7 Supplies 3.9
Vet & meds 2.7 Vet & meds 2.6
Repairs 2.6 Repairs 2.7
Hauling and trucking 2.3 Hauling and trucking 2.4
Fuel and oil 2.0 Miscellaneous 2.4
Bedding 1.9 Bedding

2.1

Utilities/Misc (tie) 1.8 Custom hire 2.0

No surprise to any dairy farmer, feed costs are the single highest cost on all farms. These feed costs are for all animals; milking and dry cows, replacement heifers and calves. All homegrown feed is valued at total cost of production. The top 4 costs were the same in both years: feed, labor, depreciation and supplies. Supplies and vet & meds switched places, and there were minor changes in the bottom four expenses, all 2.4% of total expenses or less.

These numbers represent the average for all farms. There is a substantial range in herd sizes in these farms. Does herd size make a difference? In 2013, the top 4 expenses, accounting for 77% of total costs, were the same across all herd sizes. Feed, labor, depreciation, and supplies. Herd size was broken down into 51 to 100 cows, 101 to 200 cows, 201 to 500 cows, and over 500 cows categories. The only thing that changed between herd sizes was in the 201 to 500 cow category where supplies were number 3 and depreciation was the 4th highest cost.

What is the take home? For most herds, the 4 highest costs will be feed, labor, depreciation, and supplies. How much potential – and realistic – savings are there for your farm? We don’t want to cut costs only to negatively impact future health and production.

The best tools for comparing your farm to other Ohio farms are the benchmark reports included in the Ohio Dairy Enterprise Analysis Summaries which can be found at http://u.osu.edu/farmprofitability/ohio-farm-business-summaries/ Directions on the charts explain their use. Bottom line, you can see the range of income and expense items for other Ohio farms. Specifically these allow farms to set realistic goals for trimming expenses.

Pennies or dollars?

How is your time best spent? Trying to cut expenses by a dollar per cow or a penny per hundredweight? For every hundred cows you milk, you will save $100 for every dollar you cut in production costs per cow. If each of those cows are putting 24,000 lbs. of milk in the tank each year, finding one cent per cwt in savings will save $240 per year. A penny per cwt. trumps a dollar per cow in 2016.