Considering Cost of Production

Dianne Shoemaker, Field Specialist Dairy Production Economics

Originally Published in the August 27, 2015 issue of Farm and Dairy, Dairy Excel Column


2014’s milk prices were really nice. 2015’s not so much. With an opportunity to stash some cash in 2014, it took a while for many farms to feel how tight this year’s margins really are. The quirky thing is that 2014 prices were subject to dramatic swings with a $4.74 difference between the highest and lowest Class III prices compared to a mere $1.14 range through July this year.

Why didn’t we notice those swings?

Between April and June of 2014, the Class III price dropped $2.95 per cwt. One reason we didn’t notice so much was that the April 2014 Class III price was $24.31 per cwt., and even with a nearly $3 drop, it was still above $20. However, the other reason was that the Producer Price Differentials (PPDs) in 2014 were very strong in the second and third quarters, masking the dropping Class III prices. With the PPDs increasing from $0.17 per cwt in April to $1.85 per cwt in June, that nearly $3 drop in Class III was softened to a $1.27 per cwt decrease in the milk check received at the farm. (The Class III price plus the PPD equals the base per-hundredweight (cwt) price for farms producing Grade A milk, referred to as the Statistical Uniform Price or SUP.)

Fast forward to today.

The Class III milk price, which averaged $24.49 for the first 6 months of 2014, averaged only $15.99 for the first 6 months of 2015. The PPD which averaged $0.90 per cwt for the first 6 months of 2015 averaged exactly $0.00 (yes, zero) for January through June this year. The result? At the farm, the average SUP (Class III + PPD) received for Grade A milk for the first six months went from $23.49 per cwt in 2014 to $15.99 per cwt in 2015.

How does this income compare to the costs to produce a cwt of milk? In a word, pitifully. Looking at 3 years of dairy farm data from the Ohio Farm Business Analysis and Benchmarking program, total feed costs ranged from a low of $11.78 per cwt in 2012 to a high of $12.68 in 2011. Even with moderating feed prices, feed costs will take the lion’s share of many milk checks this year. These feed costs include feeding the adult cow herd, the replacement cow herd and feed shrink; in other words, total feed costs.

To put milk in the bulk tank takes more than feed. Other direct costs include breeding, veterinary, supplies, fuel and oil, repairs, hired labor, utilities, hauling and trucking, marketing, bedding, operating interest, etc. Adding together feed and all of the other direct costs, total direct costs averaged $19.37 per cwt on 107 Ohio farms from 2011 to 2013. Now add in the indirect costs including interest on intermediate and long term loans, insurance, and depreciation, and we have average total direct and indirect costs of $21.18 per cwt. for the same farms.

It doesn’t take a math genius to see that direct costs averaging $19.37 per cwt cannot be covered by a milk check starting at $15.99 per cwt. Quality premiums have been declining and will not make up the shortfall on the farm. Very strong cull cow and bull calf prices have helped this spring. However even that cannot compensate for the substantial price drop. Total direct and overhead costs adjusted for this expected income stream (other revenue adjustments) averaged $19.40 for 2011 through 2013 for all farms. Still well above our current prices.

No farm untouched.

So how about the top 20% of the farms in the Ohio Farm Business Analysis summary? They are certainly in a better position to weather 2015’s dismal prices. With their historic average direct plus overhead cost of production at $18.28 per cwt and their total cost of production with other revenue adjustments (remember those cull cow, cull heifer, bull calf and breeding stock sales) at $16.10/cwt, margins are micro-thin but still potentially positive.

Prices are poor and don’t appear to be heading up any time soon. To set realistic goals regarding your farm’s costs of production, you have to know where you are starting from. Then you have the opportunity look for strengths and find opportunities to realistically control costs without hurting milk production. We will take a closer look at using Ohio’s benchmarking reports in a future column. Meanwhile, farmers who have participated in the Farm Business Analysis can pull out and use their personalized reports while other farms can find the reports at Click on the “Ohio Farm Business Summaries tab to find the annual summaries and benchmarking reports.


August 2015 Considering Cost of Production first picture

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August 2015 Considering Cost of Production 2nd picture