Plummeting prices in the dairy industry are creating critical cash-flow and long-term survivability issues on Ohio ‘s 3,328 dairy farms. Cost-cutting decisions must be made with full awareness of both short and long-term production and economic consequences. Many farms are analyzing every aspect of their business to see where money can be saved. The cost of labor and its impact on the overall cost of production, means a dairy manager needs to measure, evaluate, and monitor labor efficiency. An excellent way to accomplish this is by calculating the pounds of milk sold per full-time worker. This efficiency factor combines labor efficiency and dairy herd productivity into a single indicator.

The calculation of this measure is significantly influenced by your definition of an full time equivalent worker (FTE). In Ohio , an FTE is often defined as an adult who works 50 hours per week for 50 weeks (allowing two weeks of vacation per year). This translates into 2,500 work hours for each FTE. It is vital that you include all paid and unpaid labor in this calculation. Smaller dairy farms are more likely to have some unpaid family labor from a spouse, children, or the operator who likely works more than 2,500 hours per year. When analyzing and comparing your farm to other benchmark data, it is important to determine how the reporting agency defines a full-time worker.

To calculate milk sold per worker:

1. Calculate total FTE on the farm per year. Divide total hours of paid and unpaid labor for producing your dairy’s feed crops and for operating the dairy herd by 2,500.

2. Divide total pounds of milk sold by total FTE per year. Total pounds of milk sold should be taken from the milk checks. Herd average figures from dairy record systems are not an accurate reflection of milk sold because they include fresh cow milk, milk discarded from treated cows, and milk fed to calves. The pounds of salable milk fed to calves should be added to pounds of milk sold to reflect total potential milk sales.

Pounds of milk sold per worker is an important tool for evaluating the productivity of workers and cattle. It combines efficient labor utilization with good to excellent herd production. If all feed is purchased, the general rule is to double these benchmarks.

Because free-stall parlor systems can handle more cows, these systems allow more pounds of milk per year per worker than tie stall or stanchion systems. Tie stall or stanchion barns entail considerably higher costs per cow than large, modern free-stall facilities. The combination of lower investment per cow and more efficient labor utilization make free-stall parlor systems much more economical, because they generally result in lower costs for producing each unit of milk. However, existing tie stall or stanchion facilities may be able to compete with free-stall parlor systems if the operation carries little or no debt.

Competitive Level:

Fewer pounds of milk per worker will likely be sold per year for small vs. large breed herds, but the value of the milk sold per year may be similar under similar management systems. This can occur because of the higher value per cwt of milk for the small breeds of dairy cattle (milk is higher in concentration of fat and protein). However, because the value of milk sold is affected by milk price fluctuations, it is not very useful for measuring labor productivity trends over time.

If the pounds of milk sold per worker is below the competitive level:

1. Evaluate herd productivity. To achieve the desired level of pounds of milk sold per worker, cows will most likely need to be above average in production for their breed. Many competitive farmers implement strategies to increase herd productivity. Some strategies include feeding balanced rations, optimizing cow comfort, using proven milk production technologies, filling facilities to above 100% of capacity, and milking more than two times per day.

2. Evaluate labor efficiency. Antiquated facilities and uncomfortable working conditions reduce labor efficiency. Careful hiring also plays an important role in labor efficiency. Employee training, motivation, and pride in doing a job well help workers to be more efficient and effective, whether they are family members or unrelated employees. Workers in tie stall or stanchion systems should be able to handle 30 to 35 cows per FTE, including raising crops. Workers in free-stall systems should be able to handle 40 to 50 cows per worker.

Bottom Line: An excellent way to examine labor efficiency is by calculating the pounds of milk sold per full-time worker employee. In free-stall and parlor facilities, a dairy should produce over 1 million pounds of milk per FTE for large breeds and over 750,000 pounds of milk per FTE for small breeds. In tie stall or stanchion facilities, a large breed dairy should produce over 600,000 pounds of milk per FTE or over 450,000 per FTE for small breeds. If the pounds of milk sold per worker is below the competitive level, managers should evaluate herd productivity and labor efficiency with farm advisors.

Author: David Marrison, Extension Educator, Ashtabula County

Contact at marrison.2@osu.edu , 440-576-9008.

More DIBS are posted on-line at http://dairy.osu.edu .

Reference:

15 Measures of Dairy Farm Competitiveness (2008). Available at: ohioline.osu.edu/b864/pdf/864.pdf

Many producers have spent the last several months studying the proposed Average Crop Revenue Election (ACRE) program, weighing ACRE against the DCP program on their farm operations. One of the frustrations of most students of the ACRE program has been that the rules for establishing yield benchmarks have been extremely vague. So vague in fact that a final decision on ACRE vs. DCP has been impossible. New guidelines released by USDA just days ago may be very helpful for producers that are still considering the ACRE program.

The recently released USDA rules state that producers that choose the ACRE program on a given farm unit may certify previous crop yields to establish the “Benchmark Farm Yield” which is a historical crop yield for the specific farm unit. For producers that recall updating crop yields for the 2002 farm bill, this may be the only opportunity that producers have to effectively “prove yields” during the course of the 2008 Farm Bill.

It’s in a producer’s best interest to establish a strong Benchmark Farm Yield because the higher the Benchmark Farm Yield the more likely it is that the farm trigger is met and the higher the payment per acre will be should both triggers be met. Producers need to do their homework ahead of time because once the Preliminary Benchmark Farm Yields are established, the producer can no longer plug in yield data for past years. The Benchmark will change with each passing year as each new crop year data is plugged into the equation.

How is the Preliminary Benchmark Farm Yield established?

The Preliminary Benchmark Yield will be based on the Olympic Average yield for the production years 2004-2008. The Olympic Average is the five year average excluding the highest yield of the five and the lowest yield of the five. The Olympic average will change each year based on updated yield information. Producers will be asked to certify program crop yields each year on each farm unit in order to update the Benchmark Farm Yield.

If a producer opts to enroll a farm unit in ACRE , there are two options by which to establish the Preliminary Benchmark Farm Yield. Option one is to use actual yield data. Acceptable yield proof will include actual settlements or weight tickets through a commercial grain facility or crop insurance data including NAP or the APH database. In situations where crop insurance units do not match FSA farm numbers, the best advice is to ask the local FSA office on specific cases or be content to accept a default yield equal to 95% of ACRE County Yield. FSA will not accept yield monitor data as evidence for substantiating yields.

Option two is do nothing as far as proving yields at which point a default yield equal to 95% of the ACRE County Yield will be used. For producers that do not have acceptable yield records including those producers that fed their grain to livestock, this will be the only option for establishing the Benchmark Farm Yield. ACRE County Yield is a figure determined by FSA based on average county yield for each crop year.

For Producers that would like to prove their yields, but lack some records, there is the opportunity to use the yield data that is available and plug the 95% of ACRE County Yield for other years. There is one significant restraint to this stipulation. The producer can only prove yields for years back as far as the first “break in continuity”. A break in continuity occurs in any year in which yield evidence is not available for the crop in question. This does not include years when that particular program crop was not produced on the farm. For any years preceding the break in continuity, the default yield equal to 95% of the ACRE County Yield will be plugged into the Benchmark Farm Yield calculation.

Nothing about the ACRE program is simple, but establishing Benchmark Farm Yields may be one of the easier concepts for producers to grasp. If good production evidence is available and farm yields are higher than the ACRE County Yield, producers can use the data to improve the Benchmark Farm Yield. If that evidence is not available, ACRE is still an option. In that case, the producer will be limited to using the 95% plug-in figure. In many instances, this is still a very good option. In fact, if a particular farm unit has historical yields below the county average, there is no financial benefit for the producer to prove yields. In those instances, accepting 95% of ACRE County Yield is a good option.

This article deals with just one facet of a very complex program. No producer can make the decision between DCP and ACRE based solely on Benchmark Farm Yields; however, understanding how Benchmark Farm Yields are established is key to making a sound choice on every farm unit. To research the ACRE program more thoroughly, look at the Farm Service Agency website @ http://www.fsa.usda.gov/dcp .

It seems as though every time you pick up a farm publication there is a headline about the high level of risk involved in today’s farms. High levels of risk also mean high levels of stress for most individuals. With so many other aspects of production, risk management and financial issues to worry about, you may think business and family communication is the least of your concerns. However, open and honest communication is even more important during times of high stress. Communication matters because your farm operation is made up of people, and people feel more comfortable when they know what is happening within the business even if the news is not good. Good communication can help to build trust, promote understanding and motivate those involved in the farm whether they are family or non-family employees. Withdrawal and lack of communication sends a clear negative message about the future to employees and family members. It will appear as if management is giving up rather than trying to adjust to meet the challenges before them. Communication is certainly a challenge during difficult times, but if conducted effectively it can help lead your farm through stressful times.

Communication involves both talking and listening. When talking, or sending the message, be sure to be clear and concise. Listeners will begin to tune out if you are rambling, so assemble your facts and prepare what you want to say ahead of time. Be honest, but deliver your message with care and tact.

The use of ‘I’ statements are also important when discussing difficult subjects. ‘I’ statements help to keep the conversation positive and moving forward. For example instead of saying, “You shouldn’t be spending any more money on new equipment.” Try something like, “I’m not sure what your plans are for the new equipment purchase, can we talk about that some more?”

Some common problems (adapted from Family Communication During Times of Stress, North Carolina Cooperative Extension Service) that hinder effective communication that you will want to avoid are as follows:

• Judging – projecting our own interpretation or judgment into someone else’s message.
• Criticizing – belittling another person’s feelings or opinions.
• Blaming – making it someone else’s fault
• Name-calling – used as an attempt to win an argument rather than resolve the issue.
• Labeling – “the main problem around here is that you’re just plain lazy.”
• Moralizing – telling others that they ‘should,’ or ‘should not’ or ‘ought’ and ‘ought not’ to do.
• Advising – “If I were you, this what I would do…”

The second part of communication is listening. Listening is difficult and is more than just hearing the words someone is speaking. Most often a speaker says only about 125 words per minute, while the typical listener can receive somewhere between 400 and 600 words per minute. This extra time can allow listeners to get sidetracked or start thinking ahead to what they are going to say next. The key to good listening is to become an active listener who is prepared to listen. Put aside your own thoughts and focus on what the other person is saying and what they mean. Avoid giving your opinion or resolution suggestions before the speaker is finished. Do provide feedback to the speaker by nodding your head to show understanding or asking questions for clarification. Make eye contact and lean forward toward the speaker. Becoming an engaged listener takes practice and concentration, but will help to improve communication within the family and the farm. Many times during periods of high stress, individuals need to share their thoughts and feelings about what is happening, and being a good listener will help to encourage employees and family members to communicate more about important issues.

Communication should not stop at the barn door. By staying in touch with outside advisors such as your lender, feed and seed dealers, agronomist, nutritionist, veterinarian, etc. you can gain valuable information to help make decisions concerning your operation. By keeping these lines of communication open, you will build strong relationships with this support group that can be very helpful in times of high stress for your farm.

One very important note to make is communication takes time and effort. It is easy to say, “I’ll do it tomorrow.” However, too often tomorrow comes and goes, and there has still been no effort made to increase communication between management and employees or within the family. Stressful situations make it even more difficult to find time to communicate, as everyone is consumed by working to keep up and worrying about what will or could happen. It is during these times of high stress that it is even more important to make time to communicate with employees and family members.

One way to find time to communicate with employees and/or family members is to hold a family business meeting. This will provide an opportunity for the manager to share the current situation and for those involved to understand what is happening within the farm business. The group can then discuss the situation and develop an action plan to meet the challenges the farm is facing. The current situation may be bleak, but by communicating the manager is letting those around him/her know that they value them as a part of the farm team. Other ways to communicate may just be sitting down in the farm office for ten minutes of uninterrupted time, talking while working together, or scheduling a set time each day to catch up with one another.

Finally, understand people communicate differently depending upon their personality characteristics. While some personalities are action-oriented and will want to get all the issues out in the open and get started on solving the problem immediately; others will need more time to understand the issues and then think about the issues before they begin to explore ways to tackle them. It will take an effective manager to recognize the differences in communication styles and adjust accordingly. The important thing to remember is to include employees and family members as much as possible by keeping the lines of communication open.

Budgets reflect a manager’s best estimate of future revenue, expense, and profit if a certain plan is followed. Enterprise budgets represent the author’s best estimate of what profit (or loss) a particular enterprise might yield following certain practices. Enterprise budgets are developed by many University Extension Specialists across the Midwest and can be useful to new producers looking to get a start and established producers looking to re-evaluate their enterprise. The following is a list of websites that house Enterprise budgets:

Ohio State University Extension Enterprise Budgets

http://aede.osu.edu/Programs/FarmManagement/Budgets/index.htm

Ag Risk Education Library: Budget Library

http://www.agrisk.umn.edu/Budgets/

http://www.agrisk.umn.edu/Budgets/CustomSearch.aspx

University of Kentucky , College of Agriculture

New Crop Opportunities Center

http://www.uky.edu/Ag/NewCrops/budgets.html

Penn State – Farm Management: Enterprise Budgets

http://agguide.agronomy.psu.edu/cm/sec12/sec12toc.cfm

Penn State – Ag Alternatives

http://agalternatives.aers.psu.edu/

University of Illinois – farmdoc – Management: Enterprise Costs

http://www.agrisk.umn.edu/Budgets/Display.aspx?RecID=8&Pg=1

Purdue – Crop Cost and Return Guide

http://www.agecon.purdue.edu/extension/pubs/

http://www.agecon.purdue.edu/extension/pubs/id166_2009_Jan09.pdf

Iowa State – Ag Decision Maker

http://www.extension.iastate.edu/agdm/

Iowa State – Livestock Enterprise Budgets for Iowa 2008

http://www.extension.iastate.edu/Publications/FM1815.pdf

Ag Marketing Resource Center (AgMRC)

http://www.agmrc.org/business_development/business_workbench/business_worksheets_and_calculators/enterprise_budgeting_tools.cfm

Kansas State – Enterprise Budgets

http://www.agmanager.info/crops/

http://www.agmanager.info/livestock/budgets/default.asp

Kansas State Farm Management Guides

http://www.oznet.ksu.edu/library/agec2/farm_mgt.pdf

University of Missouri – Farm Budgets

http://agebb.missouri.edu/mgt/budget/index.htm

Food prices, ethanol production, and credit issues have dominated the headlines in recent months. A series of articles in the latest issue of Choices Magazine examines the question of whether these factors mark a new era of price instability for agriculture and the implications of such transition for farmers, agribusiness and food companies, and consumers. The latest issue of Choices is available at: http://www.choicesmagazine.org/magazine/issue.php

Global food demand is estimated from population projections of the United Nations and food supply is projected from Food and Agriculture Organization yield data to quantify the global food supply-demand balance for 2025 and 2050. The eight food categories examined account for 95 percent of global food consumption.

Results indicate that the historic era of secularly falling real food prices is over. The real price of corn, for example, is not expected to fall over the next four decades at the annual rate of 1.3 percent that it fell annually from 1960 to 2006. The analysis foresees future real food prices fluctuating around a flat or rising trend. Slowed national economic growth from flat or rising real food prices may be little more than an irritant for consumers in affluent countries, but will entail severe hardship for consumers in the many countries currently troubled by poverty and hunger.

Opportunities exist to expand food output by adding cropland in Brazil and irrigation in Africa, for example, but in the long term such developments will be offset by cropland removed from production by urban and industrial development, soil degradation, and the like. Although cropland can be expanded through higher real farm and food prices, higher yields rather than added cropland offer the most attractive opportunities for farm output expansion at low cost to consumers and the environment.
The slowing rate of increase in crop and livestock yields corresponds with a slowing rate of increase in public and in private agricultural research and development spending. The world will not have the luxury of curtailing spending on agricultural technology and rejecting promising technologies such as genetically modified organisms (GMOs) if is to keep real food costs from rising. Productive new cropland, irrigation, genetically modified varieties, and other technologies will be hard pressed indeed to match the massive historic gains from hybrid varieties, irrigation, synthetic fertilizers, and mechanization. On the demand side, subsidies to expand demand for farming resources such as biofuels will need revisiting if rising food costs are to be contained. Click here to access the 33 page report.

As I have traveled around the state speaking on the differences between the traditional direct counter-cyclical payment (DCP) and the new average crop revenue election (ACRE), one of the more common questions I received was “How do I explain this to the landowners of the farms I cash rent?” After reflection and speaking with a few land owners, I offer the following suggestions.

Many land owners do not understand the economics of farming. What they see and hear are higher grain prices and coffee shop rumors of high insurance indemnities being received by farmers. These pieces of information lead to the assumption there is plenty of money available for steady or increasing land rental rates. What is not known by many landowners is the expense side of the equation such as high input costs for seed, fertilizer, and pesticides. Therefore, it is important to educate your landowners on the economics of farming by explaining your crop production budget. One great help would be to access the OSU Enterprise Budgets from

http://www-agecon.ag.ohio-state.edu/programs/farmmanagement/Budgets/crops-2009/index.htm

for corn, soybeans, and wheat.

Using the OSU Extension Enterprise Budgets prepared in January 2009, the estimated variable cost of production for corn was $398 per acre (150 bu/a), soybeans was $227 per acre (48 bu/a), and wheat was $223 per acre (67 bu/a). The following graph shows the level of revenue per acre before any payments are triggered for the Counter Cyclical and ACRE components of the farm program. This does not mean that the trigger levels shown are the level of income guaranteed by the farm programs, it just indicates when payments will begin. However, the ACRE program does make payments at a revenue level higher than the variable cost of production for all three crops. So why is this important to a landowner?

One of the main concerns landowners have is if their tenant will pay the rent in full and on time. If the revenue per acre remains high, the probability of this happening also remains high. In times of financial stress, unexpected revenue declines due to poor weather or low prices (or both) often create financial problems. Many farmers have reduced their risk by purchasing crop insurance. The ACRE election also reduces risk by providing income when revenue levels significantly decline. The graph below represents the revenue per corn acre when an average yield (150 bu/a) is produced with various annual market price scenarios. Also included on the chart is a graph of the variable cost of production ($398 per/a estimated) plus land rent ($130 per/a) for a total expense of $528 per/acre.

As of 5/5/09, the fall cash price in Upper Sandusky was approximately $4.00 per bushel. According to the graph, this price would give an approximate return of $90.00 per acre over variable costs and land rent to go toward the fixed costs of equipment, labor and management. But what if the 2009 average market price declines to around $3.10 per bushel? Under that scenario, farms enrolled in ACRE would receive a payment of $84 per acre more than farms enrolled in the Counter Cyclical program. Even at $2.50 corn prices, this example farm would generate sufficient revenue to cover variable costs of production and land rent. Estimating revenue lines for soybeans and wheat result in a similar scenario where variable costs and land rent could be covered under low prices/yield conditions. Under the assumptions used to create this scenario, farmers enrolled in ACRE would be in a better revenue position under ACRE than Counter Cyclical thus more likely to meet their financial obligations such as land rental payments.

With this stated, there are still several other considerations that farmers will need to take into account such as payment limitations. Under ACRE , the amount of Direct Payment is reduced from $40,000 to $32,000 which equals approximately $3.75 per acre (most farmers are not hitting the payment limitation maximum amount for direct payments). Under high revenue situations farmers who elect ACRE will actually receive less farm program payments. However, under low revenue situation, farmers enrolled in ACRE can receive additional payments per acre with a maximum payment of $73,000.

The decision to elect ACRE or remain with the tradition Counter Cyclical program is a difficult decision for most farmers and landowners. Everyone is strongly encouraged to spend time with one of the payment calculators such as the one from the University of Illinois found at

http://www.farmdoc.uiuc.edu/fasttools/index.asp

to determine the best option for their farm. Base acres, yield levels, crops planted, and expected price and yields are all critical components in determining what farm program option will be the right option for your farm. If you need or want assistance with one of the farm program calculators, please contact your local OSU Extension office.

In late April, the U.S. Government gave farmers a gift and that gift was not part of the Economic Stimulus Package. What they did was move the DCP sign-up and ACRE election decision deadline from June 1, 2009 to August 14, 2009. The reason I believe this was a gift is because in late July, early August, more information critical to determining which program will be better in 2009 will be known.

To calculate the state revenue guarantee under the ACRE election, the two year average cash market price for 2007 and 2008 along with the five year Olympic yield from 2004-2008 must be known. The five year Olympic yields are known now, but the two year average price is still being determined. For wheat, the marketing year for 2008 began July 1, 2008 and will end June 30, 2009. Corn and soybean 2008 marketing years started September 1, 2008 and will not conclude until August 31, 2009. So by postponing the decision until summer, farmers will know the two year average price for wheat and will have 23 of 24 months of corn and bean prices needed to determine the two year average price. With the two year market price known or very close to being known, the state revenue guarantee used as the benchmark to trigger ACRE payments will also be known or very close to being known.

The other piece of information, that might be more important, is that wheat yields will already be known and farmers will have some idea of potential corn and soybean yields. ACRE payments are a result of 2009’s crop revenue relative to the state and farm revenue guarantees. Crop revenue per acre is calculated by multiplying actual yield by the 2009 average market price. If yields or a good approximation of yields are known, then that side of the equation can be completed. Farmers will then only have to “guess” on what the average market price will be for each crop to determine if ACRE might pay in 2009.

Having the additional information by late July early August should improve the probability of correctly predicting if ACRE will perform better than DCP-Counter Cyclical (DCP-CC) in 2009. Although there is still missing information, at least some of the blanks can be filled into the equation with some degree of confidence. If ACRE appears to be a good alternative at that time, make the election. If yields and prices appear to be strong causing ACRE not to be a beneficial election, remain in DCP-CC. If a farmer chooses to remain in DCP-CC, he/she should re-examine the ACRE program in the spring of 2010 and then decide between ACRE and DCP-CC again. Because of the potential for additional information, I believe at this time the prudent thing to do would be to sign-up for DCP-CC, collect the 22.5% advance payment, plant your crops, and wait until summer to determine if the ACRE election is right for your farm.