Extension > Agriculture > Dairy Extension > Business tools and budgeting > Know the drivers of dairy farm profitability
Know the drivers of dairy farm profitability
Published in Dairy Star September 3, 2010
Last year was the most challenging year for dairy farmers in memory. Most producers had to borrow money or dip into savings to stay current on their bills. Many had high accounts payable to their suppliers. The 2009 Farm Business Management records are summarized and compiled and agree with what dairy producers already know. It was the first year that the average dairy producer enrolled in the program lost money.
To examine 2009 dairy producer profitability more in-depth, I went to the public accessible website, FINBIN (www.finbin.umn.edu), one of the largest sources of farm financial and production benchmark information. I find an interesting feature of the site is to be able to run many special sorts such as herd size and type of housing. I sorted herds by profitability cohorts (20% of farms in each group) and looked at farms between 50 and 500 cows. For 2009 this group averaged a net return loss of $223 per cow. When labor and management are included, they lost over $425 per cow (Table 1). The top 40% of farms managed to have a positive net return but only the top 20% had a positive return over labor and management.
How did some of these farms manage to be profitable? Table 1 shows selected information on these farms. Not surprisingly the higher profit farms tend to have higher income from milk sales, due to the tendency of a combination of higher milk production per cow and a higher milk price. But this is not a perfect linear trend. You can't tell from this information whether the reason for the higher milk price is due to contracting to secure a higher price, or higher components, higher premiums or a combination of these. There is really no difference in cull sales between the groups.
Feed costs, replacement costs and labor are the three biggest costs on a dairy farm. The higher profit farms really understand this and focus on controlling these costs. Feed cost clearly trends lower ($366 per cow) for the higher profit herds even though they produced more milk per cow. This is likely due to better quality forage and less waste during harvest, storage and feeding. High profit farms also have a $344 lower herd replacement cost than the low profit farms. They might have a lower turnover rate resulting in fewer replacements needed to maintain herd size. They may have a younger age at first calving resulting in lower feed costs. They also might be selling some replacements resulting in a lower replacement cost. Whatever the reason, less is spent on herd replacement costs. Labor costs are lower for the higher profit herds, but this is likely due to the smaller herd size and more family labor being used on these herds.
In looking across most of the other costs there are no real clear trends for large differences between the profitability cohorts. My observation is that the high profit farms overall tend to do a little better in most areas of cost control and income. Even a small difference in each area can add up to a big difference in overall profitability.
All dairy producers need to know the drivers of profitability and how their costs compare to other dairy producers in the state. This starts by knowing the cost of production. Since most farm families have computers there are many excellent software programs and spreadsheets that can help determine cost of production. I have a couple of fairly easy to use spreadsheets that can be used to calculate your breakeven cost of production. Send me an e-mail, salfe001@umn.edu, or give me a call 320.203.6093 and I will be glad to e-mail them to you. Another great option is to join a program such as the Farm Business Management program. Make a commitment that in the next year you are going to regularly calculate your costs and make management decisions based on these costs.
| Table 1. Minnesota Dairy Farm Profitability for 20091 | ||||||
|---|---|---|---|---|---|---|
Item |
Avg2 |
Low 20%3 |
20-40%3 |
40-60%3 |
60-80%3 |
High 20%3 |
Income2 |
||||||
Milk sold, lb |
2780 |
2700 |
2696 |
2798 |
2891 |
2836 |
Cull sales |
137 |
133 |
141 |
141 |
136 |
131 |
Dairy replacement, net cost |
-431 |
-622 |
-493 |
-406 |
-290 |
-278 |
Gross Income |
2731 |
2404 |
2571 |
2779 |
3005 |
3015 |
Direct Expense2 |
||||||
Total feed |
1578 |
1719 |
1595 |
1598 |
1537 |
1353 |
Veterinary |
101 |
103 |
101 |
99 |
108 |
88 |
Supplies |
170 |
177 |
173 |
150 |
178 |
171 |
Hired labor |
270 |
337 |
303 |
260 |
266 |
129 |
Total Direct Expense |
2525 |
2789 |
2587 |
2513 |
2487 |
2087 |
Overhead Expense2 |
||||||
Interest |
62 |
69 |
60 |
56 |
58 |
65 |
Depreciation |
133 |
154 |
137 |
112 |
126 |
130 |
Total overhead |
429 |
489 |
429 |
416 |
416 |
373 |
Total direct/overhead expense |
2954 |
3278 |
3016 |
2929 |
2903 |
2460 |
Net Return |
-223 |
-873 |
-445 |
-150 |
101 |
555 |
Other Information |
||||||
No. cows |
134 |
155 |
142 |
133 |
143 |
96 |
Milk per cow |
21,224 |
20,905 |
20,935 |
21,376 |
21,805 |
21,085 |
Turnover rate, % |
33 |
35 |
36 |
34 |
31 |
30 |
Cow death loss, % |
7.4 |
8.6 |
8.4 |
7.3 |
6.5 |
5.2 |
Milk price, $/cwt |
13.15 |
12.96 |
12.92 |
13.13 |
13.34 |
13.49 |
1 Adapted from www.finbin.umn.edu, MN Farm Business Management Information. |
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