Dairy Channel: Dairy costs: How much is too much?

Recent experiences with dairy farm management teams looking for information to compare against their own farm numbers prompts me to write about the process of cost control. Many times we get calls from dairy managers who realize there are problems with cash flow and assume there must be a problem with profitability. They want to know how to get the business back into a profitable mode of operation.

I think we have convinced most everybody that the name of the game in dairy farm profitability is cost control. The problem now is to provide useful information and procedures that managers can use in deciding which costs are too high and what to do about it.

The first step. I hate to sound like a broken record, but the first step in the process is to determine what your actual costs of production are. Then you can use various sources to compare your costs to those found on profitable dairies, then take steps to bring your farm’s costs into line. Sound like a fun project for the January doldrums? Of course not! But the procedure, no matter how boring and painful, can mean the difference between life and death for your dairy farm business.

Ideally, you should have a farm business analysis done each year. This analysis will tell you actual (accrual) costs of each type of expense, such as feed, supplies, bedding, breeding, labor, custom hire, etc.

Why accrual? Because you need to know the total expenditure for each type of expenses used for the year. Just knowing in what year an item was paid for does not tell you when it was actually used. However, if your feed bill was $10,000 at the end of last year and $10,000 again at the end of this year, accrual adjustment of feed expense is probably not necessary.

Financial analysis. If you don’t do an annual analysis, you should start now. Get someone to help you. Extension agents, farm business planning and analysis teachers, vocational agriculture teachers, financial consultants and some lenders can help you get the process started.

Make a list of the categories of expenses from your farm records or tax returns and compare them from year to year. Get a copy of Dairy Excel’s “15 Measures of Dairy Farm Competitiveness,” Bulletin 864, from your Ohio State University Extension office, and use it to compare your farm’s performance to some well researched “competitive levels” for such things as feed costs per hundredweight of milk sold, operating expense ratio, and many other measures.

There are a number of sources of good information you can obtain and use to compare to your farm’s performance to see what costs are reasonable and which need to be reduced. Ohio extension agents and farm business planning and analysis instructors have been doing an Ohio Farm Business Summary for the past eight years. The 2000 summary includes 54 Ohio farms from 17 Ohio counties, using data from FINPACK software.

The 2000 Dairy Enterprise Summary includes data from 16 dairy farms, and so is not the most reliable data you can get, but it does give you some numbers to start doing some comparisons.

Data presentation. Cost and income numbers are presented on a per hundredweight and a per cow basis. Key cost figures such as feed costs and hired labor costs for all farms and for the top third of the farms in the study, based on return to management, are presented for comparison.

One good way to get your dairy farm financial analysis done and contribute to a large data base of information on dairy farm financial performance is to participate in the U.S. Top Dairies Financial Performance Survey. The purpose of this survey is to determine the financial performance of dairy farms across the United States and whether differences exist in financial performance by region.

Averages for regions and herd sizes are published and are available for query on an Internet site. You can access the survey forms from the web site and participate in the analysis, thereby contributing your farm’s numbers to the national database.

To access the data base, access the web site at http://cpdmp.cornell.edu.

New York, too. Historically, the best source of reliable dairy farm business performance data for Ohio dairy managers is the New York Dairy Farm Business Summary. This summary has been conducted since the early 1950’s and contains data for more than 300 dairy farms annually.

The summary represents uniformly collected data with enough farms to give reliable information about herds of various sizes, including a separate large herd summary of farms with 300 or more cows and a summary of herds using management intensive rotational grazing.

Other sources. Illinois, Indiana (Purdue University), Michigan State University, the University of Minnesota and the University of Wisconsin also compile and publish annual dairy farm business summaries. Each of these sources is well done and contains enough farms to be very reliable.

However, each uses slightly different methods of calculating various measures of efficiency, such as return on investment, operating expense ratio, return to unpaid labor and management. You need to use some of these resources, but you need to be certain that you are figuring your own farm’s parameters exactly the same way they are figured in the summary.

Each of the resource people mentioned would be happy to assist you in analyzing your farm business. There is plenty of information available to help you find the strengths and weaknesses in your operation, regardless of size, location or method of handling cows.

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For more help or to get the information sources mentioned for analyzing your dairy operation, contact the following:

* Ohio Farm Business Summary 2000 – Contact your Ohio county extension agent or Donald J. Breece, southwest district farm management specialist, at 937-454-5002 or by e-mail at breece.2@osu.edu.

* U.S. Top Dairies Financial Performance Survey – To access the data base, visit http://cpdmp.cornell.edu or contact Mark Stephenson at 347 Warren Hall, Cornell University, Ithaca, New York 14853-7801.

Another contact for information about the U.S. Top Dairies program is Wayne Knoblauch, a professor in the Department of Agricultural, Resource Managerial Economics, Cornell University, Ithaca, New York 14853-7801. Contact him by phone at 607-255-1599, or e-mail him at wak4@cornell.edu.

* New York Dairy Farm Business Summary – Contact a member of the Northeast Ohio Extension Dairy Excel Team, your local Extension Agent, or Stuart F. Smith, senior extension associate, farm management, Department of Agricultural, Resource, and Managerial Economics, College of Agriculture and Life Sciences, Cornell University, Ithaca, New York 14853-7801.

* Michigan State University – Log on to Sheryl Nott’s Farm Records Web site at http://www.msu.edu/user/nott.

* The University of Wisconsin’s Center for Dairy Profitability – An extensive data bank of dairy farm financial performance information is located at http://www.wisc.edu/dairy-profit/.

* The University of Minnesota’s Center for Farm Financial Management – The creator and distributor of FINPACK Farm Financial Analysis software. They also maintain a Web site containing dairy farm financial performance information at http://www.cffm.umn.edu/.

(Send comments or questions in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)