Dairy farmers have to know when to call it quits

“Weebles wobble but they don’t fall down” was a popular slogan touting egg-shaped toys popular in the 1970s. These toys (including a farm set complete with purple cow) are weighted at the larger end, so even when pushed all the way over onto their sides, they quickly spring back up when released.

Many dairy farms feel like that Weeble cow, pushed way, way over by industry pressures. The question is, can they quickly spring back when the pressure is relieved? That isn’t a simple question.

Pricing

While price pressure has eased somewhat, with Class III futures prices for March through June averaging less than $14 as of this writing, we are looking at potential farmgate prices that may not reach the total cost of production on most farms. Again. Just in time for spring planting when cash flow demands are highest.

So, we have to ask a few uncomfortable questions: “What is the point where my dairy can’t bounce back?” and “What should we monitor to know if we are getting close to that point?”

I would suggest several key numbers should be calculated and monitored:

Key numbers                    Competitive Level

Debt to asset ratio 40% Debt per cow $2,500 to $3,500 per cow Scheduled debt payment 15% of gross receipts per cow (annual) -or- $500 per cow Working Capital 15 to 25% of annual expenses

Why? On average, dairy farms added $1,000 of debt per cow in 2009 just for the privilege of continuing to milk cows. While this number will vary from farm to farm based on costs of production, cash reserves and milk-pricing strategies, this additional debt has to be carefully managed.

Like it or not, this has huge ramifications for future profitability. Unless the debt will be repaid by some other non-cow source of income, we have to ask our cows to work harder simply to repay 2009′s additional debt.

Calculations

These key numbers are relatively simple to calculate. Dairy Excel’s 15 Measures of Dairy Farm Competitiveness lays out the formulas, includes an example calculation and discusses each key number. The 15 Measures bulletin is available through your Extension office, or easily downloaded at http://dairy.osu.edu. Look under the “New Publications” heading on the home page.

A final, critical key number for your dairy farm business is the cost of producing milk per hundredweight. Knowing this number gives you a pretty specific indicator of when the dairy is likely to return to profitability based on projected milk prices.

A set of worksheets to guide you through the process of calculating both historic and projected costs of production is also available at http://dairy.osu.edu under the “Timely Articles” heading.

Important topic

The cost of production number, combined with the four key numbers above, will help each farm define the point where the business is unlikely to be able to bounce back.
What a miserable topic. However, on an individual farm basis, an important one.

We are not just talking about dairy farm businesses in an abstract sense. We are talking about people, families, lives. People who have committed to building or carrying on a dairy farm business because they love cows and farming. People who are providing jobs to other people and families.

So why talk about it? Because it does involve people and what they have worked hard to build. Because it is better to anticipate and proactively deal with the potential situation and preserve as much of the equity that people have built through the years than to wait until it is all gone and someone else makes the decision for you.

About the Author

(Dianne Shoemaker is an OSU Extension dairy specialist located at the extension center in Wooster, Ohio.) More Stories by Dianne Shoemaker

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