Balancing income, expenses challenges dairymen

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How much are you paying for the privilege of milking cows?

Since 1999, I have kept a spreadsheet for Federal Order 33 milk prices. For each month, the Class III milk price and Producer Price Differential are listed and then added together to calculate the Statistical Uniform Price. Monthly MILC payments were listed from 2002 through 2014, with MPP margins taking their place in October 2014. Annual averages for each item summarize each year’s data.

When updating the spreadsheet recently, it was a pleasure to see that the January and February 2017 Class III milk prices were more than $3 per hundredweight higher than they were a year ago. The statistical uniform price for each month was higher than the corresponding month in both 2016 and 2015.

I suspect there were sighs of relief in farm offices across the country. Sadly, more cows and more milk in domestic and foreign markets, as well as a relatively strong dollar and uncertain policy, are threatening this increase in the milk markets.

Stay focused

Controlling expenses will continue to be an important factor in both short and long-term profitability of dairy farms. The challenge continues to be controlling costs without negatively affecting growth, production, reproduction, animal and personnel welfare.

With that in mind, regular review of overall costs is in order.

Reality

The more things change. The more they stay the same.

Feed, labor, depreciation, and supplies were the top four expenses for all farms and the top 20% of farms in 2015 (2016 numbers are being completed now). These were the top four expenses in 2013 and 2014 as well.

What is the take-home message? For most herds, the four highest costs will be feed, labor, depreciation, and supplies.

How much potential — and realistic — savings are there for your farm? We cannot cut costs only to negatively impact current and future health and production.

Depreciation of machinery, equipment, and buildings is a hard number to change. This number (7% of the balance sheet inventory value for machinery and equipment, and 5% for buildings and improvements) represents normal wear, tear, and use of these items in the course of business for the year.

The biggest opportunity to impact that number is before machinery, equipment, and buildings are purchased. Is a purchase a want or a need? Is it realistic to expect cows to pay for this item or improvement? How much will it cost per cwt. or per cow? What benefits and economic returns will it provide?

How do you rank?

The best tools for comparing your farm to other Ohio farms are the benchmark reports included in the Ohio Dairy Enterprise Analysis Summaries, which can be found at http://farmprofitability.osu.edu. Directions on the charts explain their use.

Bottom line, you can see the range of income and expense items for other Ohio farms. Specifically, these allow farms to set realistic goals for trimming expenses.

Combine this review with an evaluation of net return per cow. Is it positive? This has been a challenge for farms in the down price cycle. If it is positive, is it high enough to cover all the demands for principal, family living, income taxes, etc.?

Finding the balance will be the ongoing challenge for today’s dairy farm businesses.

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