Costs and returns: By the numbers

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cows in milking parlor
Cows in a milking parlor

We are starting 2016 with Class III milk prices dipping into the $13 per hundredweight (cwt.) range for multiple months in the futures market. (Compared to the annual averages of $15.80 for 2015 and $22.34 for 2014). We last saw $13 for several months in 2010 and January of 2011.

This sure means something for Ohio dairy farms, but what? Thirty-eight Ohio dairy farms completed whole farm and enterprise analysis for 2014. This investment pays them back with tools to identify strengths and areas for improvement across their farm.

Those were the days

We remember 2014 as the brief time when milk prices were at an all-time high — rapidly followed by 2015 with milk prices falling to five-year lows. 2014’s returns were phenomenal. Looking at Table 1, the average net return per cow for all herds was $1,266 per cow. This was higher than the average per-cow returns for the previous three years added together!

These returns are not just cash heading to the bank or the dealership for a new truck; they have work to do. With the net returns, the farms have to pay themselves. Hired labor is already deducted from these net returns, but the owner’s labor and management is not. They are also used to make principal payments, pay income taxes, save for retirement, and reinvest in the farm businesses.

Biggest challenge

The most pressing challenge we see in Table 1 comes when we look at the total cost of producing a hundred pounds (cwt.) of milk.

For the past four years, it averaged $19.66 for these Ohio farms. This cost is already reduced by the income received for the sale of bull calves, cull cows, etc. The only non-cash cost is a depreciation charge for the use of the farm’s machinery and equipment (7% of the inventory value used for the dairy enterprise), titled vehicles (15%), and buildings and improvements (5%).

On the farm, we have received an average of about 85 cents per cwt. above the Class III price for our milk in Federal Order 33. The analysis farms have also received an average of $2.20 more per cwt. between 2011 and 2014. These additional dollars came from combinations of higher components, quality and quantity premiums, and over-order premiums.

Add all that up, and many farms are going to come up anywhere from $1 to $3 per cwt. short of the cash cost of producing milk, say nothing of the unpaid labor, principal payments, etc. How to target potential cost savings will be the subject of my next column.

Table 1: Comparison of total cost of production per cwt. and net return per cow, 2011-2014 Ohio Dairy Business Analysis. Raised feed valued at cost of production.

Average of all herds:2011201220132014
Total cost per cwt.1$20.23$18.76$19.21$20.42
Net return per cow2$317$231$544$1,266
Average of High 20%3
Total cost per cwt.1$16.88$15.38$16.04$18.14
Net return per cow2$1,200$1,145$1,501$1,976

1Total cost per hundredweight (cwt.) including revenue adjustments (income from cull cows, bull calf and other animal sales) before labor and management charge.
2Before a labor and management charge
3Farms sorted by net return per cow

Learn more

Table 1 above shares a few basic numbers from the analysis. Visit the Ohio Farm Business Analysis and Benchmarking website — http://farmprofitability.osu.edu — to view and download the complete 2014 Dairy and Crop Enterprise Analysis Summaries.

Interested in a business analysis of your farm? Contact us to talk about what would work well for your farm at 330-533-5538 or shoemaker.3@osu.edu. Cost is minimal due to current generous grant funding.

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