Measuring efficiency on your dairy

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Holstein cows
(Farm and Dairy file photo)

You more than likely have been told or read articles about the need for your farm to be efficient. What does it mean to be efficient? How on earth can a dairy farm measure efficiency?

The Dairy Excel 15 Measures of Dairy Farm Competitiveness bulletin measures efficiency based on dairy investment per cow. Let’s look at how this measure is calculated and what it means to you and your business.

Total dairy investment is the total current market value of all your dairy assets, and should include only land used for raising livestock, feed, pasture, livestock buildings, feed storage, manure disposal, livestock machinery, milking equipment, cows and replacements, and other investments related to the dairy enterprise.

Example calculation

Total dairy investment/number of lactating and dry cows = dairy investment per cow. $2,500,000 total dairy investment/349 cows = $7,353 investment per cow

Our recommendation is that the total dairy investment does not exceed the competitive level of $11,000 per cow. This measure indicates how efficiently the money on your farm is invested. Excessive investment per cow makes receiving a high return difficult on the dollars invested.

If investment per cow exceeds $11,000, consider reviewing your asset turnover ratio, return on farm assets, and debt per cow. If your farm is generating a high return on assets and not carrying much debt per cow, a higher investment per cow is more manageable.

Investment too high

If this is not the case, when investment per cow is high, your dollars are not working hard enough to generate dairy income. If dairy investment per cow is more than $11,000 per cow, the first question to ask is “What is out of line? Is the investment too high? Is the number of cows too low? Or both?”

High investment per cow may stem from several causes, including the following:

  • High priced land
  • Overbuilt facilities
  • Large number of owned acres per cow
  • New or overpriced machinery
  • New or overpriced/oversized facilities
  • Robotic milking and feeding systems
  • Some combination of the above

Some farms have land that is now worth much more for non-agricultural uses than the agricultural value originally paid. If the farm is profitable and you wish to continue your dairy farm business on this land, we suggest assigning a reasonable agricultural value to the land for these calculations.

If high-priced land was recently purchased at market values or non-agricultural value and the cows are expected to pay for the land, use the purchase price for the land in this calculation. Reducing investment is difficult. Rationalizing why investment exceeds more than $11,000 per cow is easy; however, you should address the problem because your dollars are not working hard enough.

Solutions

Typical solutions to high investment per cow include the following:

  • Restraint from future investments
  • Increasing cow numbers without further increases in investment
  • Trading a farm in a high=land value area for a larger farm in a lower-value area
  • Leasing assets instead of purchasing
  • Selling unproductive assets
  • The number of cows is too low if the facilities are not full. Filling the barn with high-producing cows almost always pays. Many competitive farmers fill their buildings above 100% of capacity.

Consult with your nutritionist, veterinarian, or extension educator about the optimum capacity for your facilities. It is sometimes possible to increase cow numbers by making arrangements for the care and housing of dry cows and replacement heifers. Be cautious that custom raising expenses do not increase overall costs more than the additional income. What would it take to increase by 10% the number of cows on your farm?

Interested in learning more about this topic or others in the OSU Extension 15 Measures of Dairy Farm Competitiveness bulletin? Contact your Extension Educator. Funding is available for a limited number of farms interested in completing a financial analysis this year. Contact me if you are interested.

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(Chris Zoller is an agricultural extension educator in Tuscarawas County and a member of the OSU Extension DairyExcel team.)

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