By Virginia A. Ishler
Over the years cash flow plans utilizing actual numbers have been evaluated to find commonality between high and low profit herds. Producers often ask what specific income or expense item is to blame for negative cash flow plans. There is no one single area that determines whether a farm will have a competitive cost of production. It always comes back to the big picture and not getting lost in the details.
The Extension dairy team recently summarized 2019 dairy cash flow plans from fifty-seven farms. The income for just the dairy enterprise comes down to milk and dairy non-milk inflow, such as cull cows and bull calf sales. For 2019, regardless if a herd had a breakeven milk price less than $16/cwt or greater than $22/cwt, the dairy non-milk income represented six percent of the dairy income. For the whole farm system, this non-milk income represented five percent of the total income. In the big picture, animal sales have a minimal impact on the revenue stream.
There is a much broader range when accounting for additional whole farm non-milk income, such as crop sales. The range went from seven to 25 percent of the total revenue for the various breakeven milk prices. However, the operations with the best cost of production compared to the worst had the same percentage of income coming from milk (70%), dairy non-milk (5%), and additional farm inflow (25%). The distinction was $600 per cow more cash surplus for the best cost of production versus the worst (<$16/cwt vs. >$22/cwt).
Expenses can be more difficult to focus on since there are several components that fall under dairy directs and overheads. The recommendation is to look at the totals and not get distracted by the categories. Each operation may enter expenses in slightly different ways. An example would be some vet expenses entered for breeding and registration under dairy directs. Milk hauling and marketing are usually the two largest expenses in this category and the producer has very little influence over these costs. For 2019, the marketing expenses ranged between $400 to $500 per cow. The total dairy direct expenses ranged from $830 to $1100 per cow.
The total overhead expenses for 2019 ranged from $900 to $1600 per cow. The largest expenditures were fuel and oil, repairs, and hired labor. For all costs of production from less than $16/cwt to $22/cwt, these three categories made up 53 to 60 percent of the total overhead expenses. The herds with cost of production greater than $22/cwt showed only 35 percent coming from these items. They had substantial costs in miscellaneous at $445/cow compared to the other breakeven groups at $100 or less.
Feed costs continue to be the highest expenditure on the dairy totaling more than $2,000/cow including crop expenses and purchased feed. Purchased feed is not usually the bottleneck to cash flow, as the best and worst breakeven groups spent the same at almost $1,600 per cow in purchased feed. It is the crop costs that make the difference. The herds with the most competitive cost of production spent $500 less per cow than the herds exceeding a cost of production of $22/cwt. Crop costs would include seed, fertilizer, chemical, custom hire, and rent. This dynamic has been ongoing as reflected in summary reports for the past years.
Owner draw and loan payments do not typically follow a pattern related to cost of production. The herds with the most competitive cost of production had an owner draw of $473 per cow compared to the worst with $185 per cow. Loan payments varied widely from a low of about $500 per cow to over $1000 per cow. Profitability is determined by how well all the pieces come together and the balance between revenue and expenses. Benchmarking with farms of similar size and management style can be helpful to determine where to drill down to improve financial health. It comes back to the numbers every time.
Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows, income over feed cost is a good way to check that feed costs are in line for the level of milk production. Starting with July 2014’s milk price, income over feed cost was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage, and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen, and a mineral vitamin mix. All market prices were used.
Also included are the feed costs for dry cows, springing heifers, pregnant heifers, and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.
Income over feed cost using standardized rations and production data from the Penn State dairy herd.
Note: June’s Penn State milk price: $16.46/cwt; feed cost/cow: $6.54; average milk production: 83 lbs.
Feed cost/non-lactating animal/day.
Source : psu.edu