What drives your profit? Is it milk price? Sure, that can have a lot to do with profit or loss. But then, even when milk prices tanked in late 2008, why were some farms more profitable than others?
Is the issue how you define profits? That may be part of it.
Instead of focusing on gross milk prices, what you should be looking for is net margin per hundredweight of milk produced, says Mike Hosterman, agricultural business consultant with AgChoice Farm Credit. This figure can help you drill-down into your cost control and milk production abilities. And help you assess your business goals and strategies in order to remove the obstacles that may be holding you back from achieving better margins.
It’s worth your time and effort to do so, especially in this era of high feed prices and milk price uncertainty.
Look to your peers
No two dairy farms are the same. Facilities are different, management is different, personnel are different. So does this mean that profit margins have to be different, too? It may seem that way, at least on the surface.
“Using Dairy Profit Analyzer data for the rolling 12 months that ended in September, the top 10 percent of Northeast dairy farms benchmarked had a net margin of $4.12 per hundredweight,” says Hosterman. “The lowest 10 percent of dairy farms in the data set had a net margin of $0.15 per hundredweight.” Average farms achieve a net margin per hundredweight of $2.35.
The top 10 percent made $5,241 per cow, the lowest 10 percent made $4,761 per cow and those in the average group made $4,913 per cow.
Milk price wasn’t significantly different, and really wasn’t a factor in profitability differences. Those in top 10 percent receive a net milk price per hundredweight of $19.96; all others in the data set brought home a net price of $19.41 per cwt. The percentage of components produced didn’t vary widely among the groups either.
While all farms benchmarked were making money, some were obviously better at it than others. Looking further into the numbers, two things become apparent:
1. Farms in the top 10 percent had a significantly lower cost of production ($16.68 per cwt. vs. $20.11 per cwt.).
2. Farms in the top 10 percent produced more milk than their benchmark counterparts. (Approximately 26,000 pounds annually vs. about 22,000 pounds annually.)
“Of course, it’s not just about milk production, but producing more milk more efficiently,” cautions Hosterman. “You must know your cost of production so you can determine if you are actually more efficient producing 75 pounds per day per cow or if 90 pounds per cow per day is a realistic, economically achievable goal. Don’t simply shoot for the highest milk production with no regard for the bottom line. What do those extra pounds of milk cost?”
A recent analysis by ag economists at Kansas State University sheds more light on milk production’s role in a dairy farm’s profitability. The study examined Kansas Farm Management Association Dairy Enterprise Analysis average data from 1989 to 2010 to look at trends over time and also data from 2005-2010 for individual farmers to look at variability across operations.
It, too, concludes that the correlation between profitability and milk price over time is not particularly strong.
Instead, “producers’ individual management skills are more important for long-term business survival,” says author Kevin Dhuyvetter, Kansas State University ag economist.
For the 6-year period studied, dairy farmers in the top 33 percent, or top third, averaged more than 4,000 pounds per of milk per cow per year (22,788 vs. 18,482). That’s a difference of 23 percent. Milk price between the groups only varied by $0.21 per cwt.
Furthermore, farms in the top third achieved annual net returns per cow of $172 compared to an annual net loss of $922 per cow for those farms in the bottom third of farms.
Interestingly, the top farms in the study reported a higher feed cost than the lower-performing farms, but had a lower overall cost.
“This analysis suggests that producers that are significantly more profitable than average are much more productive in terms of milk production per cow, while having similar — to slightly lower — costs on a per-cow basis,” explains Dhuyvetter.
It’s the little things
So what do these top farms do so well that create profit barriers elsewhere?
“The one thing the most profitable farms I work with have in common is that they plan, then implement, and finally, evaluate everything,” says Hosterman. This strategy doesn’t vary depending on the magnitude of the task or the decision, but rather, applies from the simplest protocol to major capital purchases and everything in between.
“It’s attention to detail, it’s excellent cow comfort, it’s good animal husbandry, it’s quality heifer programs, it’s good financial management” he concludes. “There is no magic solution.”
Find your net margin per hundredweight
To get this figure, subtract your variable cost from milk income to get your gross margin. Once you have that figure, subtract your fixed cost. That will give you your net margin.
To find net margin per hundredweight, divide your net margin by hundredweights of milk produced.
This sounds complicated, but this number matters. It is a key part of the process to find the obstacles that impact your profits.
What makes a top dairy farm top?
The top farms, according to Mike Hosterman, AgChoice Farm Credit agriculture business consultant, have a healthy balance in the following five key areas:
• Industry skills (like the ability to manage internal growth).
• Cost of production and cost control.
High-performing farms do not necessarily have the best performance in all areas, he explains, but they strike a good balance and are competent in all areas, not letting any single element of the equation slip.
For additional information on factors affecting dairy profitability, check out the analysis from Kansas State University at: http://www.agmanager.info/livestock/