Benchmarking is one of the latest buzzwords to enter the dairy industry. Benchmarking allows a farm to establish its expenses per hundredweight and compare them to other dairies on a local, regional or national basis. This information can then be used as a guide for improving management or controlling cost. Comparing cost on a per hundredweight basis allows you to compare performance independent of herd size, milk price, or geographical location.
When benchmarking your herd, use these guides:
1. Understand how the benchmark was calculated. Be sure comparisons are equal. Standardization of financial parameters has not been accomplished in dairy accounting systems. An example of this problem would be labor cost per hundredweight of milk. One accounting system may only reflect wages in its labor cost, while another would include wages, payroll taxes, employee benefits and possibly worker's compensation insurance.
2. Look at the type of dairy system being used to generate the information. In my opinion, the four types of dairy systems listed below must be looked at separately. Labor, feed, and replacement cost will be different within the four systems listed below.
- Raise forages, raise replacements
- Raise forages, purchase replacements
- Purchase forages, raise replacements
- Purchase forages, purchase replacements
For example, the labor force on a dairy which purchases forages and replacements can be significantly less than a dairy which harvests crops and raises heifers.
3. Use benchmarking data to improve profit margins and identify areas that have economic potential. Benchmarking may show that not enough money is being spent in a particular line item account. For example, if benchmarking indicates low expenditures for free-stall bedding, it may reflect poor stall management and subsequent cow comfort issues.
Resist the temptation to use benchmarking to evaluate of your business long-term. Instead, use accounting systems that focus on the growth and health of the business. Evaluation of investment in the business should not only focus on the return of the investment, but also evaluate the impact of the investment.
For example, if a tractor is purchased that will be used exclusively in the cropping portion of the business, its interest cost and the annualized portion of its depreciation should be applied to the feed cost of the farm. This would allow for an evaluation of the investment made into the purchase and procurement of feeds within the total feeding program of the dairy.
Traditionally, indirect or overhead cost items have been given very little attention in planning or in cost control. For example, the direct production cost of agricultural systems - whether it be corn, beans, hogs, milk or cattle - did not change very much during the 1970s and 1980s. However, indirect cost rose from 5 percent to 25 percent of the total business expense in the 1960s and early 1970s to 40 percent to 60 percent of the total business expense by the late 1970s and early 1980s. Those farms that didn't have accounting systems to reflect the danger of rising indirect cost found themselves in financial trouble. Those farms did not plan to meet the inflationary aspects of indirect expenses.
These same principles still apply today. While feed, milk, and replacement cost items vary within a cyclic high-low cost range, the indirect cost keeps rising upward regardless of milk price. Even though the dairy industry is reveling in high milk prices and low feed cost, you must not lose sight of the cyclical nature of our industry. Consider adapting accounting systems that will give you more tools to control cost and allow for profit during periods of low milk prices.
Paul Johnson is a veterinarian and consultant in Enterprise, Ala.