What was our farm’s cost of production for producing milk for 2013? That is a very good question that every dairy farm should be able to answer. At least one time each year a farm should calculate their farm’s costs for producing milk.

This is the time of year when most farms are closing out the 2013 bookkeeping tasks in order to meet the tax reporting deadline which is only a few weeks away.  Because you are already completing these tasks now is a great time to do your farm’s annual cost analysis. For a dairy farm having an actual cost of producing milk can be very valuable for the farm’s financial health. 

It provides a way to monitor year to year differences and changes. Making this one quick calculation,  take the total of last year’s total farm expenses and divided them by the total pounds of milk sold during 2013, gets you a total cost per pound of milk.  Somewhere between $15 and $23 per cwt. would be a good guess.

If you want more details you may want to utilize the Milk Cost of Production template developed by Michigan State University Extension educators Craig Thomas and I. The template was designed to utilize Federal Tax Form- Schedule F to make it easier for farms to develop their annual numbers.  In the template farms can adjust cost percentages to adjust for other non-dairy enterprises with individual line percentages. 

If a farm uses this type of template each year a farm has a basic tool to monitor shifts or major changes that are taking place on their farm.  Even more important, every farm needs to know their costs and income and be able to calculate their negative or positive net margin. 

Making this calculation each year helps you have a benchmark to compare year to year changes.

The next step in this process would be taking your net margin calculation and use it together with your farm’s financial information to develop a risk management plan. This plan could contain several different actions including but not limited to pricing either milk sales or production inputs.

For more information and resource you may want to visit the MSU Extension FIRM web page which has a variety of farm financial and management resources available for your review.