It pays to know your costs

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In today’s economy dairy producers need to be on top of all aspects of their business. Producers need to be prepared to deal with unprecedented volatility in both feed and milk prices. There are the complexities of animal husbandry, cropping, financial decisions, and equipment to deal with, along with many other important management areas.

Keeping in mind the price volatility in the feed markets, it looks like feed will be cheaper based on what futures are predicting for corn grain and soybeans. From the feeding side this could bring added relief to feed costs, however, it does mean producers need to closely evaluate their true crop production costs. Hopefully costs are less than the market is offering. In a year’s time the market can make a dramatic change and the old saying “knowledge is power” is very true. If crop prices do stay at predicted levels, it’s not clear where the milk price will settle out, so managing the milk margin remains a critically important item for dairy producers.

The Extension Dairy Team has been conducting cash flow planning workshops across the state. One component of the workshop is to determine the cost to produce all home-raised feeds. In the winter of 2013, the team completed cash flow plans on 143 farms, with 65 farms raising corn grain and 44 farms growing soybeans. There are two questions that keep surfacing: 1) “How much yield do I need to keep cost of production low enough to take advantage of the market if I want to sell corn or beans?” and 2) “How much land rent can I afford before it negatively impacts the cost of production?” The cash flow workshops answer these questions.

How much land rent can I afford before it negatively impacts the cost of production?

Focusing on the producers falling into the category of lowest and highest yielding corn grain, the average low yield was 116 bu/acre and the average high yield was 190 bu/acre. It cost the low yielding producers $3.49/bu compared to $2.28/bu for the high yield. Both costs of production are still competitive if the corn price stays around $4.67/bu (December futures). However, if the corn is being grown on rented land, that adds another dynamic. On the low yielding production, land rent exceeding $200/acre results in a price of $4.60/bu. On the high yielding production, a producer could tolerate land rent slightly over $300/acre.

Currently soybean futures are holding around $12/bu. Producers with the lowest yielding soybeans averaged 33 bu/acre compared to the high yielding group with 65 bu/acre. Costs for the low yielding group were $7.70/bu and the high yielding were $6.06/bu. Both costs still offer opportunity if the beans were to be sold. Taking into account land rent, the low yielding group could tolerate $100/acre but $200 would bring the cost to $12/bu. The high yielding group could tolerate $400/acre.

The bottom line this year is determining what it costs to produce home-raised feeds. This is going to be important, especially if market prices continue to decline. The most critical factor will be how much can one pay for rented land and still be competitive. Every farm is different and the key is to know these numbers. If you would like more information on the cash flow workshops and working with the Extension Dairy Team, contact either Virginia Ishler at (814) 863-3912 or vishler@psu.edu or Tim Beck at (717) 870-7702 or tbeck@psu.edu.



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