Thus, when using milk risk management tools related to Class III price, farmers still have basis risk. Similarly, basis risk exists for corn and soybean meal where we expect negative basis.
Finally, the margin between milk and feed price is what is left to pay for all other expenses including unpaid management, labor and capital. Table 1 displays the top 10 dairy-related farm cash expenses from 2005-2009.
Note that a couple of the expenses are almost certainly used for field crops on many farms (i.e., fuel and custom hire) but the primary enterprise on these farms was dairy so much of these crops were fed. The largest cash expense was for purchased feed. The value of home-grown feed (not displayed in the table) averaged $5.32/cwt of milk produced for 2005-2009. Many of the other cash expenses beyond feed are generally not too volatile. The exception is likely energy costs in the form of fuel (5th) and utilities (9th). Another increasingly important expense has been interest which might reflect the need for operating loans to alleviate cash flow considerations.
Source: Christopher Wolf, Dept. of Agricultural, Food & Resource Economics, Michigan State University