Dairy financial performance over the past four years has been challenging. During this time, farms included in the Extension Dairy Team’s data summary had a negative $391 per cow Net Return Over Labor and Management and an average $19.55/cwt cost of production. This has been a challenging period for the dairy industry. However, the 2019 data compared to the previous three years is showing some encouraging trends in dairy profitability.
Table 1. Dairy Cow and Heifer Enterprise, Farms Sorted by Net Return over Labor and Management, 2019
|N=27||Average||Low 20%||20-40%||40-60%||60-80%||high 20%|
|Milk sold per cow||25,025||22,426||24,620||24,923||27,130||24,387|
|Gross margin per cow||$5,088||$4,577||$4,987||$5,080||$5,390||$5,241|
|Total direct & overhead per cow||$4,995||$5,284||$5,166||$5,049||$4,970||$4,124|
|Net return over labor &mgt.||-$129||-$939||-$426||-$170||$211||$815|
|Cost of production per cwt.||$19.38||$22.81||$20.43||$20.17||$17.24||$15.75|
|Feed cost per cow per year1||$2,346||$2,544||$2,471||$2,244||$2,404||$2,174|
|Feed cost per cwt.||$9.38||$11.35||$10.04||$9.00||$8.86||$8.91|
|Hired labor per cow per year||$483||$382||$361||$572||$599||$102|
|Avg. gross milk price per cwt.||$18.87||$18.62||$18.70||$19.49||$18.02||$19.10|
|Milk price / feed margin (cwt.)||$9.49||$7.27||$8.67||$10.48||$9.15||$10.19|
|Heifer cost per head sold/transferred||$1,854||$1,919||$2,352||$2,143||$1,838||$1,259|
|Heifer cost per day||$2.79||$3.88||$2.80||$2.43||$2.45||$2.52|
1Feed costs reflect total feed costs including the lactating cows, dry cows, and heifers.
Table 1 illustrates some key differences between the 27 high and low profit farms in the 2019 data set. One unique item is that the high 20% profit farms did not market the most milk per cow. Generally, more milk income translates into higher profit and a lower cost of production. The 2019 data illustrates high milk yield alone is not enough if costs are too high. The high 20% profit farms had a feed cost of $2,174/cow/year, while the 60-80% group spent $2,404/cow/year. A large difference in labor cost per cow also contributed to the high profit group’s advantage. The high profit group spent $102/cow/year on hired labor while the 60-80% group spent $599. The lower feed and hired labor costs were also reflected in a lower cost to produce heifers. The high profit group spent $1,259/head sold or transferred while the 60-80% group had a cost of $1,838/head. While all farms had an average cost of production including labor and management of $19.38/cwt, the high profit group had a cost of $15.75/cwt. This data illustrates the importance of having all the management decisions of the farm in balance to achieve the best financial results. It is not enough to sell the most milk if that income results in expenses that are too high for the added revenue generated. The most profitable farms achieve a balance of revenue and costs that results in an improved financial outcome.
Table 2. Dairy Cow and Heifer Enterprise Sorted by Year, 2016-19
|Average N=92||2019 N=27||2018 N=18||2017 N=24||2016 N=23|
|Milk sold per cow||24,710||25,025||24,851||24,487||24,468|
|Gross margin per cow||$4,778||$5,088||$4,581||$4,767||$4,630|
|Net return over labor & mgt. per cow||-$391||-$129||-$624||-$395||-$463|
|Cost of production per cwt.||$19.55||$19.38||$19.51||$20.15||$19.17|
|Feed cost per cow per year1||$2,350||$2,346||$2,389||$2,330||$2,338|
|Feed cost per cwt.1||$9.51||$9.38||$9.61||$9.52||$9.56|
|Avg. gross milk price per cwt.||$17.97||$18.87||$17.00||$18.53||$17.27|
|Milk price / feed margin per cwt.||$8.46||$9.49||$7.39||$9.02||$7.72|
|Heifer cost per head sold/transferred||$1,973||$1,854||$2,023||$1,975||$2,084|
|Heifer cost per day||$2.72||$2.79||$2.58||$2.68||$2.83|
|Corn silage, rented acres N=81|
|Yield per acre (tons)||18.50||20.41||15.80||21.12||16.45|
|Total direct & overhead per acre||$554||$575||$562||$579||$498|
|Cost of production per ton||$30.93||$29.13||$36.66||$28.32||$31.30|
1Feed costs reflect total costs including the lactating cows, dry cows, and heifers.
Comparing 2019 to previous years, the trends in Table 2 show some interesting movements. Across several profitability measures, 2019 appears more favorable than the previous three years. While the average of all farms in 2019 showed a -$129/cow/year loss in Net Return Over Labor and Management, the top 40% of farms in the group had a positive Net Return. The high profit group returned $815/cow/year (Table 1) while the 60-80% group had a $211/cow/year Net Return. In previous years even the high profit group had a negative return per cow. Some of this advantage can be attributed to the $18.87/cwt milk price received in the 2019 compared to the $17.97 four-year average price. Revenue per cow averaged $5,088/cow/year compared to the multiple year average of $4,778. Heifer production cost also trended in the right direction at $1,854 per head sold or transferred compared to the multiple year average of $1,973/head.
Corn silage production cost remained steady at $29.13/ton in 2019 compared to an average of $30.93/ton over all farms in the group. Yield per acre was higher in 2019 at 20.41 tons average compared to the 18.5 tons in the multiple year average. Yield is a very important issue in the cost per unit for forage and grain crops. The range of costs for corn silage was $18/ton to $42/ton in this group. Much of the variation is explained by yield differences between the farms.
Table 3. Financial Standards Measures, Farms Sorted by Year, 2016-19.
|Average N=92||2019 N=27||2018 N=18||2017 N=24||2016 N=23|
|Farm debt to asset ratio||$42%||42%||44%||42%||42%|
|Rate of return on farm assets||>8%||1.6%||5.0%||-2.5%||2.3%||0.7%|
|Term debt coverage ratio||>1.5||0.88||1.57||0.04||1.08||0.62|
|Operating expense ratio||86.7%||81.0%||94.3%||85.6%||88.4%|
|Net farm income ratio||>20%||3.9%||9.3%||-4.0%||5.6%||2.4%|
Table 3 provides some data to objectively compare the whole farm financial health for each year. Paying bills on time has been a major challenge for farms over the last few years. This is reflected in the 1.21 current ratio shown across all years. Only in 2019 did the farms average a current ratio that met the comfort benchmark of 1.70. This improvement in Working Capital means accounts payable and current debt were reduced during 2019 versus 2018 where this ratio was 0.98 for the farms in the summary. That ratio means 98 cents of income was available to pay every $1.00 of bills due. This improvement in current ratio is a welcome change given the previous year’s history.
While producers often comment that farms are exiting due to a heavy debt load, the solvency issue was not changed appreciably in 2019 from previous years. Farms averaged 42% debt to asset ratio over the four years with the same 42% average in 2019. Lenders suggest keeping loan payments of principal and interest less than $750/cow/year. The range in the dataset went from loan payments of $200-$1,600/cow/year.
As a group the 2019 farms achieved a cost-based Rate of Return on Assets of 5.0%. While still short of the goal of 8% return, this was a significant improvement over the 1.6% group average. Higher profit on the farm also makes it more likely all loan payments can be made on time and the Term Debt Coverage of 1.57 was substantially better than the 0.88 multiple year average. The added profitability of the farms provided stronger cash flow to pay principal and provide owner draw for the family. This is reflected in the stronger Term Debt Coverage.
The driver for the change in profitability is shown in the Operating Expense Ratio. The 2019 farms had an 81% operating expense ratio compared to the average of 86.7 from previous years. That means 81 cents of every dollar went to pay operating expenses before paying for interest and depreciation. This does not meet the recommended benchmark of
While 2020 has certainly brought many unforeseen circumstances due to Covid-19, it is encouraging to see that 2019 performance was improved over previous years. It is uncertain how 2020 will turnout and much depends on the second half of the year. Producers should continue their focus on high milk production balanced against costs that are appropriate for the revenue generated.