Know Your Cost of Production Going Into 2018

Class III futures are averaging $14.69 through 2018. So this new year doesn’t look anything like 2009, or does it?

Dave Swartz, Assistant Director of Programs, Animal Systems, at Penn State University, notes Class III prices in 2009 averaged a paltry $11.36/cwt. Adjusted for inflation over the last nine years, the 2009 Class III would be about $13.06 today.

“However, many of the expenses incurred on dairy farms have increased more than 11% in 9 years, and the majority of premium programs offered to dairy producers in 2009 are no longer available, so milk price basis is lower,” says Swartz. “Adding all those factors together paints a very difficult picture for 2018.”

The only way to face coming tight margins is to know your farm’s cost of production (COP), he says. “There are still a great many dairy producers in Pennsylvania that do not know their cost of production/cwt and have done very little to benchmark their costs to industry recommendations.”

If you’re unable to calculate your COP, ask for help from your lender or Extension educators in your area. “After a producer knows [his/her] numbers, then Extension educators, private consultants, and dairy profit teams can work with the producer to control costs to meet cost of production goals and examine opportunities to improve income,” says Swartz.

The other good bit of news is that corn and soybean prices are the same or even lower than in 2009. “Basis (transportation, processing, etc.) is higher, but inventories are high, the 2017 harvest numbers set records for bu./acre, so grain prices are predicted to be subdued for the year,” says Swartz. “At this point, the only upward momentum for grain prices would come from weather patterns that threaten the South American grain crops.”