The USDA released a report last month indicating that we can expect an average decrease of 20% in income between 2023 and 2024. Dairy farm income is expected to drop 81%. The report suggests that the decline will mainly be due to volatility in milk and input prices. Ohio State University has examined dairy farms’ financial benchmarks for the past 25 years to determine where the most competitive dairies fall. The following 3 benchmarks focus on the operating costs associated with the dairy.
- Energy Corrected Milk (ECM) Per Worker
Labor costs are becoming a larger piece of the operating cost pie. Calculating ECM per worker can help determine labor efficiency issues. The Ohio State study determined that the most competitive farms sell 1,000,000 lbs of ECM per worker per year. If numbers are below the competitive level, herd productivity and labor utilization should be evaluated.
- Feed Costs Per CWT of Milk Sold
Feed costs can be looked at in a number of different ways – either including all animals on the farm (heifers and dry cows) or only lactating cows. Including all animals will give a better sense of the financial situation. The most competitive fell within the top 25% of farms for the given value. Other sources suggest the total feed costs should be below 45% of the milk check. When goals are not met, forage quality should be examined first. Forage quality has the single greatest impact on total feed costs.
- Operating Expense Ratio
The operating expense ratio is calculated by dividing the total operating expenses (minus interest) by the gross income. Farms should strive to be less than or equal to 70%. An expense ratio greater than 70% may be due to high expenses or low income. When operating expense ratios are not met, high feed costs are often to blame.
Like other benchmarking, we have to remember that every farm is different when using financial benchmarks. Farm size and labor allocations can impact how farms are compared to others. The three gauges included in this article are focused on operating costs. Operating costs should be evaluated at least quarterly or when management or feed changes occur to determine how changes may impact day-to-day costs and income to the farm. Capital, solvency, and liquidity reports should be done at least once a year to determine the full financial health of the dairy.
