Dairying is becoming increasingly complex, as fluctuating market conditions and rising operational costs put pressure on producers to stay profitable. Gary Siporski, an independent dairy financial consultant, emphasizes the importance of knowing your breakeven point — a foundational step for any successful dairy operation.
Back in 2016, the average cost of production in Midwest herds was $16.50. However, by 2023, inflation has driven that figure up to $20.25.
“Feed is a big rolling factor when in most dairies it is 30% to 50% of the cost of operation,” Sipiorski says.
Influential Factors on Dairy Profitability
Every dairy operation receives a basis over their Class III or Class IV prices, typically ranging from $1 to $5, depending on the milk plant. As we move into 2024, real numbers from coast to coast reveal the production cost for 100 lb. of milk has surged past $22 for some producers.
“That is all costs, including depreciation and heifer buying or raising costs,” he says.
A critical question arises: How low milk prices can feasibly drop? With a Class III price of $16, adding a $5 basis results in a potential minimum of $21. At these levels, dairies will struggle to cover depreciation and must brace for challenges, such as delayed capital improvements and mounting payables as bills extend beyond 30 days. Such pressures inevitably turn each month into a financial strain.
“Every dairy is different,” Sipiorski says. “There will not be enough to cover depreciation so capital improvement will not be made.”
According to Brad Herkenhoff, senior dairy lending specialist with Compeer Financial, it is difficult to speculate how low milk prices will go due to so many variables — like trade policies, domestic and international demand, increased domestic growing supply as cow numbers have increased, etc.
“One key factor we see is a wide variation in the basis from processor to processor, so with Class III looking to be in the $16/cwt. range, that basis will start to be extremely important as that mailbox price will fluctuate around producers’ breakevens,” he says.
Herkenhoff notes the focus shifts to higher components for superior energy corrected milk that will remain important. Echoing Siporski’s sentiments on knowing your cost of production, he says it is essential to:
- Regularly review operating costs and look for areas of potential savings.
- Be open to diversification or value-added products to increase revenue streams.
- Stay informed about market trends and adjust production strategies accordingly.
- Engage with your lender and consultants for guidance.
“Ultimately, staying informed and proactive in financial and operational management is key to navigating periods of low milk prices,” Herkenhoff says.
Beef Market Dynamics
With the national beef herd at the 1951 level and consumer demand remaining robust, selling crossbred calves even at a week old can significantly benefit a dairy’s finances.
“Beef-on-dairy has been a valuable tool for dairy producers to enhance profitability and financial resilience,” Herkenhoff shares. “In some of the numbers we have looked at, we are seeing a $2.50/cwt. up to $4/cwt. addition over and above milk prices from cull cows and bull/beef-cross calves.”
Putting it in a different context, Herkenhoff says prior to this beef market rally, for a dairy producer that didn’t sell excess crop or finish steers out, they would typically see their milk check represent about 93% of their overall income on average.
“The other 7% was cull cows, bull calves, misc. government payments, etc.,” he says. “Today, we are seeing milk represent closer to 75% to 80% of total income, and these cull cows and bull/beef-cross calves represent closer to 20% to 25% of overall income.”
As we get closer to year-end, Herkenhoff advises to continue to be cognizant of tax planning strategies.
“With the first half of 2025 being relatively favorable with profitable milk prices and above historical averages of beef-on-dairy sales, income tax strategies will be important again this year,” he says. “Be sure to meet early with your financial advisers and consultants to discuss strategies — whether that is deferring some income, prepaying expenses or possibly some capital expenditures. Make sure your financial team is on the same page with understanding your farm’s strategy.”
Each dairy operation is unique, and its financial strategies must be tailored accordingly. By understanding the economic landscape, engaging with financial partners, and exploring diverse revenue streams, dairy farmers can navigate the challenges ahead with greater confidence and resilience.
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