Costs to Produce Milk in Illinois 2003

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1 Costs to Produce Milk in Illinois 2003 University of Illinois Farm Business Management Resources FBM-0160 Costs to Produce Milk in Illinois 2003 Dale H. Lattz Extension Specialist, Farm Management Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign August, 2004 While there was some improvement in milk prices, total economic costs still exceeded total returns for Illinois dairy producers in 2003, according to figures summarized by University of Illinois agricultural economists in cooperation with the Illinois Farm Business Farm Management Association. The average net price received per 100 pounds of milk was $12.51 which was less than total costs of $ The average price received for milk in 2002 was $ On a per cow basis, total returns from milk were $2,421 compared to the total cost to produce milk of $2,696 per cow. Total costs have exceeded total returns in three of the last five years. Total returns have exceeded total economic costs four out of the last ten years. A detailed breakdown by herd size of 2003 milk production costs and returns for dairy farms is shown in Table 1. Farms included had no other livestock, with all costs accounted for either in crops or in the dairy enterprise. Total costs for the dairy enterprise were reduced by income from sales of dairy animals or from an inventory increase in pounds of beef produced during the year. The value of the added pounds was figured at the average price received for all weights of dairy animals sold in the past five years. The residual costs 88 percent of the total enterprise costs were the net cost of producing milk. The feed cost includes on-the-farm grains evaluated at average Illinois market prices for the year, with corn at $2.30 per bushel and oats at $1.75. Commercial feeds were listed at actual cost, hay and silage at farm values, and pasture at 40 cents per animal per pasture day. Milk production per cow for all herds averaged 19,353 pounds. The average was 919 pounds less per cow than in It still was the third highest level ever. The highest level was in 2001 when milk production was 20,715 pounds per cow. Herds with more than 80 cows produced milk at a slightly lower cost than herds with less than 80 animals. Total costs for each 100 pounds of milk produced were 5 cents lower for the larger herds. Feed costs were 55 cents less, while non-feed costs were 50 cents more per 100 pounds produced for the larger herds. The trend in total costs and returns per cow for all herds is given from 2000 to 2003 (Table 2) and from 1994 to 2003 (Figure 1). When cash and noncash costs are figured, the profit margin (return above all cost) increased a negative $334 in 2002 to a negative $275 per cow in The 2003 returns per cow were the third lowest for any year in the last ten years. The last five year returns above all costs has

2 averaged a negative $106 per cow. During this period, returns above all costs per cow have varied from a negative $334 in 2002 to $279 in In figure 1, labor and interest charges are included in total costs only. Most dairy producers will incur some hired labor and cash interest expense and would include them as cash operating costs. The 2003 returns were 25 cents per 100 pounds produced higher than the 2002 returns due to slightly higher milk prices. The average net price received for milk was $12.51 per 100 pounds. This is 29 cents per 100 pounds or 2 percent higher than the average price received in Based on 19,400 pounds of milk produced per cow, this increase in price increased total returns per cow by $56. The average net price received for milk for the last five-year period is $13.21 per hundred pounds. Dairy assistance payments from the Farm Service Agency and patronage returns related to the dairy enterprise were not included in returns. This would add about $1.50 per 100 pounds of milk produced to returns. While the price received per 100 pounds of milk increased, feed and non-feed costs also increased slightly per 100 pounds of milk produced. Feed costs in 2003 averaged $6.95 per 100 pounds of milk produced as compared to $6.49 in Feed costs have averaged $6.50 the last five years. Feed costs of $8.66 per 100 pounds of milk produced in 1996 were the highest on record. Feed costs were 50 percent of the total cost to produce milk. Non-feed costs per 100 pounds of milk produced were $6.97 in 2003 compared to $7.39 in Along with producing milk, dairy enterprises also produce beef. The average pounds of beef produced per cow in 2003 was 647 pounds. The average price received per 100 pounds sold was $ The last 2 five-year average price received for beef has been $91.30 per 100 pounds sold. Profit margins for dairy producers in 2004 should return to the black due to higher milk prices. Total returns should exceed total economic costs. The average price received for milk in 2003 was 2 percent higher than the average in The average milk price for 2004 is projected to be about 25 percent above the average for The number of milk cows in the United States in 2004 is expected to be slightly lower than in Even with an increase in milk production per cow, total milk production is projected to be slightly lower in 2004 compared to This will result in significantly higher milk prices. While milk prices should increase, feed costs will also be higher than the year before. Although corn and soybean production will be at high levels, the average price for the year for corn and supplement will be higher due to high grain prices this spring. Feed costs per 100 pounds of milk produced would average about $7.40 using prices of $2.50 per bushel for corn, $.1625 a pound for protein and $95 a ton for hay. This is based on annual feed consumption per cow, including replacement animals, of 128 bushels of corn, 3,550 pounds of protein, and 8.0 tons of hay or hay equivalents. If non-feed costs per 100 pounds of milk produced averaged $7.00, total costs to produce 100 pounds of milk would be $ A 25 percent increase in milk prices in 2004 for Illinois producers would result in an annual price of about $15.65 per 100 pounds. If total economic costs averaged $14.40 per 100 pounds of milk produced, the average Illinois producer would have total returns exceed total economic costs by $1.25 per 100 pounds of milk produced.

3 3 Table 1. Costs and Returns for Illinois Dairy Enterprises, by Herd Size, to 80 cows per herd More than 80 cows per herd All units Number of farms Average tillable acres per farm Average number of cows per farm Average milk per cow, pounds... 19,008 19,734 19,353 Average beef produced per cow, pounds Costs per cow, milk plus beef... $3,111 $3,047 $3,081 Average returns from beef Net costs for milk per cow... 2,652 2,743 2,696 Return from milk per cow... 2,357 2,492 2,421 Return above all cost... $-295 $-251 $-275 Cash costs per 100 pounds of Milk produced: Feed... $7.21 $6.66 $6.95 Operating expenses: Maintenance and power... $1.68 a $1.63 a $1.66 a Livestock expense Insurance, taxes, and overhead TOTAL operating expenses... $3.47 $4.09 $3.76 Other costs per 100 pounds of Milk produced: Depreciation... $.40 b $.44 b $.41 b Labor Interest charge on all capital TOTAL other costs... $3.27 $3.15 $3.21 Total non-feed costs per 100 pounds of milk produced... $6.74 $7.24 $6.97 Total all costs per 100 pounds of milk produced... $13.95 $13.90 $13.92 Net price received per 100 pounds of milk produced... $12.40 $12.63 $12.51 Return above all costs per 100 pounds of milk produced... $-1.55 $-1.27 $-1.41 a Includes utilities, machinery, equipment and building repairs, machines b Includes machinery, equipment, and building depreciation.

4 4 Table 2. Costs and Returns per Cow for Illinois Dairy Enterprises, 2000 to Number of farms Number of cows Net cost for milk, per cow... $2,596 $2,809 $2,810 $2,696 Return from milk, per cow... 2,272 3,088 2,477 2,421 Return above all costs, per cow... $-325 $279 $-334 $-275 Price received per 100 pounds of milk... $11.85 $14.91 $12.22 $12.51 Price received per 100 pounds of beef. $94.62 $ $80.96 $93.76 Milk produced per cow, pounds... 19,163 20,715 20,272 19,353 Returns and Costs to Produce Milk $3,500 Dollar per cow $3,000 $2,500 $2,000 $1,500 $1, Year Returns Cash operating costs Total costs Figure 1. Returns and costs to produce milk, 1994 to Interest, depreciation, and labor charges included only in total costs.

5 5 The author would like to acknowledge that data used in this study comes from the local Farm Business Farm Management (FBFM) Associations across the State of Illinois. Without their cooperation, information as comprehensive and accurate as this would not be available for educational purposes. FBFM, which consists of 6,000 plus farmers and 61 professional field staff, is a not-forprofit organization available to all farm operators in Illinois. FBFM field staff provide on-farm counsel with computerized recordkeeping, farm financial management, business entity planning and income tax management. For more information, please contact the State FBFM Office located at the University of Illinois Department of Agricultural and Consumer Economics at or visit the FBFM website at

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