2008 Dairy Enterprise Analysis-Summary

Transcription

1 2008 Dairy Enterprise Analysis-Summary KENTUCKY FARM BUSINESS MANAGEMENT PROGRAM Agricultural Economics Extension No December 2009 By: CURTIS L. MAHNKEN University of Kentucky Department of Agricultural Economics 400 Charles E. Barnhart Bldg. Lexington, KY Phone: Fax:

2 Acknowledgements Special recognition is extended to the Area Extension Specialists in Farm Business Management and farmers that contributed data to the Kentucky Farm Business Management (KFBM) program. Without their involvement, this study would not have been possible. Considerable time and effort were invested in allocating cost of inputs used by more than one enterprise, and making other judgments necessary to ensure the accuracy of the data. The author extends a special thank you to Kassie Celsor who was the first Dairy Specialist in Farm Business Management to serve when adding the number of dairies to KFBM that were added. Without her dedication and hard work, this study would not be as useful. A special thank you is also extended to the Kentucky Dairy Development Council consultants for all of their hard work. The author also thanks the reviewers of this publication, Rush Midkiff from Kentucky Farm Business Management, Dr. Jack McAllister and Dr. Jeffrey Bewley from the Department of Animal and Food Sciences, as their input is always appreciated when discussing dairy. Jerry Pierce began serving as KFBM State Coordinator in 2007 and continues to serve in that role. His leadership, and past leadership, has been responsible for the continuation of this study. Special thanks to Rick Costin and David Heisterberg, retired specialists, for their contributions to this data. The Area Extension Specialists in Farm Business Management are: Curtis L. Mahnken Bluegrass Farm Analysis Group, Inc. (859) Curtis.Mahnken@uky.edu Jonathan D. Shepherd Lincoln Trail Farm Analysis Group, Inc. (270) jdshepherd@uky.edu Christa Hofmann Ohio Valley Farm Analysis Group, Inc. (270) Christa.Hofmann@uky.edu Suzy L. Martin Ohio Valley Farm Analysis Group, Inc. (270) slmartin@uky.edu D. Bart Peters Pennyroyal Farm Analysis Group, Inc. (270) BartPeters@uky.edu Evan M. Conrad Pennyroyal Farm Analysis Group, Inc. (270) Evan.Conrad@uky.edu Rush H. Midkiff Pennyroyal Farm Analysis Group, Inc. (270) rmidkiff@uky.edu Michael C. Forsythe Pennyroyal Farm Analysis Group, Inc. (270) Michael.Forsythe@uky.edu Jennifer L. Rogers Purchase Farm Analysis Group, Inc. (270) Jennifer.Rogers@uky.edu Lauren E. Omer KDDC Initiative (270) Lauren.Omer@uky.edu Jerry S. Pierce KFBM State Coordinator (270) Jerry.Pierce@uky.edu KFBM Website http:

3 A Special Note to Our Readers The data for this study are drawn from the detailed financial and production records of producers cooperating with the Kentucky Farm Business Management program. The data are not drawn from a random sample of farms in the state. However, these data are the most accurate and detailed farm financial information available and represent the closest approximation to real world farm financial data that are available to researchers and educators. Every attempt has been made to select farms for these research studies that are typical and have complete financial information available for analysis. These data are carefully cross-checked by our farm management specialists before inclusion in this analysis. It should be noted that farms included in this study are representative of commercial farms producing major commodities and livestock, but not of all farms in Kentucky.

4 Dairy farming has changed in many ways over the last decade 1. Dairy farms have become bigger, more specialized in some cases and have required the dairy farm manager to perform many roles that he may or may not be comfortable performing. Not the least of which is record keeper. It has become increasingly more important when you examine the U.S. all milk price over the last decade, as shown in Figure 1. Because of this increased volatility in the milk price (as well as the current dairy economy) it is vital for the producer to keep good records to improve the operation. The results of the enterprise study follow and examine the links between management returns 2 and other variables. Figure 1: Prices Received, Milk, U.S. $24 U.S. All Milk Price $22 $20 $/CWT $18 $16 $14 $12 $ National Agricultural Statistics Service, November 2009 In 2008, Kentucky Farm Business Management worked with 50 dairy cooperators across the state of Kentucky with their financial records and farm management issues. The report that follows is focused on delivering the information these cooperators produced in order to provide answers to the cooperator s farm management questions. Based on the results from the sample of 50 dairy farms, Kentucky dairy enterprises, on average, were not able to cover all costs in Milk production per cow continued to climb and milk prices were in the $20/cwt range for the second consecutive year, but total milk production in the state of Kentucky declined as cow numbers declined. Higher fuel, labor and feed bills contributed to the negative net returns in However, KFBM specialists broke down the information from 23 dairy cooperators to provide information for an enterprise study in which those farms averaged $63 per cow in net returns above all costs. 1 For more detailed analysis of the dairy enterprise study please see 2008 Dairy Enterprise Analysis 2 See Methods and Definitions Used in Study at end of this publication

5 The average number of cows for the enterprise analysis group was 164, the range was from 48 to 530 cows and this group produced a total of 72,763,515 lbs of milk. Net operating income for this group was almost completely positive, though the average operating expense ratio for the group was 80%. See Table 2 for a detailed enterprise summary. Cooperators were separated three ways to examine the dairy enterprise, but perhaps the most interesting comparison when looking at enterprise studies is comparing the data on a profitability basis or management returns basis. The ultimate goal for a dairy should be profit and provision of an adequate living for the cooperator. Simply put, management returns are what is left after all economic costs have been accounted for. The desire is to discover how the farm performed after remaining inputs that may affect such ratios as Return on Assets, or Net Farm Income. In Table 1, as well as Figure 2, the high group had the smallest herd size on average. This group only sold 147 lbs/cow more than the middle group. In comparing size, the biggest herds had the highest milk per cow. This comparison appears to relate that it is not necessary to be large or the most successful at producing the most milk. Instead, it appears that one can have good management returns regardless of the size of the farm. Table 1: Management Returns/Cow Name Description # Herds Avg. Milk/Cow # Cows Low =<$1/cwt 8 19, Middle $1/cwt-$4.00/cwt 9 18, High >$4.00/cwt 6 18, Figure 2: Milk/Cow Comparison-Size vs. Management Returns Milk/Cow 20, Lbs Sold/Cow 19,500 19,000 18,500 18,000 17,500 17, Cows Milk/Cow Size Groups Milk/Cow Mgmt Groups Cows 16,500 0 Low Mid High Figure 3, shows the low group actually had negative net returns, and the high group had the lowest gross returns. The high group more efficiently used their inputs; however, as this group experienced net returns of $3.10/cwt of milk sold. If the operating expense ratio is used, concern

6 could grow for the low group as they used 92% of their gross returns to pay for operating expenses. The middle group was at 79%, and the only group under 70% was the high group at 66%. Figure 3: Returns vs. Cost of Production-Management Return Groups 3 $/CWT Returns Vs. Cost of Prod Mgmt Return Groups % % % 70% % % Returns Total Costs of Production % 30% Operating Expense Ratio % % % Low Mid High Average Break-even For management returns, the cost of production as a break-even for each group can be examined. The high group would more than likely be able to withstand a drastic milk price reduction as their cost of production was $17.90 for all economic costs. If only cash costs were examined, their break-even would be $ As was mentioned earlier, the U.S. all milk price crashed in late 2008, and in the summer of 2009 the all milk price was in the $10.50 range, whereas the summer of 2008 saw mailbox prices in the $20 range. Feed prices came down for producers, but not enough to keep farms profitable. If this continues, not only will the middle and low group struggle, but the high group will also experience difficulty. 3 See Table 3 and Table 4 for detailed summary for management returns group 4 Please note this value also includes a value given to homegrown feeds. A producer wouldn t necessarily pay for the corn silage itself, but rather would pay for labor, machinery, seed, fertilizer, etc. that goes into the product. KFBM applies a value to the homegrown feeds in order for the crop enterprise to sell to the livestock enterprise.

7 Conclusions and Observations from 2008 Dairy Enterprise Study National trends show that the number of dairy farms is decreasing, but those that remain are increasing in size and producing more milk per cow. Neighboring states are growing in total milk production, though Kentucky is decreasing (as are other southeastern states). With only approximately 1,000 dairy farms remaining in Kentucky, 23 enterprises is too small a sample to be statistically representative of the typical dairy farm in Kentucky. However, with the dairy climate dramatically changing from years past, one must also examine the strength of Kentucky dairy farms. Some observations: 1. Milk prices saw record highs in 2007 and Feed prices increased as well, preventing large net returns. For all KFBM dairy cooperators this value was $- 265/cow, and for the 23 dairy enterprises included in this report it was $-64/cow. For these 23, operating expenses were higher than many lenders prefer, with about 80% of gross returns consumed by operating expenses (as defined by Operating Expense Ratio). 2. Kentucky dairy cooperators are following the national trend of increasing in size and becoming more efficient while reducing the total number of dairies in the state. Milk production per cow was 18,439 for the group of 23 and the average herd size was 164 cows. 3. Larger herd sizes do not equal higher management returns. From examining the dairy enterprises by defining groups by management returns, the high group had the smallest herd size, at 135 cows. By contrast, the group with the largest average herd size was the low management returns group. 4. Producing more milk per cow also did not guarantee higher management returns. The high group averaged 18,184 lbs/cow, while the low group averaged 19,082 lbs/cow. However, the middle group produced 18,037 lbs/cow. 5. Maximizing cost and asset efficiency, including the cow asset, should be the focus. When examining labor efficiency, the high group produced the most milk per fulltime equivalent, producing 783,212 lbs/fte. 6. Of the 23 dairy enterprises in this study, the high management returns group also had the lowest feed cost/cow. Their value of feed fed was $9.89/cwt m.e. while the middle group fed $10.51 and the low group fed $ Returns per $100 feed fed were also highest for the high group $217 compared to $205 for the middle group, and $175 for the low group. 7. Since the high group had the mid value of milk sold per cow and the low value for labor and feed, the assumption could be made that a breakeven milk per cow would be around 18,000 lbs sold per cow, based on the results of the limited sample of cooperators in the enterprise study. This study helps to identify and illustrate potential areas of concern as well as potential areas of strength and growth. When milk prices were up, many farmers focused their efforts on producing the most milk possible per cow, but these efforts may have caused other areas to suffer. While having a larger herd and producing more milk per cow are impressive statistics, many times the areas that affect the bottom line of a dairy are labor and feed costs. Maximizing labor efficiency can be beneficial to the cows, employees, and the producer. This study also demonstrates that through decisions made using sound record keeping, producers can improve

8 their returns. This is evidenced in the fact that the 23 enterprises in this study experienced higher net returns than did the dairy cooperators included in the KFBM end of year summary. Despite the current economic situation in the dairy industry, there are areas of strength shown in this report. For KFBM dairy cooperators, milk sold per cow is strong, given the climate of Kentucky. However, there is room for growth, assuming that the marginal revenue is greater than the marginal cost of producing the next pound of milk. Milk sold per cow could increase and the marginal cost could decrease if culling unproductive cows. Improved genetics, focusing on cow comfort and many other small changes can improve a herd s productivity. As mentioned, there is also tremendous room for improvement in labor efficiency. Removing cows that are unproductive and require extra care will improve milking times and parlor throughput. Having regular meetings, being receptive to employees, and providing structure will improve productivity as well. Utilizing private and university resources can help improve feed efficiency and other issues that arise during production. Finally, it may be beneficial to assemble a team to maximize the farm s productivity, efficiency and profitability. With lower milk prices in 2009, it is vital for dairy producers to thoroughly examine their records, work with their lenders, and consult with a KFBM specialist so they are in a better position to weather tough economic times and thrive in the good times. The essence of farm management is discovering how to best utilize a farmer s scarce resources, and these decisions are best made when good, solid information is available to the producer. This vital information begins with sound record keeping and enterprise analysis. Time and time again Kentucky farmers have emphasized the fact that for their farm they know that there is no replacement for keeping and using comprehensive production and financial records, and the future of Kentucky agriculture can benefit greatly through education and utilization of this information. For questions regarding membership in Kentucky Farm Business Management, please contact your Area Extension Specialist in Farm Business Management.

9 Methods and Definitions Used in Study 5 The following definitions used within the farm analysis program are important to the proper interpretation of the material presented: Total Returns This is the total return attributable to the livestock enterprise for the year. It includes the value of milk sold, the value of all animals sold (including market and breeding), the value of milk and beef used for family consumption, and an inventory adjustment (positive or negative) for the difference in the value of livestock on the farm at the beginning and end of the year. Feed Costs This is the value of purchased and homegrown feed fed. The purchased feed cost is determined from a producer s actual cost and is adjusted for inventory amounts at the beginning and end of the year. The cost of homegrown feed is determined by charging a twelvemonth average on-farm per unit market value on the amounts fed. Simply, it is the cropping enterprise selling to the livestock enterprise. Non-Feed Cash Costs Actual cash expenses, with accrual adjustments, incurred by the farm. As mentioned in the name, it does not include any feed purchases. Non-Feed Non-Cash Costs Expenses where no cash is exchanged, such as unpaid labor, depreciation, and interest on equity capital. Total Cost of Production Total expenses, cash and non-cash, for all factors of production used by the livestock enterprise during the year, except management. Net Returns or Management Returns Calculated by deducting the total of all production costs from total revenue. This value is the reward to management. Returns per $100 Feed Fed Calculated by dividing total returns by feed costs and multiplying by 100. Value represents how efficiently a cooperator utilizes feed. CWT Milk Equivalents Value of beef divided by the average price received per cwt of milk sold; plus the total cwt of milk produced. In formula form: / Full-time Equivalent Paid Labor Months/12 + Unpaid Labor Months/12 5 For more descriptive details of methods and definitions please see 2008 Dairy Enteprise Analysis

10 Table 2: Enterprise Summary-Total Enterprise Analysis Enterprise Summary Units Avg/CWT M.E. Avg/Cow Avg High Third/CWT M.E. Avg High Third/Cow Number of Herds Herds Total Dairy Returns $ , ,755 Total Feed Costs $ , ,947 Returns Above Feed $ , ,809 Other Economic Variables Average Farm Avg High Third Returns/$100 Feed Fed $ Price Received/CWT of Milk $ Price Received/CWT of Beef $ Other Production Variables Average Farm Avg High Third Average Number of Cows Cows Cows Dry % Animal Units in Herd Units Number of Calves Born Head Calving % % Total Milk Production CWT 31,636 23,227 Milk/Cow Lbs. 18,439 18,184 Total Beef Production Lbs. 90,081 75,416 Beef Per Cow Lbs Butterfat % % Butterfat Per Cow Lbs Value of Feed Fed/CWT M.E. $ Total Concentrates/CWT M.E. Lbs Hay & Dry Forage/CWT M.E. Lbs Corn Silage/CWT M.E. Lbs Other Silage/CWT M.E. Lbs Pasture Days/Animal Unit Days Hay Equivalent/Cow Tons 7 5 Cull Rate % Weight/Breeding Animal Sold Lbs Price Received/CWT (Beef) $ Death Loss: Total Pounds Lbs. 20,818 11,940 Death Loss: % of Pounds Prod. % Deaths: Market Head Deaths: Breeding Head Breeding Survival Rate %

11 Table 3: Economic & Production Variables - Management Return Groups Management Returns-Economic & Production Variables Low Mid High Average Number of Herds Units Total Milk Returns $ Total Feed Costs $ Returns Above Feed Costs $ Total Non-Feed Costs $ Net Returns Over All Costs $ Other Economic Variables Returns/$100 Feed Fed $ Price Received/CWT of Milk $ Price Received/CWT of Beef $ Financial Operating Expense Ratio % 92% 79% 66% 80% Labor Summary Milk Sold/FTE Lbs 682, , , ,722 Cows/FTE Head Labor Wage $ Other Production Variables Average Number of Cows Cows Cows Dry % Animal Units in Herd Units Number of Calves Born Head Calving % % Total Milk Production CWT 40,873 29,032 23,227 31,636 Milk/Cow Lbs. 19,082 18,037 18,184 18,439 Beef Per Cow Lbs Butterfat % % Butterfat Per Cow Lbs Value of Feed Fed/CWT M.E. $ Total Concentrates/CWT M.E. Lbs Hay & Dry Forage/CWT M.E. Lbs Corn Silage/CWT M.E. Lbs Other Silage/CWT M.E. Lbs Pasture Days/Animal Unit Days Hay Equivalent/Cow Tons Cull Rate % Weight/Breeding Animal Sold Lbs Price Received/CWT (Beef) $ Death Loss: Total Pounds Lbs. 27,658 20,657 11,940 20,818 Death Loss: % of Pounds Prod. % Deaths: Market Head Deaths: Breeding Head Breeding Survival Rate %

12 Table 4: Per CWT Averages for Costs and Returns-Management Returns Per CWT Averages-Mgmt Groups Enterprise Returns Low Mid High Average Milk Returns Patronage FSA Beef Returns Total Dairy Returns Feed Costs Corn, Grains, Minerals Complete Feed Hay Corn Silage Other Silage Total Feed Costs Non-Feed Costs Livestock Supplies Veterinary Fuel & Oil Machinery Repair Building Repair Machine Hire Utilities Light Vehicle Paid Labor Insurance Property Taxes Miscellaneous Cash Interest Total Non-Feed, Cash Non-Feed, Non-Cash Unpaid Labor Machinery Depreciation Building Depreciation Non-Cash Interest Total Non-Feed, Non-Cash Cost & Returns Summary Total Dairy Returns Feed Costs Non-Feed Costs Net Returns Over All Costs Costs Summary Non-Feed Cash Costs Feed Costs Non-Feed, Non-Cash Costs Total Costs of Production Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin.