2008 Dairy Enterprise Analysis

Transcription

1 2008 Dairy Enterprise Analysis 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: i

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. ii

4 Table of Contents ABSTRACT... 1 I. INTRODUCTION... 2 Methods and Definitions Used in Study... 2 II. DAIRY INDUSTRY OVERVIEW FOR IV. ENTERPRISE ANALYSIS Herd Size Milk Per Cow Management Returns Break-even V. CONCLUSIONS AND OBSERVATIONS iii

5 LIST OF TABLES TABLE 1: CHANGE IN PERCENTAGE OF U.S. TOTAL PRODUCTION-NASS... 5 TABLE 2: ECONOMIC & PRODUCTION VARIABLES TABLE 3: SELECTED RESULTS: KFBM COOPERATORS BY SIZE TABLE 4: ECONOMIC MANAGEMENT ANALYSIS, AVERAGE KENTUCKY DAIRY FARM TABLE 5: ENTERPRISE SUMMARY TABLE 6: SIZE COMPARISONS-ECONOMIC & PRODUCTION VARIABLES TABLE 7: PER COW AVERAGES FOR COSTS AND RETURNS-SIZE GROUPS TABLE 8: PER CWT AVERAGES FOR COSTS AND RETURNS-SIZE GROUPS TABLE 9: MILK/COW GROUPS TABLE 10: MILK/COW COMPARISONS-ECONOMIC & PRODUCTION VARIABLES TABLE 11: PER COW AVERAGES FOR COSTS AND RETURNS-MILK/COW GROUPS TABLE 12: PER CWT AVERAGES FOR COSTS AND RETURNS-MILK/COW GROUPS TABLE 13: MANAGEMENT RETURNS/COW TABLE 14: ECONOMIC & PRODUCTION VARIABLES - MANAGEMENT RETURN GROUPS TABLE 15: PER CWT AVERAGES FOR COSTS AND RETURNS-MANAGEMENT RETURNS iv

6 LIST OF FIGURES FIGURE 1: KENTUCKY MILK COWS AND PRODUCTION, FIGURE 2: TOTAL MILK PRODUCTION, FIGURE 3: COW NUMBERS, FIGURE 4: MILK/COW FIGURE 5: PRICES RECEIVED, MILK, U.S FIGURE 6: MILK TO FEED PRICE RATIO, FIGURE 7: COMPOSITION OF DAIRY PRODUCTION COSTS-2008 DAIRY ENTERPRISE ANALYSIS COOPERATORS FIGURE 8: COMPOSITION OF TOTAL COSTS PER COW FIGURE 9: FEED FED/CWT-SIZE GROUPS FIGURE 10: EXPENSES/CWT-SIZE GROUPS FIGURE 11: RETURNS VS. COST OF PRODUCTION-SIZE GROUPS FIGURE 12: FEED FED/CWT MILK SOLD-MILK/COW GROUPS FIGURE 13: EXPENSES/CWT-MILK/COW GROUPS FIGURE 14: RETURNS VS. COST OF PRODUCTION-MILK/COW GROUPS FIGURE 15: MILK/COW COMPARISON-SIZE VS. MANAGEMENT RETURNS FIGURE 16: FEED FED/CWT-MANAGEMENT RETURN GROUPS FIGURE 17: EXPENSES/CWT-MANAGEMENT RETURN GROUPS FIGURE 18: RETURNS VS. COST OF PRODUCTION-MANAGEMENT RETURN GROUPS v

7 2008 D AIRY ENTERPRISE ANALYSIS Abstract This report presents the findings of a study of dairy enterprises on farms participating in the Kentucky Farm Business Management (KFBM) program. KFBM summary data from 2008 was examined followed by a more thorough examination of 23 dairy enterprises which had records deemed usable for enterprise analysis. 1. Fifty dairy enterprises participated in KFBM in These farms averaged 147 cows, with an average annual milk production of 18,467 lbs/cow, continuing the trend toward larger dairies with increased production levels. 2. Total Returns were up from In 2008, dairy enterprises averaged $4,204/cow, which was $1,450 higher than Milk prices, though decreasing at the end of 2008, were high for a second straight year, averaging $21.10/cwt, compared to $13.87/cwt in Returns per $100 Feed Fed were slightly under $200 per$100 of feed fed, checking in at $ Average Net Returns Over All Costs of all dairy enterprises in the year 2008 were negative, at $-265. When examining the enterprises used in the enterprise analysis study: 1. Twenty-three dairy enterprises were deemed usable for enterprise analysis. These farms averaged 164 cows and 18,439 lbs of milk sold/cow. 2. Total Returns were $3,863/cow. Milk price received was $ Returns per $100 Feed Fed was slightly less than the summary data, checking in at $198 per $100 of feed fed. 4. Average Net Returns Over All Costs of these dairy enterprises were positive, at $58/cow, and the operating expense ratio was 80%. 5. Labor Efficiency for the enterprises was lackluster as compared to industry benchmarks, producing 694,722 lbs/full-time equivalent and only having 38 cows/full-time equivalent. This publication expands on these highlights and on the factors contributing to the results. Results include analyses of the cost structure and profitability of dairy enterprises when sorted by management returns per hundredweight of milk sold, size of farm, and milk sold per cow. 1

8 I. Introduction Dairy farmers have a lot to do. The day starts with milking the cows, feeding, and being their own triage veterinarian but also may include being a crop specialist, mechanic, boss, employee, and managerand ending the day the way that it began. Record keeping must be fit in here somewhere. However, many dairy farmers are not accountants and prefer to be with the cows or in the fields where they feel more comfortable. But in today s climate, it is vital for the producer to pay close attention to his or her financial records. 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. Methods and Definitions Used in Study Summary data from 2008 was used in the first section of this publication. The summary data consisted of production and financial data that had been calculated as a component of the complete farm business records of Kentucky Farm Business Management (KFBM) program. Three size-type standards were determined for dairy farms based on geographic regions (i.e., Central Kentucky, Western Kentucky and state-wide). Size groups included in this study were less than 100 cows, cows, and 200 or more cows. Dairy enterprise production averages were used to complete the dairy herd analysis. Production efficiency averages for various types of livestock enterprises are determined each year from KFBM member data. The averages include total returns, feed costs, and other production variables, such as feed efficiency and death loss. A complete livestock enterprise summary is achieved by merging the production and the financial records together. Additionally, 23 of the 50 dairy farms contained sufficient detailed data to be used for enterprise analysis. That data is included in the latter part of this publication. The data was compiled by KFBM specialists who broke certain costs, such as livestock expenses, into a more dairy detailed grouping, and these costs were then allocated to the dairy enterprise. 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 2

9 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. Unpaid Labor The imputed charge for any operator labor contribution toward livestock production. The 2008 imputed rate charged for unpaid labor is $33,060 per 12 month equivalent or $2,708 per month. Machinery and Building Depreciation Economic depreciation as maintained by the KFBM Program, equipment is generally depreciated over a ten-year period. These values have been allocated to the dairy enterprise where applicable. Non-Cash Interest Charge Imputed equity interest charge for the average annual capital investment for machinery, buildings, land and an imputed interest charge on cash operating expenses. The rate in 2008 was 3.8% on land and 6.2% on non-land items. It is the opportunity cost of investing in the farm. 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 3

10 II. Dairy Industry Overview for 2008 Dairy farming in Kentucky, and around the United States, has changed drastically over the last several years. In 1998, smaller farms were already starting to exit the market and farms were becoming bigger and more specialized. This has resulted in fewer dairy cows in Kentucky as seen in Figure 1. According to the National Agricultural Statistics Service (NASS), since 1998, approximately 50,000 cows have left Kentucky either to go to market, or to other farms. In that time period Kentucky dairy farms have increased their productive efficiency by increasing milk per cow from 12,214 pounds per cow to 13,444 lbs per cow. This modest increase in milk per cow is not enough to compensate for the near 36% decrease in cows; however, which results in total milk production decreasing from 1,710 million pounds to 1,210 million pounds a 29% decrease. Figure 1: Kentucky Milk Cows and Production, Cows and Production, Kentucky, Thousand Head Lbs Milk Produced per Cow Milk Cows (Average) National Agricultural Statistics Service, September, 2009 This problem is not unique to Kentucky. According to Table 1, the southeastern region of the United States has been bleeding milk since Since that time, this region has lost a total of 3,305 million pounds or 3.16% of the total U.S. milk production. Figure 2 shows that while the production in the southeast is declining, the U.S. production continues to increase. Cow numbers have decreased in the southeast region as well, as shown in Figure 3. Cows have moved from traditional markets to areas that wouldn t normally be considered dairy areas due to cost of land/production in traditional markets, urban sprawl, and a myriad of other reasons. Many of these herds have seen a benefit in better production efficiency as new technologies, and a renewed focus on cow comfort have been adopted. This can be seen in Figure 4. The southeast and Kentucky have increased in milk per cow, but not at the rate of the rest of the U.S. herd. This is not to suggest Kentucky or southeastern producers are not adopting new 4

11 technologies, but rather that heat and humidity play a large part in determining a cow s production. Table 1: Change in Percentage of U.S. Total Production-NASS % of U.S. Production % of U.S. Production % Change Tennessee 0.954% 0.499% % Kentucky 1.087% 0.637% % Florida 1.486% 1.084% % North Carolina 0.795% 0.469% % Louisiana 0.478% 0.168% % Virginia 1.171% 0.908% % Arkansas 0.343% 0.103% % Mississippi 0.368% 0.153% % Georgia 0.914% 0.713% % Alabama 0.245% 0.097% % West Virginia 0.177% 0.095% % South Carolina 0.238% 0.168% % Total 8.257% 5.095% % Figure 2: Total Milk Production, Total Milk Production Million Lbs Million Lbs U.S. Kentucky Southeast National Agricultural Statistics Service, September

12 Figure 3: Cow Numbers, Cow Numbers, Thousand Head Thousand Head US Kentucky Southeast National Agricultural Statistics Service, September, 2009 Figure 4: Milk/Cow Milk/Cow Kentucky US Southeast National Agricultural Statistics Service, September,

13 Since 1999, the U.S. milk price has experienced considerable volatility, though it has trended upward, as seen in Figure 5. The lowest prices during the period shown occur in mid- 2002, early 2003 and early Prior to 2007, the highest price was in 2004 which corresponds to the lowest number of cows in Figure 3. The highest prices occurred in 2007 with eight months of prices over $20/cwt. If Figure 5 is then compared to Figure 3, one can see that the U.S. herd grew quickly as farmers increased herd size in an attempt to take advantage of the high milk price. This assisted the decline in milk price that occurred at the end of 2008 and continued into Figure 5: Prices Received, Milk, U.S. $24 U.S. All Milk Price $22 $20 $/CWT $18 $16 $14 $12 $ National Agricultural Statistics Service, November 2009 The milk to feed price ratio gives an idea of profitability. It is calculated by dividing the price of milk by the price of feed 1. The higher this number is, the more profitable it is to turn feed into milk. It is generally considered profitable to produce milk when the ratio is above 3.0. Figure 6 shows the milk to feed ratio by month from 2004 through There are only 22 months where the ratio has been above 3.0, and that has not occurred since November In fact, despite higher milk prices throughout most of the year, 2008 was the worst year for this ratio as it was the lowest year in 11 of 12 months. This was due to higher feed prices and has continued into The feed prices were driven by large increases in the price of corn as grain producers across the U.S. raised corn to maximize their revenue. This meant fewer acres of soybeans and fewer acres of hay. 1 Feed price as used in Milk to Feed Ratio is calculated as: Price of Corn *.51) + (Price of Soybeans *.08) + (Price of Hay *.41)-NASS 7

14 Figure 6: Milk to Feed Price Ratio, Milk to Feed, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec National Agricultural Statistics Service, September

15 III. Comparisons Between 2008 KFBM Dairies and 2003 KFBM Dairies Since the last KFBM dairy study in 2003, the dairy industry in Kentucky has changed tremendously, as discussed in the previous section. However, the demographics of the dairy cooperators in KFBM have changed as well. Beginning in 2007, dairy cooperators were being recruited through the KFBM-KDDC Dairy Partnership Incentive Program. Dairy producers were given an incentive of $0.50/cwt of milk produced if they met certain requirements. One of those requirements was that they be enrolled in Kentucky Farm Business Management or an acceptable accounting service, and through this program a new specialist was employed to service the new dairy cooperators in Kentucky. In 2007, there were 30 new dairy cooperators and most stayed on the KFBM program into In table 2, 2008 is compared to 2001, 2002, and Despite the milk price being almost $5/cwt 2 higher than the other years in the comparison, returns per $100 of feed fed are not that different from 2002 and In 2001, a year with a moderate price until the $20+/cwt of 2007 and 2008 returns per $100 feed fed were the highest at $231. Following the national trend, farms have been increasing in size with more efficient milk production. Herd size is only slightly higher, but higher nonetheless, and milk produced per cow has increased by approximately 1,000 lbs/cow 3. This translates into higher dairy returns, with 2008 seeing dairy returns just under $1,200 more than 2001, a high milk price year. The downfall in 2008 was in feed costs. Feed cost per hundredweight milk equivalent (cwt ME) was $7.10 in 2001, $7.40 in 2002, and $7.70 in In 2008, this number increased 39% to $10.73/cwt m.e. The 2008 KFBM dairy cooperators fed less of all feed groups, except for corn silage. Higher concentrate, grain, and higher hay prices due to consecutive dry crop years led to cooperators feeding more homegrown feedstuffs to balance the ration. In 2008, non-feed costs were also considerably higher. Fuel prices topped $4.00/gallon for gasoline and diesel fuel which affected not only the cropping enterprises, but the dairy enterprise as well. Dairy haulers, as well as suppliers, were forced to add fuel surcharges in order to make a profit. Labor prices were also higher in 2008, and all of this added up to a rough year for net returns. Net returns over all costs were $-265/cow in The cull rate in 2008 was smaller compared to This could be the result of the higher milk price and the cooperators attempt to produce as much milk as much as they could and capitalize on the higher milk price. This does have a downside, however, as cows that require extra attention do decrease the efficiency of the farm. 2 Unless noted cwt is hundredweight of milk. 3 Milk Sold/Cow: the author believes that milk sold per cow is a more accurate way of looking at milk production, since this is what the producer is actually selling to the milk company. 9

16 Table 2: Economic & Production Variables Averages for Economic & Production Variables Units All Number of Herds Herds Total Dairy Returns $ ,204 Total Feed Costs $ ,115 Returns Above Feed $ ,089 Total Non-Feed Costs $ ,354 Net Returns Over All Costs $ Other Economic Variables Returns/$100 Feed Fed $ Price Received/CWT of Milk $ Price Received/CWT of Beef $ Other Production Variables Average Number of Cows Cows Cows Dry % Animal Units in Herd Units Total Milk Production CWT Total Beef Production Lbs Beef Per Cow Lbs Milk/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 Cull Rate % Weight/Breeding Animal Sold Lbs Price Received/CWT (Beef) $ Death Loss: % of Pounds Prod. Lbs Death Loss: Total Pounds % Deaths: Market Head Deaths: Breeding Head Breeding Survival Rate % In order to examine the differences that exist between size groups, KFBM dairy cooperators were separated into three groups (less than 100, , and 200 or more cows). Table 4 is the economic management analysis for 2008, broken down into the size groups. Table 3 is a more concise version. 10

17 Table 3: Selected Results: KFBM Cooperators by Size < Cows/Farm Milk Sold Lbs/Cow 17,056 17,788 19,619 Avg. Milk Price Mgmt Returns/Cow NFI/Operator/Cow Cows/FTE Milk Sold/FTE 506, , ,547 Evidence of economies of size in this data is seen in management returns per cow. The small group had returns of $ , the middle group had returns of $35.03, and the large group had the largest returns, at $ It is also interesting that this pattern is evident in milk production per cow as seen in Figure 7. The large group was the most efficient in milk produced per cow, followed by the middle group and then the low group. It may be deduced that there is a strong link between milk per cow and management returns, but there is not enough evidence to say this with confidence. The large group did receive the highest milk price at $21.44, while the small group received $20.84, followed by the middle group at $ Labor efficiency is shown in cows/full-time equivalent and milk sold per full-time equivalent. Benchmarks would like to see these numbers at cows/fte, and one million lbs of milk sold/fte. However, none of the studied groups achieve these benchmarks, creating tremendous room for improvement in labor efficiency and becoming an area on which a cooperator could focus to improve management returns. 11

18 Table 4: Economic Management Analysis, Average Kentucky Dairy Farm FARM RETURNS AND COSTS Operator Totals. Per Cow Year Ending Dec. 31, 2008 < < FARM RETURNS Crop Returns 114, , ,500 1,786 1,960 1,326 Livestock Returns Above Feed 125, , ,325 1,956 1,997 2,263 Custom Work 1, , Other Farm Receipts 7,344 15,466 9, Tobacco Receipts 9,024 8,186 11, GROSS FARM RETURNS 257, ,411 1,186,379 4,018 4,145 3,671 FARM COSTS Soil Fertility 26,827 60,109 90, Pesticides 7,260 12,223 27, Seed 12,828 19,788 39, Crop Total 46,915 92, , Utilities 11,734 16,953 42, Machinery Repairs 15,336 33,940 67, Machine Hire and Lease 19,121 38, , Fuel & Oil 15,752 30,205 54, Light Vehicle Machinery Depreciation 14,811 28,687 53, Power & Equipment Total 76, , ,344 1,196 1, Drying 114 1,264 1, Storage 660 1,252 3, Building Repair & Rent 5,417 11,789 24, Building Depreciation 10,312 9,371 19, Building Total 16,504 23,675 49, Production/FTE 506, , ,547 < Avg. Wage $/Hr Labor Unpaid ,205 43,774 60, Labor Paid ,278 67, , Labor Total , , ,736 1, Vet, Medicine, & Livestock Supply 19,292 35, , Insurance 4,970 13,920 19, Miscellaneous 2,644 4,716 6, Interest Charge 7.00% 25,277 48, , Other Costs Total 52, , , Interest 19,920 40,362 46, Taxes 1,943 2,867 3, Cash Rent 10,882 13,884 41, Leasing Cost Land Cost 32,745 57,113 91, TOTAL NON-FEED COSTS 289, ,329 1,075,001 4,510 4,152 3,326 Gain (Loss) on Mach & Build Sales Less Amort. 1,042 5,425 3, MANAGEMENT RETURNS -30,599 4, , ECONOMIC RETURN ANALYSIS < Number of Cows Net Farm Income 35, , ,634 Total Acres ,023 Interest on Equity Capital 32,401 74, ,465 Tillable Acres Unpaid Family Labor 0 2,143 3,005 Opr Acres Operator(s) Labor & Mgmt Income 2,605 46, ,163 Owned Acres Unpaid Operator Labor 33,205 41,631 57,855 Share Rent Acres Management Returns -30,600 4, ,308 Rented Acres Net Farm Income Per Operator 34,634 85, ,086 Number in Average Labor & Mgt Income Per Operator 3,809 20,435 92,211 Milk/Cow 17,056 17,788 19,619 Production Per $1 Non-Feed Cost Avg Price of Milk Farm Production Per Man Year 134, , ,237 Cash Interest Paid 11,831 13,318 48,540

19 IV. Enterprise Analysis When performing an enterprise study several questions are asked: How much am I spending on this input, Could I be spending less on input 1 and more on input 2, and How would that affect my profitability? A question that farmers may have is: What is this group doing differently from what I am doing? With that question in mind several factors were selected to examine the performance of the dairy cooperators included in this study. The selected factors used were herd size, management returns, and milk per cow. The data is comprised of 2008 Kentucky Farm Business Management cooperators whose data was thorough and detailed enough to break down and examine specific costs. Of the 50 dairy cooperators in the KFBM summary data from 2008, 23 were used in this study. While the average number of cows for the 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%. Table 5 contains enterprise summary data for the group. The group averaged 18,439 lbs of milk per cow, which is only slightly lower than the summary data. This is quite a bit higher than the Kentucky average reported by the NASS. KFBM dairy cooperators in this study produced 4,995 lbs more milk per cow than the average Kentucky dairy producer. Total milk production was 31,636 cwt of milk per herd and was higher than the 27,125 cwt of milk sold by the total group of KFBM dairy cooperators. Butterfat was the same at 3.78%, but the high third had a butterfat of 3.85%. The group fed $10.97/cwt milk equivalent, which was higher than the KFBM summary of $10.73/cwt m.e. The high third, however, had a feed cost of $9.89/cwt m.e. and fed fewer actual pounds of feed per hundredweight milk equivalent. Figure 7 shows that feed is 61% of the cost the study cooperators incurred. Figure 7: Composition of Dairy Production Costs-2008 Dairy Enterprise Analysis Cooperators Machine Hire, 6.49% Taxes, Ins, & Misc, 1.22% Fuel & Oil, 1.48% Utilities, 2.93% Building Repair, 1.78% Machinery Repair, 1.75% Lvsk & Vet, 8.89% Paid Labor, 11.70% Cash Interest, 2.57% Feed, 61% 13

20 The second highest cost incurred by this group is paid labor at 11.59%. The labor efficiency average for the data was 694,722 lbs of milk sold per full-time equivalent 4. A solid benchmark for dairies is one million pounds per worker. Figure 8 examines the composition of total costs per cow. In comparing to the 2008 enterprise study data, it is noticed that feed comprises a larger portion of total costs. Non-feed, cash expenses also consume a larger portion, leaving just over 10% to pay for noncash costs, such as depreciation or unpaid labor. What this appears to show is that cooperators are paying themselves less, but could possibly be probably working much harder than they did five years ago. Figure 8: Composition of Total Costs per Cow 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Composition of Total Costs Per Cow Non Feed, Non Cash Non Feed, Cash Feed 4 Full-time equivalent=paid Labor Months/12 + Unpaid Labor Months/12 14

21 Table 5: Enterprise Summary 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 %

22 Herd Size With the shift over the last several years toward fewer, but larger operations, smaller operations wonder about the processes of the larger farms. Perhaps farmers desire to expand their herd to take advantage of economies of size. With the different set of management questions farmers would face, it is appropriate to examine what Kentucky dairy producers do differently in varying size groups. The dataset was divided into three groups by the number of cows per farm. The data is presented in Table 6. The three groups were less than 100 cows, cows, and more than 200 cows. In the three groups there were nine cooperators with less than 100 cows (64 cow average), eight cooperators who had cows (126 cow average), and six cooperators who milked more than 200 cows (365 cow average). The average milk sold per cow for the dataset is 18,439 lbs. Surprisingly, the larger herds were more efficient in milk production, and there was a larger jump in milk efficiency from the middle to the large group (18,246 to 19,810) than from the small group to the middle group (17,696 to 19,810). The next variable to examine is the price received per hundredweight of milk sold. The large group led in receiving a higher price ($21.61/cwt) than the average ($20.93/cwt), while the small group received the second highest price ($20.75/cwt), with the middle group receiving $20.64/cwt. Labor is one of the biggest costs to a dairy and must be used efficiently to be profitable. A full-time equivalent (fte) is used to examine labor efficiency. A full-time equivalent is found by dividing paid labor months by 12 and adding in unpaid labor months which are also divided by 12. The large herds were more efficient with their labor, selling 882,835 lbs/fte, followed by 689,948 lbs/fte from the middle group, and 573,557 lbs/fte from the small group. This number for all groups is below a generally accepted industry benchmark of one million lbs/fte. None of the groups hit this benchmark, leaving considerable room for improvement by Kentucky dairy cooperators. The biggest cost to a dairy is feed cost. To examine its effect, costs of different feedstuffs were separated. Table 7 and Table 8 give the values of the groups, while Figure 9 graphs these values. The large group spent considerably more on other grains, which includes brewer s grains, distiller s grains, and corn gluten. This group may be able to take advantage of buying commodities in bulk and may be better able to find alternative sources of feed than the smaller size groups. This group also spent more on corn silage than the other groups, but spent less on hay. 16

23 Figure 9: Feed Fed/CWT-Size Groups Feed Fed/CWT Size Groups $/CWT < >200 When looking at the expenses on a hundredweight basis, as in Figure 10, there is some evidence of economies of size. Feed expenses are indeed the largest costs these dairies experienced with the small group using $13.09/cwt, the middle group paying $11.32/cwt, and $10.78 being paid by the large group. In recent years, the feed expense has been increasing, but 2008 feed expenses were high across the board, especially as feed contracts ended in September coinciding with higher prices. Figure 10: Expenses/CWT-Size Groups Expenses/CWT Size Groups $/CWT <100 Cows >200 Cows Average Non Feed, Cash Feed Costs/CWT Non Feed, Non Cash In comparing returns and costs for these groups in Figure 11, the small group had the lowest returns per hundredweight of milk sold, and also had the highest cost of production. The middle group had the highest net returns over all costs, as documented in Table 7 and Table 8. The average was $1.22/cwt with the small group having negative net returns. 17

24 Figure 11: Returns vs. Cost of Production-Size Groups Returns Vs. Cost of Production Size Groups $/CWT <100 Cows >200 Cows Average Returns Total Costs of Production By breaking the dataset into herd size groups, an understanding can be gained of the different challenges facing larger farms. There is evidence of economies of size in feed expenses as well as non-feed, non-cash expenses, but not in non-feed cash costs such as labor. These farms were able to use their labor more efficiently; however, due to the more specialized nature of the farm, a higher wage rate had to be paid to their employees. These farms were also not as efficient as possible with less than one million pounds of milk sold/fte. The large group did not cull as much as the other groups, which may show that these farms may have cows that should have been sold in order to capitalize on the higher milk price. This practice has consequences as these cows may need extra attention meaning fewer cows through the parlor, and less efficient labor. This may also mean that this group is in a period of expansion or has a better herd of cows resulting in fewer broken cows. 18

25 Table 6: Size Comparisons-Economic & Production Variables Size Comparisons-Economic & Production Variables < >200 Average Number of Herds Units Total Milk Returns $ Total Feed Costs $ Returns Above Feed $ 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 % 88% 74% 76% 80% Labor Summary Milk Sold/FTE Lbs 573, , , ,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 11,337 22,901 73,732 31,636 Milk/Cow Lbs. 17,696 18,246 19,810 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. 7,300 11,582 53,410 20,818 Death Loss: % of Pounds Prod. % Deaths: Market Head Deaths: Breeding Head Breeding Survival Rate %

26 Table 7: Per Cow Averages for Costs and Returns-Size Groups Per Cow Averages-Size Groups Enterprise Returns <100 Cows >200 Cows Average Milk Returns Patronage FSA Beef Returns Cull Sales 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 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

27 Table 8: Per CWT Averages for Costs and Returns-Size Groups Per CWT Averages-Size Groups Enterprise Returns <100 Cows >200 Cows 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 Paid Labor Insurance Property Taxes Miscellaneous Cash Interest Total Non-Feed 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

28 Milk Per Cow As was mentioned in discussing herd size, Kentucky dairy producers are following a nationwide trend of fewer and larger farms that producer more milk per cow. If a farmer decides against expanding, he must then examine other options. One way to improve returns would be to increase milk production efficiency per cow. With this in mind, a farmer may examine the differences between his operation and those operations that produce at a high rate the directive of this section. Cooperators were divided into three groups based on milk sold per cow and these groups were 17,000 lbs/cow and under, 17,000 to 20,000 lbs/cow, and 20,000 lbs/cow and higher. Table 9 shows the breakdown. The average milk sold per cow for the data was 18,439 lbs/cow. As mentioned in the previous section, as herd size increases, milk per cow increases. The high group averages 223 cows, while the middle group averaged 164 cows, and the low group averaged 105 cows. Table 9: Milk/Cow Groups Name Description # Herds Avg. Milk/Cow # Cows Low <17,000 lbs/cow 8 14, Middle 17,000 to 20,000 lbs/cow 7 18, High >20,000 lbs/cow 8 21, Table 10 gives more detail into the comparisons. In examining total milk returns per cow, the relationship between milk sold per cow and total milk returns was positive. The low group was quite a bit lower than the higher two groups, which is a combination of only selling 14,859 lbs of milk per cow and receiving the lowest price for milk. The middle group was only $0.02/cwt higher, however, and all three groups were closer together with this grouping than by herd size. This also explains the returns per $100 of feed fed. While both of the top groups were above $200, the low group averaged $174. It can be deduced this is from the milk production efficiency because of the similar milk price, as well as this group having the lowest total feed costs with a value of $2,156 per cow. The high group also had the highest total feed costs per cow at $2,299 per cow. Tables 11 and 12 give more insight into costs and revenues. While the low group had the lowest feed cost per cow, but because their milk production efficiency was so low, they conversely had the highest value of feed fed per hundredweight milk equivalent. Their cost was $12.20 while the middle group experienced $10.61/cwt m.e. and the high group produced milk at a feed fed cost of $10.05/cwt m.e. Figure 12 examines what feeds these groups were feeding and corn silage, the bulk of a cow s diet, is similar across groups, as are other silages. The feed that shows the most difference for the low production group is complete feed. This group s cost for complete feed was $3.74/cwt, the middle production group fed $2.32/cwt and the high production group had the low value of $2.29/cwt. The low group also fed more hay, or at least fed a higher value of hay. Following a dry year in 2007 where hay was difficult to obtain, this group may not have had an adequate supply of homegrown hay and needed to buy lower quality hay or more expensive western hay. 22

29 Figure 12: Feed Fed/CWT Milk Sold-Milk/Cow Groups Feed Fed/CWT Milk/Cow Groups $/CWT Low Mid High Corn Other Grain MineralComplete Feed Hay Corn Silage Other Silage Misc Forage In examining the expenses in Figure 13, the middle group spent more on non-feed, cash expenses than the other two groups. This group spent $7.01/cwt of milk sold, while the high group spent $6.38/cwt of milk sold and the low group spent $6.51/cwt of milk sold. When examining the costs, the main culprit in the difference is in labor and livestock supplies. A further examination of the livestock expenses shows that this group spent more on breeding expenses and about $0.10/cwt more on barn supplies. Figure 13: Expenses/CWT-Milk/Cow Groups Expenses/CWT Milk/Cow $/CWT Non Feed, Cash Feed Costs/CWT Non Feed, Non Cash Low Mid High Average The milk sold per full-time equivalent, as shown in Table 10, shows the high group shipped more milk per fte (857,658 lbs/fte) than the other groups (mid-697, 511 lbs/fte) (low-529,326 lbs/fte) which is consistent with the data showing milk production efficiency growth with the increase of herd sizes. However, the middle group only has the same cows/fte as the low group with about 32% greater labor efficiency but with substantially greater wages to employees. 23

30 In examining non-feed, non-cash expenses, the high group paid more in building depreciation as well as non-cash interest. These farms have more tied up in their buildings and the farm in general, which may be from reinvestment in the farm with funds from high milk prices or possible recent expansions. In Figure 14, returns vs. cost of production are examined. Interestingly, the low group had a higher return per cwt of milk sold after including beef returns. This group experienced a return of $22.75/cwt, while the middle group brought in $21.21/cwt, and the high group had a return of $21.57/cwt. Cost of production decreased as milk per cow increased, but the operating expense ratio may prove more helpful as it is the operating expense divided by the gross farm returns. The average for the data was 80%; however, both the low and middle groups were above 80% and most lenders prefer this number below 70%. The high group is closer to this benchmark, but still needs extensive improvement. The higher this ratio, the less the farmer has to pay for non-variable expenses (i.e: debt payments). Figure 14: Returns vs. Cost of Production-Milk/Cow Groups Returns Vs. Cost of Production Milk/Cow 86% % % % $/CWT % 76% Returns Total Costs of Production % Operating Expense Ratio % % Low Mid High Average 68% 24

31 Table 10: Milk/Cow Comparisons-Economic & Production Variables Milk/Cow Comparisons-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 % 85% 82% 74% 80% Labor Summary Milk Sold/FTE Lbs 529, , , ,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 15,487 30,973 48,366 31,636 Milk/Cow Lbs. 14,859 18,910 21,606 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. 10,477 19,456 32,351 20,818 Death Loss: % of Pounds Prod. % Deaths: Market Head Deaths: Breeding Head Breeding Survival Rate %

32 Table 11: Per Cow Averages for Costs and Returns-Milk/Cow Groups Per Cow Averages-Milk/Cow 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

33 Table 12: Per CWT Averages for Costs and Returns-Milk/Cow Groups Per CWT Averages-Milk/Cow 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 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

34 Management Returns 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 dividing the data into thirds, three distinctive groups became apparent. If the management returns were at, or below $1/cwt of milk sold, then the farm was put in the low group. The middle group had management returns per cow from $1-4/cwt, and anything above $4.00 was classified as high. There were eight cooperators in the low group, nine in the middle group, and six in the high group. In Table 13, as well as Figure 15, 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 13: 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 15: 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 28

35 In examining Table 14, several production variables stand out in describing the data. The first variable is milk sold/fte. As expected, the high group sold the most milk per full-time equivalent at 783,212 lbs/cow. However, the low group shipped more milk per fte (682,510 lbs/fte) than the middle group (646,584 lbs/fte). The high group also paid much lower wages to their employees than the other groups at $5.59. The middle group paid $7.24, and the low group did not perform well in labor efficiency paying $9.20 in wages to their employees. Labor efficiency was a definite strong point for the high group in having 45 cows/fte. Other areas where the high group excelled were butterfat percentage, death loss, and the price received for breeding livestock sold (this group may be marketing cows as well as milk). In looking at butterfat, the high group had a percentage of 3.85, followed by the middle group at 3.77, and the low group at The high group also had lower death loss, only losing 14.98%, while the middle group lost 22.16%, and the low group lost the most, at 27.06%. When the groups were able to sell their cows for beef production, the high group was also able to receive the highest price, receiving $77.68/cwt, compared to $50.06, for the middle group and $41.19 for the low group. In examining feed in Table 15, the high group also had the lowest feed cost. Their feed cost was $11/cwt of milk sold, followed by the middle group at $11.55, and the low group at $12.88/cwt. With feed being one of the biggest costs a dairy farm will incur it is important to use feed as efficiently as possible. In Figure 16, the biggest differences present are the high group fed more complete feed and far less other grains. Their hay cost was slightly less than the other two groups suggesting they either had a sufficient supply of hay at the beginning of the year or were able to produce good quality hay in Figure 16: Feed Fed/CWT-Management Return Groups Feed Fed/CWT Mgmt Return Groups $/CWT Low Mid High As could be expected, the high group paid less per hundredweight of milk sold for all expenses than the other two groups. In total non-feed, cash expenses, the high group was $1.93/cwt and $2.24/cwt lower than the middle and low groups, respectively. The majority of that difference came from the labor expense/cwt, as discussed above. The high group also seems 29

36 to have benefitted from lower machinery depreciation indicating the use of either older equipment or equipment already paid for. Figure 17: Expenses/CWT-Management Return Groups Expenses/CWT Mgmt Return Groups Low Mid High Average Non Feed, Cash Costs/CWT Non Feed, Non Cash Figure 18, 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 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 18: Returns vs. Cost of Production-Management Return Groups $/CWT Returns Vs. Cost of Prod Mgmt Return Groups % % % 70% % % Returns Total Costs of Production % 30% Operating Expense Ratio % % % Low Mid High Average 30