1998 Dairy Enterprise Analysis

Transcription

1 1998 Dairy Enterprise Analysis KENTUCKY FARM BUSINESS MANAGEMENT PROGRAM Agricultural Economics Extension No February 2000 By: RUSH MIDKIFF, DARWIN FOLEY, BART PETERS, AND CRAIG INFANGER University of Kentucky Department of Agricultural Economics 400 Charles E. Barnhart Bldg. Lexington, KY Phone: Fax:

2 KENTUCKY FARM BUSINESS MANAGEMENT PROGRAM 1998 DAIRY ENTERPRISE ANALYSIS Acknowledgments Special recognition is extended to the Farm Business Analysis Specialists and farmers in the Kentucky Farm Business Management Program. Without their involvement, this study would not have been possible. Considerable time and effort were invested allocating costs of inputs used by more than one enterprise, and making other judgments necessary to ensure the accuracy of the data. The authors also acknowledge the contributions of two former State Coordinators, Dr. Fred Justus and Dr. Steve Isaacs, for their efforts in establishing the original analytical format for data collection and analysis of dairy enterprises. The Area Farm Business Analysis Specialists are: Rick Costin Lincoln Trail Association Darwin V. Foley Louisville Association Craig D. Gibson Ohio Valley Association David L. Heisterberg Pennyroyal Association Rush Midkiff Pennyroyal Association Russell Morgan Purchase Association Terry W. Moss Pennyroyal Association Bart Peters Pennyroyal Association Waylon Ramming Ohio Valley Association Craig L. Infanger State Coordinator Gregg Ibendahl State Farm Management Specialist A Special Note to Our Readers The data for this study are drawn from the detailed financial 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 which are available to researchers and educators. Every attempt has been made to select a set of farms for these research studies which 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. Bear in mind that farms included in this study are representative of large, commercial farms producing major commodities and livestock but not of all farms in Kentucky.

3 Table of Contents Highlights of Findings...1 Introduction... 2 Methods and Definitions Used in Study...2 Description of Dairy Enterprises Studied and Comparison with KY Dairy Industry...2 Variability in Cost and Returns...3 Implications and Analysis of Financial Returns...6 Production and Other Variables Which Can Influence Profits...7 Costs and Returns by Herd Size...9 Costs and Returns by Milk Production Per Cow...12 Conclusions...15 Tables and Figures Table 1. Variability in Costs, Returns, and Other Production Factors... 4 Table 2. Variability in Costs and Returns for Dairy Enterprises....5 Table 3. Variability in Costs, Returns (Per Cow)... 5 Table 4. Variability in Costs and Returns (Per Cwt. of Milk Equivalents)... 6 Table 5. Production and Other Variables Which Can Influence Profits, Table 6. Practical Ranges of Production and Economic Variables Which Can Influence Profitability, Table 7. Variability in Cost, Returns, and Other Production Factors by Herd Size Table 8. Variability in Costs, Returns, and Other Production Factors - Herd Size...11 Table 9. Variability in Costs and Returns by Herd Size, Per Cow...11 Table 10. Variability in Costs and Returns by Herd Size Per Cwt...12 Table 11. Variability in Costs, Returns, and Other Production Factors by Milk Production...13 Table 12. Variability in Costs and Returns - Milk Production Table 13. Variability in Costs and Returns (Per Cow) - Milk Production Table 14. Variability in Costs and Returns (Per Cwt. of Milk Equivalents) by Milk Production.. 15 Figure 1. Operating Income per Cow by Milk per Cow, Figure 2. Kentucky Farm Business Management Association County Groupings... 16

4 KENTUCKY FARM BUSINESS MANAGEMENT PROGRAM 1998 DAIRY ENTERPRISE ANALYSIS Rush H. Midkiff, Darwin Foley, Bart Peters, and Craig Infanger 1 Highlights of Findings This report contains the findings of a study of dairy enterprises on farms participating in the Kentucky Farm Business Management Program. In 1998 the Kentucky Farm Business Management Program changed vendors for year end data processing and as a result changed the methodology of cost analysis. This change is reflected in this publication. The report emphasizes findings for 1998, but also draws comparisons made with results from prior years. 1. In 1998, 28 enterprises were evaluated. Farms in the study averaged 140 cows, and ranged in size from 50 to 437 cows. Average milk production per cow was 17,179 pounds, with farm averages ranging from 12,844 lb. to 22,521 lb. 2. Total operating income was positive and averaged $425 per cow. On a per cwt. of milk equivalent produced basis, operating income averaged $ Total returns averaged $2,910 per cow, a $238 increase over Milk prices averaged $15.93 per cwt. for the year compared to $14.44 in Producers received $46.55 per cwt. for beef vs. $39.72 in 1997, but the studied farms produced less beef per cow (565 pounds/cow vs. 576 in 1997). Beef returns averaged $173 per cow in 1998, and equaled 5.9% of total dairy returns. The price received per cwt. of milk was a large factor in the increased returns. 4. Three expense categories (feed, cash operating expenses, and depreciation) were calculated. These cost totaled $2,485 per cow and consisted of $1,349 in feed costs, $1,033 in cash operating expenses and $105 in depreciation expenses. 5. Dairy enterprises varied greatly in levels of production efficiency, costs, and returns. Although returns to unpaid labor, investment and management were positive, 3 of the 28 herds (11%) had negative returns to unpaid labor, investment and management. The highreturn farms (top 1/3 of herds, based on returns to labor, investment and management per cow) averaged $917 per cow, or $4.95 per cwt. of milk equivalent produced. The low-return farms (bottom 1/3 of herds) averaged $90 per cow return to labor, investment and management, or $.53 per cwt. of milk equivalent produced. This publication expands on these highlights and on the factors contributing to the results. It includes results of analyses of the cost structure and profitability of dairy enterprises when sorted by net returns per cow, herd size, and milk production per cow. 1 The authors are all associated with the Kentucky Farm Business Management Program, a cooperative effort between the Department of Agricultural Economics, University of Kentucky, and the incorporated Farm Analysis Groups whose members are farmers. These cooperator-farmers are located in 75 counties in Central and Western Kentucky (see Figure 2 at the end of this publication). Ten different Farm Analysis Specialists work with these farmers on a regular basis to ensure accurate and complete record keeping. At year s end, they provide farmers with a complete summary and analysis of the farm business. 1

5 Introduction In 1979 the Kentucky Agricultural Experiment Station initiated a study to determine how well Kentucky dairy farmers compete with other dairy farmers in this region. Physical and financial records of dairy enterprises on farms in the Kentucky Farm Business Management Program for 1979 through 1998 have been collected and analyzed. This report focuses on the 1998 results of 28 dairy enterprise records. Based on results from this group of 28 farms, Kentucky dairy farms on average were profitable in Milk production per cow was basically the same as Methods and Definitions Used in Study Most of this study's production and financial data were calculated as a regular part of the complete farm business records kept by participants in the Kentucky Farm Business Management Program. For inputs used by more than one enterprise, the cooperating farmers and their Farm Business Analysis Specialist allocated the appropriate proportion of the costs to the dairy enterprise. In 1998, the Kentucky Farm Business Management program adopted the Illinois Farm Business Farm Management Program. The data collection and reporting format is different than in the past studies and earlier years. The presentation of the data is slightly different for Therefore, comparisons to 1997 and prior years is rather limited. The following definitions and explanations are used: Total Returns Value of milk sales and value of beef produced and dairy patronage returns. Milk Equivalents (M.E.) Value of beef produced divided by the average price received per cwt. of milk sold plus total cwt. of milk produced. Machine and Building Depreciation taken from economic depreciation schedules as maintained by the KFBM Program. Equipment is generally depreciated over ten years, and farm buildings with the exception of feed and grain bins or single purpose structures are depreciated over twenty-five years. Value of Grain and Roughage Fed Total value of the grain and roughage fed to the dairy enterprise. Grain and roughage raised on the farm was charged at its yearly average on farm market value (what farmers would receive if the feed were sold and marketing costs were deducted). For example, fed corn produced on the farm was charged at $2.39/bu. In Charges for hay and silage depended upon type and quality. Pasture was charged at $.22 per day of grazing by an animal unit (1,000 pounds = 1 animal unit). Total Operating Income Total returns less cash operating expenses, feed costs, and machinery and building depreciation. This represents returns to operator labor, interest on capital and management. Percent Cull Rate-Breeding Number breeding animals sold divided by average number of cows in herd times 100. Description of Dairy Enterprises Studied and Comparison with Kentucky's Dairy Industry The 28 dairy enterprises 2 included in this study had an average of cows in the milking herd with a herd size range from 50 to 437 cows. Twelve herds (43%) had less than 100 cows, 8 herds (28.5%) had between 100 and 150 cows, and 8 herds (28.5%) had more than 150 cows. Milk production per cow averaged 17,179 lb. in 1998, basically the same as the 1997 average of 17,187 per cow. The 1998 Kentucky average production, as reported by the Kentucky Agricultural Statistics Service, was 12,217 pounds per cow, down 300 pounds from the 12,517 pounds per cow the 2 Participation in this study was voluntary. No attempt was made to randomly select participants in a statistical sense, therefore no attempt is made to draw inferences about dairy herds outside this study. However, the results are likely to be a reasonable representation of relatively progressive dairy enterprises in Kentucky. 2

6 previous year. Thus farms in the study produce at a significantly higher level per cow than the average dairy farm in Kentucky. While production per cow for Kentucky dairy herds has climbed steadily from the period when this study began, the number of cows in Kentucky has declined dramatically, from 255,000 in 1979 to 140,000 in Also, milk production in Kentucky and the southeast has declined as a percentage of the nation's total production during this period. Variability in Costs and Returns Based on Operating Income Per Cow A consistent finding in all nineteen years of this kind of analysis has been the large variation among dairy enterprises in levels of production efficiency, costs per unit of production, and operating income per unit of production. This variability illustrates the complex nature of the dairy production process and the large number of factors that affect unit costs. To show the extent of variation in costs and returns and to examine how some important factors contribute to that variation enterprises in this study were first divided into three groups based on returns to operator labor, investment and management, (high-return middle-return and low-return). Averages for the high-third middle-third and low-third groups along with the overall averages from all 28 herds are presented in Tables 1, 2, 3, and 4. High-return enterprises averaged $917 operating income per cow which equals $4.47 per cwt. of milk equivalents produced For the low-return farms operating income exceeded total costs only by $90 per cow, resulting in a profit of $.53 per cwt. of milk equivalents produced. Only 3 (11%) of the farms in the 1998 study failed to have operating income that exceeded operating expenses and depreciation. Total returns averaged $3,311 per cow for the high-return group. Total returns were $674 greater for the high-return group than for the low-return farms. High-return farms received $.13 per cwt. more for the milk they sold, and $13.83 per cwt. more for their beef then the average dairy in the study. In past years of this study, high return farms have generally received a slightly higher price for both milk and beef, but it has not been a significant factor distinguishing whether or not a farm falls into the high-return group. The difference in operating income between the high-return group and the lowreturn group was $827 per cow. As shown in Table 3B $674 of the difference was on the return side while $152 per cow was on the cost side Milk production averaged 18,372 lb. per cow on the high-return farms, 1,766 lb. more per cow than the low return farms (16,606 lb.). The total of feed costs, operating expenses and depreciation averaged $2,547 per cow on the low-return farms, and $2,395 on the highreturn farms, making the difference of $152 per cow. Thus, in 1998, cost differences between groups was not as significant as differences in returns. The high-return producers had feed, operating and depreciation cost per milk equivalent of $11.66 per cwt. compared to $15.00 per cwt. on the low-return farms, (a difference of $3.34). Operating Income per cow is plotted against milk production per cow in Figure 1 for all 28 herds studied in In 1998 operating income per cow was correlated with milk per cow. Production for the high third was higher than that of the low third and the mid third. Figure 1 3

7 Table 1. Variability in Cost, Returns, and Other Production Factors Enterprise Summary Average Hi-Third Mid-Third Low-Third Pounds of Milk Produced Pounds of Beef Produced Milk Equivalents Value of Milk Sales Value of Beef Produced Patronage Returns Total Returns Value of Grain & Roughage Value of Supplement Fed Value of Feed Fed Returns above Feed Costs Returns per $100 Feed Fed Feed per Cwt. Of Milk Equivalent: Grain Supplement Total Concentrates Hay and Dry Roughage Corn Silage Other Silage Pasture Days Hay Equivalent Cost/cwt. Of Supplement Cost /Cwt. Of Concentrates Pasture Days/ Animal Unit Number of Cows Cows Dry % Animal Units in Herd Number of Calves Born Calving % Pounds of Milk per Cow Butterfat % Pounds Butterfat per Cow Price Recd per Cwt. Milk Price Recd per Cwt. Beef Mkt Avg Purch Price per Animal Breeding % Cull Rate -Breeding Weight \Breeding Animal Sold Price Recd /Cwt.-breeding Death Loss- Total Pounds Death Loss % Pounds Produced Market Death Loss No Breeding Death Loss No Breeding Survival Rate %

8 Table 2. Variability in Costs, Returns for Dairy Enterprises Enterprise Analysis Average Hi-Third Mid-Third Low-Third Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vechicle Miscellaneous Cash Rent Total Operating Expense Return above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income Table 3. Variability in Costs, Returns (Per Cow) Enterprise Analysis Average Hi-Third Mid-Third Low-Third Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income

9 Table 4. Variability in Costs and Returns (Per Cwt. of Milk Equivalents) Enterprise Analysis Average Hi-Third Mid-Third Low-Third Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income Implications and Analysis of Financial Returns The decline of Kentucky's dairy industry in recent years is a cause for concern. Contributing factors in recent years have been stricter health standards, retirement of owners, structural changes in the industry, and price volatility due to the removal of government supports on grain and milk. In the Louisville Area the encroachment of urbanization has closed many dairies. Higher land prices and a labor market that offers 40 hour weeks plus benefits have added more challenges. While all these factors contributed to the general decline, we can see from the data that lack of profitability had the largest impact on the decline in number of farms. In the long run, an enterprise should produce returns sufficient to cover the total cost of production with something left to reward the operator for his/her management and risk-taking. In 1998 one of the best years Kentucky dairies has seen, 3 of the 28 enterprises studied (11%) did not have returns sufficient to cover feed, operating and depreciation. In 1997, 28 of the 29 enterprises studied (62%) failed to cover all costs, and in 1996 the rate was 65%. Implications of this situation for an individual producer depend upon (1) the business's financial position (i.e., the proportion of capital that is borrowed), and (2) the relationship between the individual's returns and the composition of his/her total cost (the cost structure). One logical way to examine a dairy enterprise's economic performance is to divide total cost into three broad components: (1) cash operating costs, (2) feed costs, and (3) depreciation. Feed costs include both the cost of purchased feeds and the market value of 6

10 home-grown feeds. (Detailed breakdowns of cash operating cost and depreciation costs on a per cow and per cwt. basis are shown in Tables 1, 2, 3, and 4.) Separating feed from the other cost categories is logical because feed is a product that can generally be sold or fed to another livestock enterprise. Thus feed should be charged against the livestock enterprise at the price for which it could be sold (less marketing cost). If dairy enterprise returns do not exceed cash operating costs plus the value of feed fed, the farm is losing money by feeding the feed that is produced. Although this did not happen to the low return group in 1996, 1997, or 1998, it did in 1995 when total returns were $2,273 per cow while combined non-feed cash costs ($990 per cow) and feed costs ($1,391 per cow) totaled $2,381 per cow. Thus, in 1995 the low return group could have made $108 per cow more by selling their feed instead of feeding it. The 28 farms in the study averaged $530 per cow above the total of cash operating costs and feed costs. Total returns were $2,910 per cow while cash costs plus the value of feed fed amounted to $2,380 per cow. For each cwt. of milk equivalent produced, cash operating costs plus total feed costs averaged $ The total returns per cwt. of milk equivalent produced was This left $2.91 per cwt. to cover depreciation for machinery and buildings, interest on investment and to pay the operators labor. The seriousness of covering cash costs and feed costs, but not covering non-cash costs is sometimes called living off depreciation, and depends on two things: (1) the magnitude of the deficiency in covering all non-cash costs and (2) how long this deficit goes on. Unless there is income from some other source (an off-farm job for example), income must be provided for family living expenses as well as cash for repayment of principal on loans, replacement of current capital items, and any farm improvements that must be made. Farms that consistently fail to cover all or most non-cash costs will not survive in the long run without off farm income. If they do survive, it is because they are either willing or able to accept a return on labor and/or capital that is below the opportunity costs of these resources. Production and Other Variables Which Can Influence Profits The dairy enterprise involves a complex production process with a number of factors affecting costs and returns. Some are, for the most part, beyond the individual farmer's control, such as milk and beef prices, weather, interest rates and government programs. Others are influenced directly by the operator's decisions and actions (or inaction).to analyze a dairy enterprise, one must examine the level of performance achieved in different aspects of the production process. We look at two measures of performance: (1) how the enterprise has performed over time, and (2) performance variability within the enterprise. Averages for frequently calculated measures of dairy production performance over time are presented in Table 5 for 1991 through An upward trend is evident in production per cow and in butterfat per cow. Although the year-to-year averages of different production aspects were quite consistent, large variations were found among individual enterprises each year. To show the extent of variations, "practical ranges" were determined for many production performance measures calculated in this study. The practical ranges shown in Table 6 include the performances of about 79% of all enterprises studied in To determine these ranges, the three lowest and three highest individual values for each measure were dropped in an effort to remove "unusual circumstances" from the results. Large variations in performance between the production and economic variables listed show clearly that some of the farms could make considerable improvement in production efficiency and management decisions. The poultry industry and the pork industry have made great strides in production efficiency by micro managing each part of the production process. Indications are that this trend applies to the dairy industry as well. 7

11 Table 5. Production and Other Variables That Influence Profits, Item Averages Average Number of Cows Percent of Cows Dry Animal Units in Herd Total Milk (pounds) 1,554,871 1,650,970 1,742,540 1,686,540 1,896,100 1,896,400 2,241,400 2,402,531 Total Beef (pounds) 66,833 69,584 65,483 66,317 65,641 67,629 77,800 79,046 Pounds of Beef per Cow Pounds of Milk per Cow 15,170 15,326 15,999 15,802 16,697 15,869 17,187 17,179 Pounds of Butterfat per Cow Death Loss: % of lb. of Beef Prod Price Received for: 100 lb. Milk $12.86 $13.90 $13.35 $13.81 $15.53 $13.18 $14.44 $ lb. Beef $57.77 $54.94 $56.96 $50.70 $44.23 $34.94 $39.72 $46.55 Percent dry cows and death loss are important indicators of management control. A high percentage of dry cows indicate breeding problems and a longer calving interval, and will likely reduce milk production and feed efficiency. Death loss as a percent of pounds produced is easily influenced by the death of cows. The loss of one cow has the same influence on percent of pounds produced as a dozen or more baby calves. The loss of the cow means more in dollars per head, but the loss of a high percentage of the heifer calves is also costly because it affects the future of the herd. A high ratio of concentrates fed per hundred weight of milk equivalent may indicate overfeeding of concentrates, an unbalanced ration, or a lack of high-quality forages. A high quantity of hay equivalents per cow suggests that roughage is being wasted, or that the farm has larger cows, and/or that more replacement animals are on hand per cow. Since feed is the largest cost item in the operation, cost control and management of this component can have the biggest impact on overall cost control. Non-livestock capital investment per cow is affected both by the stage of life of the operation and the manager s capital purchase decisions. New or expanding operations typically have high capital investments, while mature operations that are winding down are using up their assets and typically have low capital investments. However, wide ranges exist regardless of stage due to the differences in management control and discipline. Balance should be sought in order to keep the dairy operating efficiently without making unnecessary, expensive purchases. Milk price is a function of seasonality of sales, the buyer of the milk, butterfat test, protein test, volume incentives, quality incentives, and location within the state. In general, the further south the milk is marketed, the higher the milk price. 8

12 Table 6. Practical Ranges 4 in Production and Economic Variables That Influence Profitability. Item High Low Price Received for: 100 lb. Milk $16.31 $ lb. Beef $63.19 $29.95 Percent Dry Cows Milk per Cow 19,230 14,268 Pounds of Butterfat per Cow Death Loss: % of Pounds Produced Breeding Survival Rate Culling Rate In determining the practical range the 3 highest and 3 lowest values for each individual item were dropped. Thus, each practical range contains performances achieved on about 70% of the enterprises studied. Note that the high number sometimes indicates good performance, and sometimes it indicates poor performance. Costs and Returns by Herd Size The average size of the dairy herds studied in 1998 was cows, and the range in size was from 50 to 437 cows. Determining how well different size dairy herds compete financially is a major objective of this study. Economies of size (lower costs and/or higher returns per unit of production as enterprise size increases) may exist for the dairy enterprise. If so, they can come from two sources. First, external to the production process, is the ability of an operator with a larger enterprise to (1) buy inputs in quantities large enough to receive a price discount, and (2) sell in larger quantities and receive a volume premium for products sold. Second, larger operations can justify improved technology by spreading the fixed costs over more units of production. This can lower fixed labor cost, interest, and depreciation per unit of production. Economies of size may be offset by diseconomies, primarily those associated 9 with the greater demands on management. With a small enterprise, an operator may "get by" (at least for a while) with only moderate attention to breeding schedules, sanitation, disease control, and feeding practices. This inattention could prove disastrous for a large enterprise. Management of a larger herd also typically involves much more business management and less physical labor on the part of the manager/operator. Increased levels of personnel management and financial planning can be a difficult task for managers of expanding operations. To examine the relationships between enterprise size and per unit costs and returns, the 28 enterprises studied in 1998 were divided into three size groups: fewer than 100 cows, 100 to150 cows, and more than 150 cows. The results are shown in Tables 7, 8, 9, and 10. A fairly consistent finding prior to 1994 had been that the smaller enterprises tended to have the highest costs (and lowest net returns), but this was not the case the last four years. In 1998, all of the groups, on average, had positive total operating income. The farms with more than 150 cows fared the worst on a per cow basis, while farms with less than 125 cows fared the best on a per cow basis. The group with less than 100 cows had the lowest cash operation expense ($822) and the group with more than 150 cows had the highest cash operation expense ($1,164 per cow). The trend for these costs was not consistent from smallest to largest herds. Machinery depreciation and building depreciation and were highest per cow for those with more than 150 cows and lowest per cow for those with less than 100 cows, indicating economies of scale for these costs were not apparent. Milk production per cow and total returns were highest for herds of

13 cows. While this group had the highest production (18,250 lb. per cow) those with cows had the lowest (16,393 lb. per cow). Because the number of farms in each category is small, it is difficult to draw conclusions about size and profitability. What we do see in Kentucky and the nation's dairy industry is that the average size unit is increasing. The average size herd in the study increased from 90.3 in 1981 to in During this same period total milk produced for the average herd increased from 1,168,584 pounds to 2,402,531 pounds. Thus, the average farm has doubled milk volume in that 17-year period. Table 7: Variability in Cost, Returns, and Other Production Factors by Herd Size Enterprise Summary Average < Pounds of Milk Produced Pounds of Beef Produced Milk Equivalents Value of Milk Sales Value of Beef Produced Patronage Returns Total Returns Value of Grain & Roughage Value of Supplement Fed Value of Feed Fed Returns above Feed Costs Returns per $100 Feed Fed Feed per Cwt of Milk Equiv. Total Pounds of Feed Fed Grain Supplement Total Concentrates Hay and Dry Roughage Corn Silage Other Silage Pasture Days Hay Equivalent Cost/cwt of Supplement Cost /Cwt of Concentrates Pasture Days/ Animal Unit Number of Cows Cows Dry % Animal Units in Herd Number of Calves Born Calving % Pounds of Milk per Cow Butterfat % Pounds Butterfat per Cow Price Recd per Cwt Milk Price Recd per Cwt Beef Mkt Avg Purch Price per Animal Breeding % Cull Rate -Breeding Weight \Breeding Animal Sold Price Recd /Cwt-breeding Death Loss- Total Pounds Death Loss % Pounds Produced Market Number Breeding Number Breeding Survival Rate %

14 Table 8: Variability in Costs, Returns by Herd Size Enterprise Analysis Average < Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income Table 9: Variability in Costs, Returns - Herd Size Per Cow Enterprise Analysis Average < Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income

15 Table 10: Variability in Costs, Returns - Herd Size Per Cwt. PER CWT Enterprise Analysis Average < Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income Costs and Returns by Milk Production Per Cow Over the years this study has shown that high milk production per cow is important to dairy enterprise profits. Tables 11, 12, 13, 14 show that on average the highest producing herds had the highest net returns. These tables break the 28 studied farms into three groups based on milk production per cow. As would be expected, total returns per cow increased as production level increased, with the highest producing group (over 18,000 pounds per cow) grossing $837 more per cow than the lowest producing group (under 16,000 pounds). This more than offset the $297 per cow cost advantage held by the <16,000 pound production group. All three groups were profitable in The highest producing group did have the highest total operating income. Cash operating expenses per cow ranged from a low of $878 with the under 16,000 lb. herds to $1,078 for the over 18,000 lb. herds. The higher producing herds spent more on livestock supplies (DHIA, BST, breeding fees, cleaning supplies, etc.) and veterinary services. Livestock supplies ranged from $85 per cow for the under 16,000 lb. herds to $184 per cow for the over 18,000 pound herds. Vet costs showed a similar relationship ($50 for the low group to $94 per cow for the high group). The lowest producing herds also had the lowest cash operating expenses on a per cwt. basis. Feed costs per cow increased with production, as one would expect. Feed costs per cwt. of milk were highest for the 16,000 lb. group, and lowest for the >18,000 lb. group. Depreciation per cow increased from the lowest producing group to the 16,000 to 18,000 lb. group and increased again for the over 18,000 lb. group. On a per cwt. of milk basis the >18,000 lb. group had the lowest depreciation costs per cwt. 12

16 Table 11: Variability in Cost, Returns, and Other Production Factors - by Milk Production Analysis Report Average < Pounds of Milk Produced Pounds of Beef Produced Milk Equivalents Value of Milk Sales Value of Beef Produced Patronage Returns Total Returns Value of Grain & Roughage Value of Supplement Fed Value of Feed Fed Returns Above Feed Costs Returns Per $100 Feed Fed Feed per Cwt. Of Milk Equivalent Grain Supplement Total Concentrates Hay And Dry Roughage Corn Silage Other Silage Pasture Days Hay Equivalent Cost/cwt of Supplement Cost /Cwt of Concentrates Pasture Days/ Animal Unit Number of Cows Cows Dry % Animal Units in Herd Number of Calves Born Calving % Pounds of Milk Per Cow Butterfat % Pounds Butterfat Per Cow Price Recd Per Cwt Milk Price Recd Per Cwt Beef Mkt Avg Purch Price Per Animal Breeding % Cull Rate -Breeding Weight \Breeding Animal Sold Price Recd /Cwt-breeding Death Loss- Total Pounds Death Loss % Pounds Produced Market Number Breeding Number Breeding Survival Rate %

17 Table 12: Variability in Costs, and Returns by Milk Production Enterprise Analysis Average < Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return above Op Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income Table 13: Variability in Costs and Returns (Per Cow) by Milk Production Enterprise Analysis Average < Total Returns Value of Grain & Roughage Value of Supplement Fed Returns Above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return Above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income

18 Table 14: Variability in Cost and Returns (Per Cwt. of Milk Equivalents) by Milk Production. Enterprise Analysis Average < Total Returns Value of Grain & Roughage Value of Supplement Fed Returns above Feed Costs Operating Expense Livestock Supplies & Services Vet & Medicine Machinery Repair Machinery Hire Fuel & Oil Utilities Interest Hired Labor Building Repair Insurance Taxes Light Vehicle Miscellaneous Cash Rent Total Operation Expense Return above Operating Expense Depreciation Machinery Depreciation Buildings Total Year Operating Income Conclusions While these 28 enterprises cannot be claimed as statistically representative of all herds in the state of Kentucky, some conclusions can be drawn about these enterprises: (1) Returns per cow were higher than the previous year, primarily because higher milk prices and cheaper feed prices. (2) In 1998, as in prior years, enterprises varied greatly in milk production per cow, returns per cow, and costs of production per cow and per cwt. The enterprises also showed great variability within each production cost category, and within a categorized level of milk production per cow. (3) There was a slight pattern associating higher milk production with higher net returns per unit. (4) Total returns had more of an impact on profitability than cost control. (5) The removal of the price support program for milk and grain increases the price risk that dairies must face. Where prices were once rather seasonal and stable, prices are now affected more by the fluctuation in the price of butter and cheese and are therefore more volatile. This study helps illustrate the wide range in profitability exhibited by Kentucky dairy enterprises, and why lack of profitability of individual herds has put so many farms out of business. The trend for Kentucky dairy herds that remain in business is increasing size (number of cows) and production per cow. While the increase in herd size and production level may be necessary to generate sufficient total net returns for the operator, this study illustrates that cost control is extremely important. Producers and dairy consultants must carefully study the costs associated with increased production, and determine where the marginal (additional) return of increased production no longer exceeds marginal costs. Those who are susceptible to price risk should look to the 15

19 futures market to lock in prices for feed inputs and milk that will insure cash flow requirements. Management decisions regarding production level, need to be based on expected milk and beef prices, and on input costs. Planning, organizing, directing, coordinating, and controlling the available resources of land, labor, and capital is the essence of farm management. Sound decisions in all these areas must be made with good information. Enterprise analysis is an important component of the total analysis of the business. There is no substitute for keeping and using comprehensive physical and financial records such as those provided though the Kentucky Farm Business Management Program. Figure 2. Kentucky Farm Business Management Association County Groupings Educational programs of the Kentucky Cooperative Extension Service serve all people regardless of race, color, age, sex, religion, disability, or national origin.