Cows, Cash, and Communities: What Do Dairy Farms Mean to You?
By Rebecca White
(EDITOR’S NOTE: The following originally appeared in the October 7, 2011 issue of Farmshine newspaper)
For some, the only interaction with dairy farming is the trip to the grocery store for a gallon of milk. For others, it is a daily interaction with dairy farming whether it’s milking cows, making cheese or delivering milk. But even for those who haven’t ever been on a dairy farm, their lives are influenced by Pennsylvania’s largest industry – agriculture. Within agriculture, dairy represents the greatest share of total receipts at about 40%.
During this year’s Ag Progress Days in Rock Springs, PA, the Penn State Extension Dairy Team gave a series of presentations to the attendees. One of these presentations included a talk about how dairy farming affects all citizens in the Commonwealth. Dairy producers and city dwellers alike attended the presentation to learn about the positive effects dairy farming has on the economics of the Commonwealth.
One of the positive benefits dairy farming has on the state is job creation. There are over a half million dairy cows in the Commonwealth and for every nine cows, one job is created for a total of 60,000 jobs statewide. Not all of those workers are employed at the farm; many make their careers in the sales and service sectors of the industry that support farm operation. Those half million dairy cows produce over 1.2 billion gallons of milk every year in PA. It takes a lot of time, money and resources to produce a gallon of milk. For instance, before a mature cow produces milk, it has to grow and be cared for over two years.
The average retail milk price in Philadelphia and Pittsburgh from 2007 through 2010 was $3.60 per gallon. Dairy producers get paid for every 100 pounds of raw milk or hundredweight (cwt). If a gallon of milk cost $3.60 that equals to $41.86 per cwt. From 2007 through 2010, Pennsylvania dairy producers received an average of $18.39 per cwt or $1.65 per gallon of milk. Milk prices can vary quite a bit. During that same time period the lowest price was $12.90 and the highest was $23.90 per cwt. However, the percentage of the retail milk price dairy producers receives remains relatively consistent (35 to 55%; based on USDA Agricultural Marketing Service data).
On average, a dairy producer is paid $1.65 per gallon of milk, but how much does it cost to produce that gallon? Keeping the cost of production low is essential to maintain profitability for the dairy producer but also helps maintain the low cost of food for the consumer. The Pennsylvania State Extension Dairy Team helps dairy producers determine their cost of production and pinpoint areas that can be improved to increase financial sustainability.
When cost of production on dairy operations is discussed, it usually only refers to the total operating costs per cwt. In PA, the operating costs ranged from less than $14.00 per cwt to over $21.00 per cwt during 2007 through 2010 based on USDA’s Agricultural Resource Management Survey of milk producers (http://www.ers.usda.gov/Data/CostsAndReturns/monthlymilkcosts.htm).
In 2009, the average PA dairy operating cost of production was higher than the US average and just slightly below in 2010. The average cost of production during that time was $16.78 per cwt or $1.44 per gallon. That leaves $0.21 per gallon for a dairy producer to pay himself, his labor, and other overhead costs.
Total Operating Costs
Total operating costs include total feed costs (including purchased, home-raised, and grazed), veterinary and medicine, bedding, marketing, custom services, fuel and utilities, repairs, and interest on operating capital. Allocated overhead (hired labor, rent, taxes, owner draw, etc) is not included in the operating costs. On the chart below, the blue line represents the gross milk price in PA during 2007-2010 and the red line is the total operating costs on PA dairy operations. The difference between those lines is what is left over to pay for those allocated overhead costs. During low milk price cycles, overhead costs may not be covered on many farms. Milk prices dropped in 2006 and 2009; what is in store for 2012?
Feed is usually the biggest expense on a dairy and can be variable like milk prices. On the graph the purchased feed costs are in green. With rising fuel prices and energy costs, all these expenses can quickly add up and influence other costs. When the cost of fuel increases, fuel costs on farm increase, delivered purchased feed prices can increase, custom crop work prices can increase, and other services will all be affected.
What can dairy producers do to control their costs?
Determining the cost of production for a dairy operation is essential for two main reasons: 1) assessing how financially efficient the operation is at producing milk currently and historically, and 2) determining the break-even margin or milk price so decisions such as contracting milk prices or feed costs can be made effectively.
Beginning in mid 2008 and continuing through November of 2009, the gross milk price was not enough to pay for just the operating costs. These numbers are based on a sample of dairy operations and some assumptions were made. However, the message still stays the same: if a dairy has a high cost of production, when milk prices drop, so does profit.
There are many costs associated with dairy farming so figuring out a place to start analyzing can feel overwhelming. The Penn State Extension Dairy team has multiple resources and programs that can start dairy producers on the journey to cutting costs and increasing profitability. The Profitability Assessment Dairy Tool (PA Dairy Tool) is a comprehensive financial and production analysis that pinpoints areas of economic loss on a dairy. The follow-up drill down tools further focus in on the cause of the economic loss. Working with a profit team, a consultant, or a member of the Extension Dairy Team, dairy producers can utilize these resources to cut costs.
Beginning in January of 2012, the Penn State Extension Dairy Team will host a series of one-day workshops called “Managing Your Milk Margin to Improve Your Dairy’s Cash Flow” where dairy producers will determine their own farm’s breakeven class III price and discuss their areas of cost of production that could be improved. A series of conference calls will also be offered starting in January called “Show me the Money; Strategies for Dairy Farm Profitability”. A summary of PA dairy farm data will be discussed with Extension team specialist and agribusiness professionals.
Producers interested in using these valuable tools on their dairy or attending the workshops or conference calls are invited to contact the Penn State Extension Dairy Team for more information. Contact Rebecca White at (814) 863-3917 or email@example.com or visit this website: http://www.das.psu.edu/research-extension/dairy/dairy-science/pa-tool