Managing the Dairy with Financial Records
Farm Business Management Update, December 2007 - January 2008
Bill Whittle (firstname.lastname@example.org), Extension Agent, Farm Business Management, Page County
The Farm Business Management staff of Virginia Cooperative Extension has partnered with Farm Credit to provide dairy farmers with financial management tools useful for financial decision making. This program, Dairy Management Institute (DMI), has completed its seventh year with 40 dairies participating. DMI has three goals. They are to provide participating farmers with 1) a year-to-year comparison of their farm’s financial status; 2) a within-year comparison of income and expenses to the DMI class average; and 3) to provide all Virginia dairy farms with financial benchmarks against which their financial health can be measured.
DMI uses readily accessible financial data derived from Schedule F, summary of milk checks, and farm records to provide a snapshot of the farm’s income and expense picture. The records of participating farms are aggregated and analyzed to provide a set of benchmarks for Virginia dairies access the financial health of their business. Benchmarks are averages which allow a dairy to judge progress or lack of progress against the average. Benchmarks are management tools, not definitive numbers. One dairy may have high labor costs while the next uses only family labor that does not require a typical paycheck. Another dairy may have high purchased feed expenses but low fertilizer, chemical and other expenses associated with growing feed. If your farm’s records don’t match a benchmark, it does not necessarily mean there is a problem. It does mean that there is a difference and, as the manager, you should determine if the difference is actually an indicator of a problem or just of different management objectives and outcomes.
Aggregated records paint a picture of an “average” Valley dairy farm. In Tax Year 2006, the average DMI herd consisted of 134 cows selling 19,869 pounds of milk per cow at an average price of $14.82 per hundredweight. $14.82 is $1.54 less than the average received in TY 2005 and $2.00 less than the TY 2004 price. As you can see, milk price fluctuates dramatically.
Table 1 provides a list of the top five and top 10 expenses for Valley dairy farms for Tax Year 2006. The top five expenses for the average farm were 66.0% of the Cash Operating Expenses, and Purchased Feed alone accounted for $4.38 of the $14.82 per hundredweight received for milk. The top five expenses are scrutinized because any opportunity to affect the farm’s bottom line comes from reducing major expenditures rather than dealing with fringe expenses. A minor percentage reduction in purchased feed can make a substantial reduction in overall expense as opposed to eliminating a minor expense such as office supplies or DHIA costs.
The aggregate Total Cash Income per cow in TY 2006 was $3,494, down $284 from 2005, while the aggregate for Cash Operating Expenses per cow (not including Interest and Depreciation) was $2,910, up $291 from 2005. The average Valley dairy farmer was left with $584 per cow to pay debt, cover family living expenses and make improvements to the farm. In TY 2005, this amount was $1,159. These less-than-rosy numbers are not meant to discourage producers, but to stress the importance of knowing your financial picture. A good year can quickly be wiped out if the volatile milk price drops.
Milk price volatility will continue and the successful dairy will manage both income volatility and expenses. Financial benchmarks become a management tool when a dairy can compile its information in a format and compare its progress. Maintaining DMI records over years allows a dairy to judge its progress and adds credence to management decisions. Dairies interested in the DMI can contact Tom Stanley in the Augusta County Extension Office, or Bill Whittle in the Page County Extension Office.
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