Controlling Dairy Farm Expenses
Farm Business Management Update, December 2008 - January 2009
By Bill Whittle (firstname.lastname@example.org), Extension Agent, Farm Business Management, Northwest District
Agriculture has recently been blessed by record incomes for most commodities and cursed by record cost of most inputs. These unusual times requires more from farmers than just increasing production to take advantage of higher prices. Chasing the elusive higher price with greater production is one way farmers get into financial trouble. With each input costing more, a minor mistake in production is magnified and does even greater damage to the bottom line. The dairy industry in the Valley can attest to this impermanence of a high market with record high milk prices last year and a slide this year, though milk price has not approached historical lows.
High expenses should not be just entries on the ledger that we must accept but should be an invitation to develop ways to manage them. Cutting back expenses without cutting production strengthens your bottom line and if you can also increase production while controlling the expenses your bottom line should get even brighter.
Financial records are a tool as important as any other on the farm and one that should be used as frequently as any other tool. Human nature generally allows us to remember our income but causes us to forget our expenses. This “flaw” gives us a skewed view of how the farm is actually doing. We can correct that “flaw” by pulling information out of the farm record books and even from the Schedule F tax form.
Of the many ways to look at your financial records one of the simplest is to review the top five and top 10 expenses for the farm. Tracking expense over years and comparing them to industry benchmarks provides guidance for your decisions. If you track your expenses over several years it becomes readily apparent when an expense gets out of line. There may be a legitimate reason for a substantial change in an expense but without knowing the history of the expense on your farm and your industry’s benchmarks it may prove difficult to determine if control is necessary for survival.
The dairy industry in the Valley can use aggregated benchmarks generated by the Dairy Management Institute (DMI) to assist in validating their expenses. The Farm Business Management staff of Virginia Cooperative Extension has partnered with Farm Credit to conduct the DMI for the past eight years to provide benchmarks for financial decision making. The 2007 Tax Year DMI aggregated financial data from 40 Valley dairies.
These 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 manager you should determine if the difference is actually an indicator of a problem or just of different management.
Below is a table of the top five and top 10 expenses for valley dairy farms for Tax Years 2007 & 2006. In 2007, the average of the top five expenses for the DMI farms consumed 67% of the Cash Operating Expenses, and Purchased Feed accounted for $5.73 of the $20.93 per hundredweight received for milk. The 2006 top five expenses consumed 66.0% of the Cash Operating Expenses, and Purchased Feed accounted for $4.38 of the $14.82 per hundredweight received for milk. It is easy to see that over time the expenses can change dramatically. 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.
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