From the Fields: How to Help Dairy Farmers Improve Milk Margins
By: Chris Schneider, senior agricultural officer, Investors Community Bank

On the approximately 9,500 licensed dairy farms in the state, the average milk production per cow in 2017 was 23,552 pounds, according to the Wisconsin Agricultural Statistics Service. That said, higher production is not always equated with the best margins. But what every dairy producer – and his/her agricultural banker – needs to know is an accurate calculation of what it costs the farm to produce 100 pounds of milk.

The challenge with that is that there are a number of ways to calculate the cost to produce, and not all producers realize that. Farmer A may say it costs him $16 to produce 100 pounds whereas Farmer B says $18. But they may not be comparing apples to apples, so to say. It’s more important than ever for farmers, as business owners and banking clients, to be able to calculate their true cost and operating expense ratio in the stressed market we’re currently experiencing. As you well know, we’re in the fourth year of low commodity prices, which is definitely not following the typical trend or cycle of two good years, two bad years and so forth. 

Some dairy producers calculate their costs taking normal expenses into account. Some take principal into account; others include depreciation. What we as agricultural bankers need is an accounting of “true expense costs” inclusive of everything it takes to care for the cow and run the dairy operation. We need to encourage producers to consider all fixed expenses including interest and not including principal or deprecation to render a true cost – the operating expense ratio. We need producers to put on their business hat and to measure and re-measure what their operating expense ratio is every quarter so they know what it takes them expense-wise to turn a dollar.

Now is the time to point producers’ focus internally on factors like these versus changes such as pursuing a new milk plant. With the oversupply of milk on the market, the milk plant is a driving force, and if a producer is contracted with a milk plant, we want him/her to maintain that existing relationship.

You might caution the producer that itemizing operational expenses may create a lengthy list. It may include the 10-ingredient feed the cow eats, the labor required to care for her, the roof over her head and utilities required by the operation, among many other factors. When sitting down with your dairy clients, here are some questions you can ask them to ask themselves to assess their farming operation from a sound business perspective: 

  • What is the farm’s purchased feed concentrates per cow? 
    If it’s $1,400 annually or greater, encourage the producer to seize the opportunity to assess this with the help of the farm’s dairy nutritionist.
  • What is the farm’s labor costs? 
    Typically, agricultural bankers assess those per 100 weight, and recommend producers’ numbers come in at $3 or less. This number can fluctuate depending on the type of farm and if they exclusively milk cows or if they grow and make their own feed, as well as other farm operations.
  • What is the value of the cow leaving the farm? 
    Many producers don’t ponder what the farm will receive for a cow when she is shipped off to be processed for beef. We need to do a better job of educating our clients that this is a matter of careful timing. If the cow dies because the farmer keeps her too long, her value is $0. It’s also a matter of keeping cows only so long as they maintain peak milk production. Additionally, we are well aware that the value of the cow varies with varying beef prices. We need to remind producers that they also need to take into account if there is a calf ready to replace the producing heifer. 
  • What is your milk basis? 
    Producers need to be aware of what their milk basis is as well as what their milk plant pays for better fat or protein content because those contribute to making better cheese, for example. We are well aware that the average basis in the past year has been reduced by milk plants changing how they pay for it because of the surplus of milk. Some plants pay more for fat, others for protein, depending on the products they’re making. Encourage producers to know what their milk plant seeks to determine if they can modify their operations to produce that.

Encourage producers to evaluate these factors quarterly to determine where they stand at any given time financially, and to provide objective information from which to make necessary adjustments. We’ve found that producers are more likely to be receptive to this in the current financial environment. In contrast, some may have let these assessments slide in a year like 2014 when milk prices were really high. Upon compiling the numbers, you can review these numbers with your dairy producers and, if need be, assess where changes can be made. 

This is also a prime time to encourage the producer to assemble his/her point people – in addition to you, the farm’s nutritionist, veterinarian and agronomist – for a team meeting. Each of these trusted advisors bring different vantage points to the table; for example, a nutritionist might be able to provide insights on how to modify the composition of the feed, one of the largest expenses for a dairy. 

I leave you with an important final thought – to encourage dairy producers to listen to input from their circle of trusted advisors (including you, of course). Remind them that remaining a viable business means being willing to change and not simply doing things a certain way solely because “that’s the way we’ve always done it.” Times are changing, and no one knows better than agricultural bankers who see farming operations fold far too often that viable dairy producers need to be willing to change with them. Does that mean a producer has to embrace the latest and greatest technology? No. But it does mean encouraging him/her to evaluate opportunities to cut costs and increase efficiencies that ultimately improve an operation’s milk margins.