Analyzing Your Dairy Profits

Dale M. Johnson, Farm Management Specialist, University of Maryland Extension

Due to unexpected family responsibilities, Sarah Flack is unable to attend this year's NODPA Field Days. We are fortunate to have Farm Management Specialist Dale Johnson step in and lead the NODPA Field Days workshop, Money Matters: Demystifying Financial Recordkeeping to Improve your Farm's Decision Making Capacity and Bottom Line.

What price are you getting for a hundred pounds of organic milk? If you are like most dairy farmers, you know the price or you can get it quickly by reviewing milk check receipts. But do you know how much profit you make per cow? If you are like many dairy farmers, you may not know. Your acreage or dairy facilities limit the number of cows you can milk, so maximizing your profits per cow determines your standard of living and viability. This article explains how to calculate your profit per cow per year. By analyzing your income, expenses, and profit per cow, you can benchmark your farm against other farms to determine your strengths and weaknesses. This article will show you the average of seven organic farms that I work with that you can compare your farm to.

You can use the spreadsheet, Analyzing Your Profit on page 13 to do a historical economic analysis of the past three years of your farm - the long run, so to speak. Maybe one year was dry with lower forage yields or maybe one year milk production was better than normal. By averaging three years, you get a good economic picture of how you are doing. To complete the analysis, you will need your tax forms from the past three years and a few other records. Follow the instructions below to do your analysis.

On line A, enter your average number of cows in your herd (lactating & dry) for each year 2015, '16, and '17.
On line B, enter your total cwt of milk sold for each year (from your final milk check for each year, get the total pounds of milk sold and divide by 100.)
On line C, divide line B by line A for each year.
Line D will be calculated later.
Under the Farm income and farm expenses, enter each number directly from Schedule F for each year.
Line 2 of Schedule F (Sales of farm products) usually totals your milk sales, crop sales, and calf sales. Refer to your records to break out those numbers into Line 2 a, b, and c.
Cull cow sales are usually found on Form 4797, Sales of Business Property. If so, add the cull sales to the calf sales in Line 2c for each year.
With a calculator, average 2015, 2016, and 2017 for each line and enter the results in the column “Avg. 15-17”.
With a calculator, divide the “Avg. 15-17” for each line by the average number of cows in line A. By doing this, you put everything on a per cow basis. Enter the calculation for ach line in the “15-17/cow” column.
On line D, divide the milk sales in line 2a by the total cwt of milk sold to calculate the average price of milk per cwt for each year.

The last column shows the income, expenses, and profit per cow for 7 organic dairy farms that I have been working with for many years. All of these farms sell their milk through Organic Valley. For the years 2015-2017, they have an annual average profit of $1,085 per cow. $1,000 per cow profit is a good goal for many organic dairy farms to strive for. Of course, much depends upon your price that you receive for your organic milk and your ability to minimize expenses per cow and per cwt of milk. Compare your farm on each line to the average of the 7 organic farms. Expenses per cow that are lower than the average may indicate strengths in your farm. Expenses per cow that are higher than average may indicate weaknesses in your farm.

Schedule F trend summary			Your Farm			Average of 7
Year	2015	2016	2017	Avg. 15-17	15-17/cow	organic farms
A) Average number of cows						75
B) Total cwt milk sold						5,867
C) Average CWT milk sold per cow						78.1
D) Average price per CWT						$37.72
Schedule F line
Farm income
1a & 1b Sales of livestock bought						$235
1c Cost or other basis of line 1						$124
1e Subtract line d from line c						$110
2 Sales of farm products
a. Milk sales						$2,947
b. Crop sales						$32
c. Cattle sales						$439
3 Cooperative distributions						$23
4 Agricultural program payments						$3
5 CCC loans						$0
6 Crop insurance						$0
7 Custom Hire						$29
8 Other income						$25
9 Gross Income						$3,608
Farm expenses
10 Car and truck expenses						$9
11 Chemicals						$0
12 Conservation expenses						$0
13 Custom hire						$132
14 Depreciation						$333
15 Employee benefits						$0
16 Feed						$641
17 Fertilizer and lime						$80
18 Freight and trucking						$28
19 Gasoline, Fuel, and oil						$96
20 Insurance (other than health)						$30
21a+21b Interest						$119
22 Labor hired						$130
23 Pension and profit-sharing						$0
24a+24b Rent or lease						$116
25 Repairs and maintenance						$260
26 Seeds and plants						$96
27 Storage and warehousing						$0
28 Supplies purchased						$194
29 Taxes						$31
30 Utilities						$91
31 Vet., breed., and med.						$45
32 Other expenses						$93
33 Total expenses						$2,523
34 Net farm profit						$1,085

This worksheet is a simple and useful analysis. But it has possible inaccuracies. If you use a cash accounting method, like this, you do not account for changes in inventories which may lead to an inaccurate calculation of profit. However, on many dairy farms the beginning and ending inventories are similar enough so that an adjustment may not be needed. Doing this analysis for three years and averaging the years like in this spreadsheet will mitigate inaccuracies from changing inventories.

Doing the analysis for several years is also useful for looking at trends in the business. If you are a dairy farmer in Maryland and would like me to help you with your analysis, call me at 301-432-2767, ext. 325 or email dmj@umd.edu.

On Friday, September 28th, I will give a presentation at the 2018 NODPA Field Days further explaining this and other economic analysis to help you make decisions and improve profitability. You may want to bring your tax records in case you have questions. I hope to see you there.

Dale Johnson can be reached by phone:
301-432-2767, ext. 325 email: dmj@umd.edu
or by mail:
The Department of Agricultural and
Resource Economics,
University of Maryland
2112A Symons Hall,
College Park, MD 20742

Attached Files: