Milk cost of production
Spreadsheet allows dairy producers to use their own farms financial data to calculate their cost of milk production.
It is critical for every dairy producer to know what it costs them to produce milk. This information is important because it helps to: 1) determine the magnitude of current profit/loss margin, 2) determination of whether costs are competitive with other dairy producers, 3) ability to identify which individual specific costs are above industry standards so these costs can be potentially lowered and 4) for use in milk marketing to determine whether a specific milk price available through a milk marketing tool (e.g., futures and forward contracts, put options) is profitable for the business.
There are many sources of information available that can offer guidance in the current cost of producing milk. However, these sources have severe limitations because they use industry “standards” and not farm-specific financial data. We have developed a simple spreadsheet that allows dairy producers to use their farm’s financial data to estimate their cost of producing milk. This spreadsheet is primarily based on the data generated from the Schedule F used for federal income tax filing purposes. However, producers and their consultants can use data generated from the farm’s accounting system or a business analysis summary (e.g., FINAN). Inputs to the spreadsheet include expense information for every expense category that appears on the Schedule F. Each expense and income category may also be adjusted if the user desires to allocate less than 100% of a specific expense to the cost of producing milk. Other required information includes: 1) crop acres, 2) average number of cows milked, 3) total milk sold (pounds), and 4) total gross milk sales.
Other recommended financial data for the spreadsheet are 1) cull cow income, 2) other livestock income, 3) other farm income, 4) deacon calf income, 5) crop sales income (e.g., corn, wheat) and 6) total inventory changes (e.g., changes in accounts payable, accounts receivable, and feed inventories, etc.). These data are used to make two important adjustments to the cash cost of milk production. First, an adjustment to remove the cost of producing “non-milk” sources of income (i.e., cull cows, other livestock, other farm income, deacon calves, crops) from the cost of producing milk. The sales value of these items is deducted from the total cash cost of milk production (i.e., assumes each “non-milk” source of income produced by the farm was sold at its breakeven cost of production which may not be true under current grain markets). The second adjustment is also to the total cash cost of milk production for inventory changes (i.e., crops and feed, market livestock, accounts receivable, prepaid expenses and supplies, accounts payable). Some of these items can have a dramatic impact on the real cost of milk production. Adjustments should be made for expenses incurred during the year but not accounted for in cash expenses (increase in accounts payable) or, a use of cash to reduce accounts payable (paying off prior year’s accounts payable). Adjust for items used in the current year, but paid for in past years (decrease in prepaid expenses); or items paid for in the current year that will not be used until future years (increase in prepaid expenses). Also, changes in feed inventory are important to consider. If feed prices remain stable and feed inventory decreases those costs were incurred in past years and not reflected in current cash costs. If feed inventory increases those cash costs are incurred in the current year but will not be used until future years. Without these adjustments this year’s cost of production will be confounded with past or future years. If actual data is not available (e.g., data provided by a FINAN or other detailed farm financial business analysis report) the data should at least be estimated.
The final inputs to the spreadsheet are: 1) family living expense and 2) depreciation and/or principal repaid. It is highly encouraged to have principal repaid entered since it more accurately reflects the actual cost of milk production compared to depreciation. Depreciation is usually highly inaccurate because today’s depreciation rules for tax return purposes allow levels of depreciation that are much higher than the real decline in asset value. Principal payments are usually a direct reflection of the actual cash needed to operate the business unless an abnormal amount of principal is repaid in the accounting period under investigation. This may happen due to either less than, or more than normal principal being repaid due to the existence of unusual business conditions. If such unusual conditions exist, the producer might want to consider entering a number more representative of the actual principal payments in a normal year. Consider asking for assistance from the author or other Extension Educators in making adjustments to get your calculated costs and incomes to reflect your farms actual situation.
Once the data is entered into the Excel spreadsheet the cost of production measures are calculated in an “Output Section” directly below the data entry section. Also, a comparison to Michigan Dairy Farm Business Analysis Summary income and expense data is provided. This comparison is done in both tabular and graphic form. These comparisons allow the producer to benchmark his/her farm’s financial performance as compared to other dairy farms in Michigan. All sections of the spreadsheet are supplied with clickable buttons that allow the printing of those specific sections.