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Achieving Low Costs of Producing a Cwt. of Milk

by John J. Hanchar

INTRODUCTION
Economic efficiency is the ability to realize a favorable relationship between input use and output based upon economic measures such as the value of production, costs of inputs, and others. Production is economically efficient when goods are produced at minimum cost. Various costs of producing a hundredweight (Cwt.) of milk help evaluate economic efficiency.

The following measures with definitions are used here (Cornell University. Dairy Farm Business Summary (DFBS) Program. Charles H. Dyson School of Applied Economics and Management: Ithaca, NY.).

  • Operating costs of producing milk are estimated by deducting nonmilk accrual receipts from total accrual operating expenses including expansion livestock purchased.
  • Purchased inputs costs of producing milk include the operating costs of producing milk plus depreciation on machinery and buildings.
  • Total costs of producing milk include the operating costs of producing milk plus depreciation, the value of unpaid family labor, the value of operators’ labor and management, and the interest charge for using equity capital.

Each of the above are divided by hundredweights sold to yield $/Cwt. measures.

For dairy farms in NYS, profitability is closely tied to the total cost of producing a Cwt. of milk. As cost increases, the rate of return on assets (RROA) without appreciation as a percent, a measure of profitability, declines (Figure 1). Dairy farm business owners who work to reduce costs of producing a Cwt. of milk very likely see improved profitability.

Consider the relationship between the total cost of producing a Cwt. milk and milk sold for 2010 (Figure 2). The data suggest that efficient, small dairy farms, that is, those with the lowest total cost of producing a Cwt. of milk, rival the efficiency of larger farms. Professor Loren Tauer, Charles H. Dyson School of Applied Economics and Management, Cornell University, utilized DFBS data to study the efficiency of NYS dairy farms by farm size. Based upon his research, Professor Tauer concluded “That modeling procedure [that is, the procedure employed by Professor Tauer in his research] showed that most of the empirical high cost observed on many small dairy farms is due to inefficiency. Therefore, efficient small dairy farms can be competitive with larger dairy farms in New York in producing milk at comparable costs per unit. … The implication is that the efficient small dairy farm can compete with the efficient large dairy farm.” (Tauer).

The emphasis is on being efficient. What characteristics do the most efficient small dairy farms possess? Owners of small dairy farms can benefit from a better understanding of the challenges, and effective strategies of cost efficient small dairy farms, and from the differences in farm business summary factors between cost efficient small dairy farms and a group of less cost efficient farms.

Figure 1. Rate of Return on Assets without Appreciation (Percent) by Total Cost of Producing a Hundred Weight of Milk ($/Cwt.), 2010. Source: Cornell University. 2010. Dairy Farm Business Summary Program. Charles H. Dyson School of Applied Economics and Management: Ithaca, NY.

‘Western New York
The following overview is of an actual dairy in Western New York, the family asked that their name not be used. We appreciate the family sharing their information so that other families can gain from their experience

‘WNY’ Farm Description
We will call the farm WNY Farm. Since its formation in the early 1980’s, the farm business has evolved, increasing in size — animal numbers and acres — and steadily realizing goals of relatively high rates of production, low costs of production and high rates of profitability. A variety of facilities improvements have occurred over time: barnyard improvements; free stall housing; and bedded pack barn for transition calves among others. In 2010, the average number of cows for the year was about 170, and tillable acres totaled about 500 acres.

Challenges
The family mention labor as the number one challenge faced by the farm business. They strive to realize labor efficiencies based upon comparisons to other farm businesses, but cite limiting factors they relate to size. “… we do not have specialty positions. Our employees must be flexible, and able to do some field and cow work. So the labor pool is limited somewhat.” The farmers note that the business tends to be understaffed in the summer, and overstaffed in the winter. “We try to not hire extra planting or harvest help, but utilize our existing labor. Timeliness of planting and harvest always become a challenge. Plus, we are both involved in off-farm activities, so we tend to have extra labor so that we can participate.”

A second challenge faced by the business is the volatility of grain, feed markets, specifically when grain prices reach relatively high levels. Achieving low feed costs per Cwt. objectives becomes difficult in an environment of volatile, relatively high grain prices.

A third challenge is the availability of technology. As the family works to realize competitive costs of producing a Cwt. of milk, they are frequently addressing availability of technology – availability of new technology and, or an existing technology becoming less available or not available at all. “We were early users of rbST. As we deal with increased restrictions on its use, we are seeing a decrease in production as a result.” They are looking for strategies to implement so that they are able to achieve the business’ financial and family goals in this new environment. As they examine alternatives they note that the future “will likely include an increase in herd size.”

Effective Strategies for Meeting Challenges
An important strategy for meeting challenges faced by WNY Farm is to achieve the objective of relatively high milk production. A couple of approaches are emphasized. “This [the achievement of high rates of production] is a result of a combination of genetics and emphasis on cow comfort. We have always bred for both type and production, and have used higher TPI (Total Performance Index) bulls. Cow comfort efforts have taken various forms. Early on, we bedded with lots of straw and cows were out on pasture every day. Then we switched to mattresses and tunnel ventilation. When we built our free stall, we used sand bedding and rubber flooring. We strive to keep our cows happy and content.” A willingness and ability to change are also evident in the family’s approaches.

A second important strategy is to produce grain in addition to forages. The availability of land led to changes over time. “We were able to do some cash crop farming, but as time went on we found it to be more profitable to grow all of our grain needs. Our only purchased feed consists of some protein supplement and minerals. Thus, we are protected from the volatility of the grain market. Our low feed cost keeps us competitive with our larger neighbors.”

A third strategy somewhat hidden in the above challenges and strategies is the family’s practice of measuring and comparing results. They mention comparisons to other dairy farm businesses when discussing the labor challenges that they face, and when discussing the value of achieving low feed costs. WYN Farm has participated in Cornell University Cooperative Extension’s Dairy Farm Business Summary Program every year since about 2000. They utilize the summary to monitor results and to identify areas for possible improvement. The ability to measure and compare results to others is evident above.

Farm Business Summary Factors Where WNY Farm Differs Markedly from a Group of Less Cost Efficient, Less Profitable Small Dairy Farms
What types of differences in business summary results between WNY Farm and a group of less cost efficient, less profitable small dairy farms are notable given the challenges faced, and strategies implemented by WNY Farm? Areas of difference can suggest areas for possible improvement as a small dairy farm strives for low costs of producing a Cwt. of milk, and resulting improvement in profitability.

To make the desired comparisons, DFBS cooperators for 2010 with 200 cows or less were placed in two groups. The first group is the top 20 percent (18 farms) based upon the rate of return on assets (RROA) without appreciation. WNY Farm is one of the 18 farms in the top 20 percent of small dairy farms. The second group is the remaining 80 percent (71 farms) based upon the same measure of profitability. Due to the relationship between RROA without appreciation and the total cost of producing a Cwt. of milk (See Figure 1), the less profitable group can be viewed as the less cost efficient group (Table 1).

Table 1. Average Performance Measures for Selected Cost and Profitability Factors for the Top 20 Percent and Remaining 80 Percent of NYS Dairy Farms, 200 Cows or Less, 2010 DFBS Data.

Farm Business Summary Factor Top 20 Percent (18 Farms) Remaining 80 Percent (71 Farms)
 Operating cost of producing a Cwt. of milk $10.72 $14.77
Purchased inputs cost of producing a Cwt. of milk $12.19 $16.30
RROA without apprec. (%) 6.41 -1.89

Groups based upon the rate of return on assets (RROA) without appreciation.

WYN Farm is one of the 18 farms in the top 20 percent above, and the farm’s results for 2010 were compared to averages for the less cost efficient group.

Rates of Production. WNY farm realized notably greater rates of production compared to the less cost efficient group. Milk sold per cow in pounds, hay dry matter per acre in tons, and corn silage per acre in tons were 33, 38 and 21 percent greater, respectively, than the averages for the group of less cost efficient small dairy farms. The pounds of milk sold difference helps WNY Farm achieve efficiencies when using pounds or Cwts. sold sensitive measures for comparison. Even though WNY Farm does not differ notably from the less cost efficient group with respect to some labor efficiency measures, cows per worker for example, (see the Adams’ comments under Challenges above), the farm realized 41 percent more milk sold per worker compared to the less cost efficient group.

Cost Control. WNY Farm realizes considerably lower operating, purchased inputs, and total costs of producing a Cwt. of milk when compared to the less cost efficient group. The farm’s strategies of growing grains, seeking high production, and practicing sound financial planning and control combine to yield these differences. WNY Farm’s dairy feed and crop expense per Cwt. of milk is 63 percent less than the average for the less cost efficient group.

Income Generation. WNY Farm’s emphasis on high production is evident in its gross milk sales measures. For 2010, the farm achieved 33 percent greater gross milk sales per cow compared to the less cost efficient group, while realizing virtually the same gross milk sales per Cwt. (price) as the less cost efficient group, roughly $17.80 per Cwt.

Profitability. Emphasis on achieving low costs of producing a Cwt. of milk through strategies mentioned above yield greater levels of profitability compared to the less cost efficient group. Note the difference for RROA without appreciation between the top 20 percent group, WNY Farm is one of the farms in this group, and the remaining 80 percent of small farms (Table 1).

Select Accrual Receipt and Expense Items. WNY Farm’s accrual receipts for milk per cow, and crops per cow and per Cwt. are considerably greater than those of the less cost efficient group. The farm’s strategies to achieve high production explain the receipts for milk differences. The receipts for crops differences are notable given that the ratio between total tillable acres and the average number of cows is about 3 for both WNY Farm and the less cost efficient group.

WNY Farm’s accrual expenses per Cwt. for dairy grain and concentrate, machinery repairs and depreciation, dairy roughage, utilities, and fertilizer and lime were $2.30, $0.98, $0.33, $0.31, and $0.29 less, respectively, when compared to the expenses of the less cost efficient group. WNY Farm’s accrual expenses per Cwt. for building depreciation, hired labor, machinery hire, rent and lease, bedding, and bST were $0.66, $0.54, $0.39, $0.32, and $0.28 more, respectively, when compared to the expenses of the less cost efficient group.

SUMMARY
Efficient small dairy farms can achieve costs of producing a Cwt. of milk, and profit levels that rival larger farms. Note well, the phrase, “efficient small dairy farms.”

Characteristics of efficient, small top performing dairy farms can provide information to, and help educate others that are interested in increasing efficiency on the way to lower costs of producing a Cwt. of milk and higher levels of profit.

WNY Farm realizes higher rates of production, and resulting income generation (milk and crops), and more favorable cost control when compared to a group of less efficient small farms allowing it to realize levels of profitability that consistently place it in the top 20 percent of farms in NYS with 200 or fewer cows based upon RROA without appreciation. Notable characteristics, factors where WNY Farm differs from the less cost efficient group include:
1. Higher rates of milk and forage production.
2. Lower dairy feed and crop expense per Cwt. due in part to its strategy to grow both forages and grain crops to meet the feed needs of the herd.
3. Lower costs per Cwt. for dairy grain and concentrates, machinery operation and ownership, dairy roughage, utilities, and fertilizer and lime among others.
4. Higher costs per Cwt. for building depreciation, hired labor, machinery hire, rent and lease, bedding, and bST among others.

REFERENCES
Cornell University. 2010. Dairy Farm Business Summary Program. Charles H. Dyson School of Applied Economics and Management: Ithaca, NY.
Tauer, L. W. 2001. “Efficiency and Competitiveness of the Small New York Dairy Farm.” Journal of Dairy Science. 84(11, November): 2573-2576.

John J. Hanchar is a specialist with the Cornell University NWNY Dairy, Livestock, and Field Crops Program and PRO-DAIRY.

Comments

4 thoughts on “Achieving Low Costs of Producing a Cwt. of Milk

  1. john mcmahon says:

    So how much does a dairy farmer make on a gallon of milk? Thanks

  2. Tara Hammonds says:

    Hi John,
    As of August 2015, the cost of milk was $16.70/cwt, which would make it roughly $1.44/gal. Hopefully this helps!

  3. Jessica says:

    Hello! Is there any potential to access updated numbers for the cost of producing a cwt. of milk as it looks like this was posted in 2012? Thank you!

  4. Tara Hammonds says:

    Hi Jessica,
    This USDA site has updated numbers for the cost of production per cwt that were updated relatively recently. Hope this helps!

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