Margin Makeover

Smart decisions can be made when an operation knows their breakeven margin, but when comparing to benchmarks, make sure calculations use the same units.
Margin Makeover - Articles

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Photo credit: Jill Kopfer

Production perspective:

Reporting a breakeven margin can be confusing because they can be stated on a per cwt or per cow basis. Regardless of the unit, it is the amount of money left after feed costs are subtracted off to pay all other expenses. Another confounding part is if the number is reflecting solely the lactating cow feed costs or if it includes all animals. When margins are being reported a descriptor should be included on what it is representing.

The dairy operation is no different from other businesses in regard to utilizing an accountant and knowing the breakeven margin. Smart decisions can be made both on the income and expense side of the income statement when the operation knows their breakeven margin.

Twenty-four dairy farms from the Penn State Extension Crops to Cow to Cash project had their complete financial information evaluated using the University of Minnesota’s RankEm program. For 2016, the most profitable farms had a breakeven margin per cwt of $9.55 (actual received was $8.78) compared to the least profitable at $11.80 (actual received was $7.17). In this program, the margin is comparable to the Farm Bill’s Margin Protection Program as it encompasses feed costs for the entire herd, both home raised and purchased. This number represents what is left over to pay all other expenses on the farm minus all the feed costs. Even the most profitable herds were losing $0.77/cwt with the least profitable losing $4.63/cwt. Monitoring this number monthly is difficult because capturing the feed costs for all animal groups can be tedious.

The same set of data was used to determine the breakeven income over feed cost (IOFC) per cow. This accounts for animal performance, milk price and feed cost. In the RankEm program, feed costs for all animal groups are included. For 2016, the most profitable herds had an actual IOFC of $8.36/cow with a breakeven of $7.81/cow ($0.55 surplus per cow). Their average milk production per cow per day was 82 pounds. The most profitable herds were doing a good job of controlling feed costs and maintaining good milk production.

For the least profitable herds the average actual IOFC/cow was $6.71 with a breakeven of $8.95. Examining milk income alone, these herds were losing $2.24 per cow per day. Their average milk production was 76 pounds. These herds had higher feed costs and overhead expenses that resulted in an unsustainable breakeven.

The next logical question is how can a margin be calculated two different ways with varying results? For the most profitable herds, they either lost $0.77/cwt or had a surplus of $0.55/cow. It all comes down to the units. The interpretation is the same for 2016 – these herds were sustainable compared to their counterparts. With the margin/cwt calculation, the feed cost per cwt reflects the change based on the herd’s production. For IOFC, milk income/cow (milk price/cwt x milk production) reflects the amount of change. Ideally it is best to examine both numbers as they are providing a slightly different story.

To add another layer of complexity, many people use IOFC per cow using the lactating feed cost only. This is the approach Penn State Extension has taken because it is easy to calculate and monitor. For 2016, IOFC per cow averaged $8.03 on 83 pounds of milk (Dairy $ense). The breakeven IOFC should be determined to evaluate how much money is being made or lost on a monthly basis.

A margin makeover is needed when the breakeven far exceeds the actual, whether it is on a per cwt or per cow basis. When comparing against benchmarks make sure the numbers are reflecting the same units and feed costs. There is a different story being told depending on how the number is reported.

Action plan for determining the farm’s breakeven margin

Goal – Develop a cash flow plan including the operation’s breakeven IOFC and cost of production for both the dairy enterprise and the whole farm. Monitor the actual IOFC monthly.

  • Step 1: Work with a consultant to develop a cash flow plan. Have a completed balance sheet and income statement available.
  • Step 2: After the herd’s breakeven IOFC is determined, monitor the actual against the breakeven on a monthly basis.
  • Step 3: Working with a profit team share results to determine if the cash flow is meeting expectations or if adjustments are needed.

Economic perspective:

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows income over feed costs is a good way to check that feed costs are in line for the level of milk production. Starting with July 2014’s milk price, income over feed costs was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen and a mineral vitamin mix. All market prices were used.

Also included are the feed costs for dry cows, springing heifers, pregnant heifers and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.

Income over feed cost using standardized rations and production data from the Penn State dairy herd.

Note: July’s Penn State milk price: $18.42/cwt; feed cost/cow: $5.17; average milk production: 81.0 lbs.

Feed cost/non-lactating animal/day.

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