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Opportunities to Reduce Farm Fixed Costs

This article review the types of fixed costs occurring on dairy farm and tips how these costs could be reduced.

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Updated:

May 1, 2026

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For many dairy farmers, financial record-keeping or updating financial statements is not a daily priority. Dairy farmers are not in the farming business because they like sitting all day in front of a computer, running accounting software, and analyzing or modeling future farm costs or input scenarios.

What are Fixed Costs?

Fixed costs are the farm's expenses that are incurred regardless of milk production levels or herd size variation. No matter how many cows are in the barn, the fixed costs will remain the same. These costs do change with time and tend to adjust more slowly. Producers usually have limited flexibility to offset rising fixed costs.

Producers think of variable, operating, or direct costs more often as they search for the lowest cost for feed, seeds, fuel, etc. Often, these costs or prices for these inputs are widely advertised, and producers have a good sense of where the market stands.

But who is thinking about fixed costs?

For an average dairy farm, the fixed cost share is between 30-35% of total costs per cow or per cwt milk (MSC Business Service; Organic Dairy Farm Performance). This is a significant portion of the total costs, and it is worth carefully looking at to find opportunities to reduce expenses. It could have a substantial impact on the survivability of the farm.

Here is a scenario for a typical 94-cow Pennsylvania dairy that produces 75 pounds of milk per day. Assuming the farm receives $18 per cwt milk, if the fixed costs are reduced by 10%, the farm would receive an additional $1,200 per month in revenues.

Fixed costs are challenging to calculate or measure accurately and incorporate into budgets. These costs may be predictable for a relatively short period of time. They can be effectively estimated accurately for two or three years ahead. For planning

purposes, new farm businesses may need to estimate their fixed costs by using standard financial benchmarks or researching the budgets of similar farms until a pattern is documented. Established dairies need to review income statements and balance sheets for costs that do not change with production level.

The largest fixed costs usually are medium and long-term bank payments, leases, rents, real estate taxes, and insurance. Inappropriately structured fixed assets payment plans usually have long-term negative consequences.

The common name is DIRTI 5: Depreciation, Interest, Repair, Taxes, and Insurance. Other fixed costs include equipment or building rental and mortgage payments.

Depreciation is the decrease in the value of equipment or a building because of time, use, and obsolescence. Accumulated hours (or miles) and age are common factors used to determine the equipment's remaining or salvage value at the end of its economic life.

Interest on borrowing money to purchase the equipment is determined by the lender. This is the cost of borrowed money for the purchase.

Repair costs represent annual maintenance whether the equipment is used or not. However, it is sometimes difficult to separate annual maintenance costs and variable maintenance costs. These costs include the material (such as fuel, oil) and labor, and they increase over time. The operator's skills, the prices of lubricants in the area, etc., might affect the repair costs. Typically, repair costs are 5% of the purchase price of the equipment, but it pays off to check the farm's maintenance records from past years' expenses for better assessment (Edwards, 2015).

Maintenance labor includes maintenance and travel time (Edwards, 2015). It is estimated that the actual hour of labor exceeds field equipment time by 10–20%. Adding 10–20% to the equipment labor dollar value per hour would provide the labor cost per hour estimate (Edwards, 2015).

Taxes - Pennsylvania's farmers have to pay a 6% tax on the purchase price. There is no property tax on equipment. In other states that collect separate taxes on farm equipment, 2–4% of the value of the equipment could be used to assess the tax.

Insurance should be carried on farm machinery to cover the replacement in case of fire, theft, or physical damage. Pennsylvania's farmers do not need to carry separate insurance if it is under the whole farm policy. If a vehicle is exempt, a minimum liability insurance is required. However, if the equipment is financed, the lender might require full insurance coverage if used as collateral.

The insurance costs depend on rates or amounts of coverage. Typically, 1% of the average value of the machine is often recommended to assess the insurance costs for planning purposes. However, the actual insurance quote would be more accurate. Insurance costs could change with different rates or amounts of coverage.

Another insurance that needs to be considered is workers' compensation insurance for hired or seasonal labor for more than 30 days of employment.

Housing is not typically included in the fixed equipment costs, but it is something that needs to be considered as well. Housing adds to the longevity of the equipment and thus lowers long-term costs. It is estimated that 0.5% of the property's average value is sufficient for housing costs. However, a higher estimate would apply to states that heavily rely on property taxes and have higher-than-average property values.

Tips for Reducing Fixed Costs

Take the time to review the farm's income and expenses as they happen during the year. This way, you have the chance to spot trends, challenges, and opportunities as they arise. As you begin to track your business expenses, divide your costs into fixed and variable categories. Don’t resolve the farm books at the end of the year. This does not provide enough time for pertinent adjustments.
Think twice before you invest in new equipment. Are you purchasing it because it is really needed, or is it just a 'want' or a 'nice thing' to have?
If new equipment is needed, evaluate the option of leasing, custom hire, or purchase. Lower payments would be preferred to keep fixed costs low.
If the farm’s cash reserves to purchase the equipment are intended to be used, the opportunity cost of the investment, as opposed to other productive investment alternatives, needs to be reviewed.
Adding more cows or increasing milk production will ‘dilute’ the farm’s or cows’ fixed costs. However, it may increase variable costs, such as labor. Also, improving the efficiency of the milking facility may lower operating costs but raise fixed costs. So, an economic evaluation is needed.
Review your mortgage and other fixed asset payments. Improperly structured payment plans usually have long-term negative consequences. Talk to your financial advisor about how the farm loan can be restructured to reduce payments.
Negotiate lower rent or move to a less expensive facility.
Negotiate lower insurance or change insurance plan.
Relocate to a jurisdiction that has lower business taxes.
Change to a less costly utility plan.
Lay off some employees.

Farm fixed or overhead costs make up well over one-third of total farm costs, and thus, it is worthwhile investigating the opportunities to improve farm income, increase cash flow, and enhance overall farm financial efficiency.