Working through Tough Times: Dairy Breakevens
Whether you have calculated a dairy breakeven price religiously at least once a year or have never gone through the calculations, tough times are a great time to dive in and make sure you have a good grasp on what the numbers are. Taking a close look at the numbers will bring light to specific areas of concern or equip you for evaluating potential adjustments. Seeing the calculations on a per-cow or per-hundredweight (cwt) basis might aid in benchmarking. It will also be easier to evaluate what the situation might be if conditions change; for example, if the dairy were only able to produce 85% of normal production, how might that impact the other numbers?
What Is Needed
- Summary of previous year's income and expenses (e.g., profit and loss statement, statement of cash flows, 1099-INT, Schedule F, and Form 4797)
- Dairy production data (e.g., year-end milk check with total production for the year and DHIA or other documentation for figuring cow numbers)
- Loan information (principal and interest)
- Accounts payable and prepaid expenses for both the beginning and end of the year
- Line of credit and credit card information
- Checkbook balance for both the beginning and end of the year
- Summary of capital purchases and sales
Running the Numbers
For completing the Penn State Extension Dairy Breakeven Cost worksheet (Figure 1), use historical financial data, either from a selection of months or from the entire previous year, beginning with cash inflow and then working through the various expenses for crops, the dairy, operations, owner draw, changes in capital, and loan activity.
At the bottom of the worksheet is a section to double-check that the numbers balance out, as well as to calculate the total owner draw for the year if that elusive number has not been tracked adequately.
Reviewing the Calculations
Look at the Total Outflow (Figure 2). If cash surplus is negative, consider how much the breakeven point will need to change in the coming year, or decide how much the operation can handle for long-term viability and retention of equity.
Do not underestimate the value of Non-Milk Inflow. Income from other sources may be needed to get a breakeven that fits.
The Milk Price Breakeven shown is for the whole farm. Compare this to what is projected for the coming year(s).
Action Steps
If you would like a copy of the Penn State Extension Dairy Breakeven Cost worksheet as a fillable PDF, Excel document, or in some other format, please send an e-mail to dairyteam@psu.edu or contact any of the Penn State Dairy Team members at Penn State Extension Dairy Experts. Step-by-step written instructions and one-on-one assistance are available.
Figure 3 shows the cash inflow portion of the worksheet with some example numbers. Adjusting a few numbers, as shown in Figure 4, can reveal the impact of potential changes, such as a change in cow numbers or milk production. Though the actual milk income is not changed in Figure 4, it is worth noting that a lot of the overhead might not change significantly despite a drop in production, which could raise the breakeven cost significantly.
An open and honest evaluation of the numbers will help with decision-making during tough times, as well as in the better times. It may also help to work with a trusted individual or a team to assemble the numbers, discuss the weak spots, or figure out next steps that make the best sense.
