Benchmarks identify dairy farm's comparative standing

KIMBERLY

Although the raw numbers that are used as benchmarks for calculating dairy farm profitability are down on both sides of the ledger for 2016, this doesn't mean that the data should be ignored or isn't still valuable.

That was the message from Keith Maney to attendees at the recent farm management update for ag professionals sponsored by Extension Service offices in Wisconsin's east central counties. He is a financial analysis specialist with Lakeshore Farm Management, which is based in Valders.

Maney noted that the terminology associated with “benchmarks for profitability” has evolved during approximately the past 25 years as dairy farmers began to view their operations as business enterprises.

Benchmark ingredients

The elements being considered in benchmark comparisons are profitability analysis (the difference between income and expenses), financial efficiency (use of funds), solvency analysis (debt and equity ratios compared to assets), liquidity analysis (cash for paying current bills), repayment capacity (ability to pay long-term debt) and performance data (crop and milk production yields). Maney said “labor efficiency” is the latest factor that was added to the list.

Dairy farmers tend to be well aware of performance factors such as milk production per cow; milk components and quality; milk prices and production costs; feed uses; and purchased feed costs, Maney said. But that does not apply as often to the benchmark items. He has also learned that not many dairy farmers are greatly interested in the fine points of “profitability analysis” (the rates of return on farm assets and equity).

Another important number is the value of unpaid farm labor and management, Maney noted. He acknowledged, however, that assigning an exact number to that value is “a tough calibration.”

Individual agricultural lending institutions will differ somewhat in their interpretation of the numerical statistics that make up the benchmarks, but that doesn't diminish their importance, Maney said. Measuring the farm's financial performance will help in making decisions such as buying land, undertaking a facility or herd expansion and whether to buy field and harvesting equipment or hire custom operators.

Financial picture

Think of a dairy farm's financial picture as a bucket in which production of milk and crops, milk quality, labor, assets and debt load are combined, Maney advised. As with a bucket of water, it is important that there not be any leaks.

If there are leaks, one frequently used approach is to convene a team of all the parties — on and off farm — who are involved in the farm's operation. Regular meetings focused on addressing the leaks should point the way to improvements, he promised.

The farm management associations active in several regions of Wisconsin and the Center for Dairy Profitability at the University of Wisconsin-Madison are resources for assembling the numbers used as benchmarks, Maney pointed out. When presented to dairy farmers, it is best to limit the benchmark analysis to one page rather than to except them to pore over 10 to 12 pages.

Pie charts and graphs

Because they are very visible, pie charts and graphs are another effective way to present a large set of numbers, Maney remarked. This can be done for individual farms or for groups of them.

As the data for 2016 is compiled, many of the numbers are likely to be significantly lower than in recent years, he said. As the negatives, Maney listed prices for milk, cull cows, bull calves and purchased grains, while the positives include lower prices for fuel and other purchased feeds and a higher inventory from forage crops that were raised.

Among the dairy sector trends being tracked and used as benchmarks are those obtained from members of Lakeshore and its sister Fox Valley Farm Management association, Maney indicated. That group started with 603 farms in 2006 and was down to 347 for 2015.

Recent dairy statistics

For that period, the numbers show an increase in dairy herd average size from 141 to 233 cows, average somatic cell count dropped from 255,000 to 190,000 per milliliter and average net profit per cow ranged from just over $1,000 in 2014 to a loss of about $185 in 2009.

Pounds of milk sold annually per cow topped 24,000 in 2014 and 2015, average debt per cow steadily increased to nearly $5,200 per cow in 2015 and per-hundred costs of milk production for five groupings of dairy herd sizes ranged from $15.13 to $16.55 during 2015. For herds of more than 350 cows in the data base, pounds of milk sold per cow averaged 25,660 pounds in 2015.

Even if dairy farmers don't show a great interest in the specifics of the benchmarks, Maney hopes they will at least be open to “start the discussion” on how the benchmark numbers apply to their own situation.