The cost of living and the cost of farming keep going up However, the price dairy farmers
received for their milk has been rather flat for the last few years, and it could be that way for
another few years That will make it more difficult for families to "make ends meet"
How much money does your family need per year - - now and in the future 7 As you estimate
this for your family, consider the rising cost of living and your retirement needs See Table I
Look at the projections for the year 2010, and for 2030' To maintain desirable future standards
of living, farm profits should increase about 10% per year
Table 1 The Rising Cost of Living
% Change
Year in CPI Low Med High
1985 3 7 15,776 23,664 31,553
1990 6 7 20,000 30,000 40,000
1995 4 2 24,849 37,273 49,697
2010 4 0 44,751 67,127 89,501
2030 4 0 98,056 147,082 196,109
Note CPI is the consumer price index
Knowing your family's needs can help you determine how much profit you need per cow and
per cwt. of milk shipped The formulas below can help you calculate this for your farm
(Annual needs ) divided by (number of cows __) = margin needed per cow
(Annual needs ) divided by (cwt. milk shipped ) = margin needed per cwt
(Annual needs ) divided by (realistic margin per cow
(Annual needs ) divided by (realistic margin per cwt
You also need to prepare for retirement and you should start doing that at a very young age
Don't depend on Social Security to support you in your retirement years Start early to fund
your retirement plan and off-farm investments on a regular basis. Also, you may not want to
rely on the sale of the farm as your retirement package, especially if you want your business to
continue, because this could create major tax burdens and capital costs for the next generation
Let's assume your family needs $30,000 profit per year from the farm Table 2 shows how
much profit margin you will need per cow and per cwt of milk shipped, at various herds sires
and at various levels of production, to cover this $30,000 family allowance - - or to cover any
other $30,000 farm expense item.
Table 2 Annual Cost of a $30,000 Expense Item per Cow and per Cwt of Milk Shipped
.Qms. Per Yr 13M1 18.000 21.000 24.000 27.000 30.000
50 600 4.00 3 33 2.86 2 50 2 22 2.00
100 300 2.00 1 67 1 43 1.25 111 100
200 150 1 00 .83 71 63 56 50
400 75 50 42 36 31 28 25
800 36 .25 .20 .17 .15 13 12
1600 18 13 10 09 08 07 06
3200 9 06 05 04 04 03 03
Let's assume we have 50 cows and ship 15,000 lb. of milk per cow We just spent $30,000 That
will cost us $6OO per cow per year, or $4 00 per cwt of milk shipped We can cut the cost per
cwt in half by doubling production, but the cost per cow remains the same Or, we can double
herd size and cut both costs, cost per cow to $3OO and cost per cwt to $2 00 No doubt, you’ll
find it easier to double herd size than to double production per cow. Size and production are
important, and you need the skills to manage both. Increasing herd size generally requires
more capital than increasing production and the cost of borrowing capital is discussed below
Positioning Your Dairy Business For Success
Glenn A. Shirk
Extension Agent, Lancaster County, Pa
December 1997
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Doubling herd size could increase debt per cow by $2,000 Table 3 shows us that a $l,OOO debt
load per cow, financed at 8% for 10 years, will cost about $146 per year to service For $2,000 of
debt per cow the cost doubles to about $292 per cow, that about wipes out the $3OO reduction
per cow in column 2of Table 2 from doubling herd size Thus, we will have to expand at less
cost or increase production along with the expansion, which may be difficult to do
Table 3 Annual Cost of Servicing $l,OOO of Debt per Cow and per Cwt of Milk
Length Cost/Cow/Yr.
Loan Ml- 112% 15.000 181200 21.000 24.000 27.000
Syr 243 255 1.62 1.35 1.16 1 01 090
10 yr 146 159 0 97 0 81 0 70 0 61 0 54
15 yr. 115 129 0 77 0 64 0.55 0 48 0 43
Another form of expansion is increasing production per cow, production per acre, and output
per worker This may require less capital investment than a herd expansion However,
production can only be pushed so far until you start reaching a point of diminishing returns
As you push for more production, keep comparing incremental costs with incremental gains
Know your abilities and limitations plus your likes and dislikes Do you have the ability to
sustain high levels of production without experiencing negative setbacks at some future date’
Generally speaking, an economical level of production appears to be around 19,000 lb of milk
shipped per cow per year Each 1,000 lb of milk produced above this 19,000 lb level will net
about $5O additional profit per cow per year These figures of course, vary from farm to farm
Focus on margin of profit Herd size, production per cow and least-cost production are
important only if they contribute to desirable profit margins The larger the profit margin per
cow or per cwt. of milk shipped, the less sensitive your business is to chartges in prices and
costs of production. Small margins of profits can quickly be wiped out with only the slightest
change in prices and costs In Table 4, both farms are making $30,000 profit now, but the larger
farm is doing it by shipping 3 times as much milk Because of the volume of milk shipped,
the impact of aslooor $2 00 drop in milk price is also 3 times as great ($27,000 vs $9,000) A
$l.OO drop nearly wipes out the large farm, but the smaller farm still has a $21,000 margin
Please note this is not to imply that smaller farms generally have a larger margin of profit
Table 4 Profit Margins vs Size (assumes 18,000 lb milk shipped per cow)
Cwt. milk shipped
Original profit margin 30,000 600 333 30,000 200 111
$l.OO drop in milk -9.000 JSQ JJ2Q -27.000 dfiD iLDO
Profit after $lOO drop 21,000 420 233 3,000 20 011
2nd $ 100 price drop -9.000 ilfiQ JJ3Q -27.000 dSQ JJM
Profit after 2nd drop 12,000 240 133 (24,000) (160) (0 89)
At n recent dairy meeting. Dr David Gallon, of Cornell University, was optimistic about
dairying in the Northeast A number of things are working in our favor, some of which are
Our farms are smaller, but more secure, because of greater profit margins per cow
We can grow low-cost, high quality forage.
We have an available supply of low-cost water
We can sustain higher production levels with less environmental stress on cows
We have more opportunity to manage downside risks because of greater diversity
We are within easy reach of about half of the US consumer market
:rict Sales
50-Cow Herd with
per per per per per per
Farm Cow Cwt Farm Cow Cwt.
9,000 27,000
(Turn to Page A3S)
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Solutions K
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Lancaster Fanning, Saturday, January 3, 1988-A33
Cost of an 8% Loan per Cwt of Milk Shipped
m Ralph Daugherty M
Brogue
(717) 927-6084
150-Cow Herd with
Ed Werner
Northampton
(610) 262-6552
Kenneth Bittner
Cermansville
(610)767-4017