Dairy Numbers Considered, a Look at 2019 and 2020

The first half of 2019 was miserable, but as cow numbers finally trended down, milk prices gained strength with Class III increasing steadily from $13.96 in January to $19.37 in December.  The industry looked forward to 2020 and a long-awaited opportunity to rebuild cash reserves.

The Federal Order 33 Statistical Uniform Price (Table 1.) averaged $15.85 in 2020, $1.36 lower than 2019’s $17.21 per cwt.  USDA’s 2020 Ohio All Milk Price (AMP) averaged $18.18 per cwt, fifty-four cents lower than 2019’s reported $18.72 per cwt.  Ohio’s 2019 AMP is comparable to the average milk price received by farms in the 2019 Ohio Farm Business Summary, $18.62 per cwt.

Table 1: Federal Order 33 Milk prices and USDA All Milk Prices 2019 and 2020, $/cwt.

Actual, on-farm milk prices vary from farm to farm based on component production, quality, and quantity.  An unexpected factor in 2020 will be how individual Class III processors handled the massive negative producer price differentials in June, July, October, and November milk checks.  Some Class III processors passed on the full deductions to their producers.  Others passed at least some of the higher value of Class III milk back to their producers.

What annual averages cannot convey is the financial roller coaster experienced by farms in 2020 illustrated in Figure 1.  The second-highest Class III price of $24.54  posted in July (eclipsed only by September 2014’s $24.60) was battered down to a $16.52 Uniform Price by a record negative $8.02 Producer Price Differential in Federal Order 33.  June, October, and November’s prices weren’t far behind.  Most risk management tools are not designed to deal producer price differential risk.

Figure 1. Class III, Producer Price Differential and Statistical Uniform Price, Federal Order 33, January through December 2020.

How did 2019 look for Ohio’s Dairy Farm Business Summary Farms?  Twenty-one farms participated in the 2019 analysis.  We will look at data for 17 conventional farms with completed analyses.  Herd sizes ranged from 60 cows to nearly 1,200 cows with four herds milking more than 700 cows (avg 853), four milking 460 to 699 cows (avg 553), six herds milking 130 to 300 cows (avg 170), and three herds milking less than 110 cows (avg 88).

Net return per cow averaged $249 per cow, ranging from two farms generating more than $1,000 per cow to four farms generating net losses per cow up to $800.  Positive net returns are needed to make principal payments, generate family living, pay income tax liabilities and  provide funds to reinvest on and off the farm.  Farms generating negative net returns must either use up cash reserves, take on additional operating debt, or accumulate unpaid bills.  None of these options are sustainable over multiple years of low or negative returns.

Table 2 summarizes average cow numbers, milk sold per cow, feed cost and total cost per hundredweight, milk price received and net returns per cow for all farms, and those same number for the 4 farms that generated the highest average net return per cow.

Table 2: 17 Conventional Ohio Dairy Farms, 2019.  High 20% sorted by Net Return per Cow

The highest cost on dairy farms continues (and will continue) to be feed costs.  On average, 54% of total costs were feed costs.  For the high 20% farms, 51% of their total costs were committed to feeding the herd.  These feed costs are comprehensive and include the feed for cows, calves and heifers and includes all purchased feed, and home grown feed which is valued at the crop’s cost of production.  Because feed fed considers beginning and ending inventories, quantities and costs of feed produced, it also includes the cost of feed losses from field to feed bunk (shrink).  The only feed cost that might not be included is feed costs that are included in custom heifer raising fees.  This cost would be included in the custom heifer charge and in total cost of production.

The high 20% farms sold more milk per cow at a slightly higher milk price which cost them more than $2 per cwt less to produce than the average for all farms.  While the four farms that generated negative net returns actually received an average milk price of $19.75 per cwt, which was higher than the average price received by all farms and the high 20% farms, it was substantially lower than their $23.23/cwt direct and overhead cost of production and could not be “made up” by any additional dairy income received which includes sales of cull cows and heifers, bull calves and breeding stock.

If we learned anything in 2020, it was that the unexpected and unanticipated can happen without notice.  The 2019 analysis showed that some farms made decent returns and others struggled.  The 2020 analysis will show the same.  That is good news and bad news depending on which group you will fall in.  The trick is getting and staying in the group that makes decent returns, even in years that we would characterize as not the best.  Another piece of good news is that the farms that make the high 20% are not the same every year.  Why is that good news?  Because those farms are consistently in the top 30 to 40% and are positioned to have high 20% years.

How do farms get there, and then stay there?  Farm owners and managers must have real, accurate, accrual adjusted numbers.  Then these accurate financial analysis numbers are intentionally used to evaluate the farm’s position and progress and used again to set goals and make informed management decisions.  

Farm owners, managers and bookkeepers are now gathering or have already assembled information needed for income tax preparation and starting 2021’s bookkeeping.  It is also time to get analysis started and finished.  Much of the same information is used.  Get started with your farm’s financial analysis starting with your 2020 business year.  Find the Ohio Farm Business Analysis Technician closest to you at https://farmprofitability.osu.edu  or contact Dianne Shoemaker at shoemaker.3@osu.edu to start your 2020 analysis now.  All analyses must be completed by the end of May to receive personalized benchmark reports.