Look for profit, not price
A common comment made by dairy producers these days is, “If we could just get the milk price up, I would be fine.”
However, depending on your input costs, it may not matter if the price of milk goes up.
Milk and input prices are so volatile that just getting a higher price for milk does not guarantee profits. Admittedly, it would be great to see $20 milk again, but if it comes at the same time as $7 corn, it won’t matter much for producers who need to buy feed.
The other factor is how long the $20 milk lasts. For many producers who have taken out operating loans or refinanced, it will take a long time to recover even with overall favorable prices.
Because of the increase in market volatility, it is more important than ever to know your cost of production. Knowing your costs can help you make decisions about the long-term viability of your farm operation. It also can help you identify areas of the farm that are making money and those that are not.
A cost of production should be done for each crop you grow, and for the dairy operation. If you raise steers or any other type of livestock, you should evaluate that, as well. Having those costs separated will help you determine what enterprises are making money and if you should let one go.
Be careful not to let one go based on one year of information, as that crop may be a very profitable enterprise in an average year. However, if year after year you find you are not making money growing corn and you would be better off buying it, you will want to either put your acres into a more profitable crop or get better at growing corn.
Using cost of production
Knowing your cost of production also can help you make decisions about marketing your products. If forward contracts, puts and calls are something you are not comfortable with, it might be time to learn more about them. If after learning more you still are not comfortable with using these marketing tools, there will be a need for greater cash management.
Obviously no one wants to see the milk price drop to half of what is was, but that is exactly what happened in 2009, and prices likely will rise and fall again. It is much easier to handle the low times when you have a little cash reserve. Your tax adviser will not think keeping cash around in the good years is a great tax-management strategy. However, you need to decide whether the extra taxes are worth the security you are gaining for the bad years like this one.
Of course, just knowing your cost of production in comparison to the price you can get is useless if you don’t use it to make management decisions. Profitability always comes down to management, and the little things do count. One of those little things is looking at your numbers to determine where your time and money are best spent. Then you still have to know how to react to what the numbers tell you and alter your management to deal with it.
Bendixen is the Clark County Extension dairy and livestock agent.
This article published in the January, 2010 edition of WISCONSIN AGRICULTURIST.
All rights reserved. Copyright Farm Progress Cos. 2010.