University of Missouri Extension

G3651, New November 1995

How to Compute Your Cost of Producing Milk

Ken Bailey
Commercial Agriculture Program

The U.S. dairy industry has become much more competitive in recent years. As a result, profit margins are smaller. One key to remaining competitive and prospering in the years ahead is improving production per cow and milk quality and lowering the cost of producing milk. This report provides a tool to help estimate your production cost. More specifically, it provides a simple worksheet to help you estimate your monthly costs and returns per 100 pounds (hundredweight) of milk shipped. This worksheet also can be used to assess new management changes or inputs such as a TMR, megalac or POSILAC. (Information about obtaining worksheets can be found at the end of this guide.) Once costs are known, you can take steps to improve your management, lower your costs and improve profits.

You can find much of the information you need to complete this worksheet on your milk check and in your checkbook. A monthly time frame is used to help you monitor these critical costs frequently. If your feed costs, for example, are too high, it's better to find out now rather than later.

The process begins by answering a series of questions and transferring the appropriate information to the worksheets.

Questions

First, pick a month for your analysis. Enter this information on the top of the worksheet. Then, answer the following questions:

Next, let's calculate your variable cash expenses..

Now, lets move on to the rest of your variable expenses.

Now comes the hard part. You must enter the rest of your variable cash expenses. However, we only want you to reflect the portion of these expenses that were used on the dairy enterprise. For example, what portion of your monthly fuel bill did you use for cropping, and what was for the dairy enterprise? There are no rules here. For guidance, look to the example in the worksheet.

Monthly Worksheet

Name of farm: _______________________

Name of operator: _______________________

Month: __________________

Gross income Your farm Example farm
1. (a) Pounds of milk sold for the month (from your milk check)   181,903
(b) Divide (a) by 100 to get milk sales in hundredweights   1,819
2. Gross milk price ($ per hundredweight)   $12.50
3. Compute gross milk sales by multiplying 1(b) by step 2   22,738
4. Livestock sales related to dairy   3,000
5. Capital revolvements and other dairy income   0
6. Add lines 3, 4 and 5 for total gross receipts   25,738
Variable expenses Your farm Example farm
7. (a) Market value of purchased concentrates, alternative feeds, vitamins and minerals   6,250
(b) Market value of purchased forages consumed   2,873
(c) Market value of home-raised grains consumed   667
(d) Market value of home-raised haylage and silage consumed   0
(e) Market value of home-raised hay consumed   0
8. Estimate the monthly value of pasture consumed    
(a) Average number of head on pasture for the month   20
(b) Monthly pasture charge   $5
(c) Multiply (a) by (b)   100
9. Total 7(a) through 7(e) and 8(c) to compute the total value of feedstuffs consumed   9,890
10. Estimate the true cost of labor for the dairy enterprise    
(a) Amount spent for hired labor for the month (including benefits)   2,000
(b) Hours of unpaid family labor   330
(c) Value of family labor   $5
(d) Multiply (b) and (c)   1,650
(e) Value of your operator labor   200 hours x 8 = 1,600
(f) Portion of time the labor force was used on the dairy enterprise   75 percent
(g) Add lines (a), (d) and (e) and multiply by (f)   5,250 x .75 = 3.938
11. Milk check deductions   1,764
12. Expenses for DHIA fees   200
13. Expenses for artificial insemination   283
14. Expenses for veterinary fees and medicine   500
15. Expenses for dairy supplies; the portion of the following costs related to the dairy only   667
16. Expenses for fuel and oil   .3 x 299 = 90
17. Utility bills   .5 x 558 = 279
18. Building repairs   208
19. Machinery repairs   .33 x 1,050 = 347
20. Farm taxes   0
21. Farm insurance   .5 x 300 = 150
22. Any legal and professional fees   .5 x 42 = 21
23. Car and truck expenses   .5 x 333 = 167
24. Other expenses   100
25. (a) Interest payments   1,567
(b) Portion of the interest payment that went for the dairy enterprise   75 percent
(c) Multiply (a) by (b)   1,175
26. Get estimate for annual depreciation expenses of dairy enterprise. Divide this by figure 12   642
27. Estimate total operating expenses by adding steps 9, 10(g), 11 through 24, 25(c) and 26   20,419
28. Estimate income over operating expenses by subtracting step 27 from step 6   5,318

Annual Worksheet

Lines below refer to monthly worksheet January February March (etc.)
1. (a) Cwts of milk sold 1,819.00      
Income from operations
3. Milk sales 12.50      
4. Livestock sales 1.65      
5. Other farm income 0.00      
6. Total gross receipts 14.15      
Income from operations
9. Dairy feed costs 5.44      
10. (g) Dairy labor (include benefits 2.16      
11. Marketing fees .97      
12. DHIA fees .11      
13. Artificial insemination .16      
14. Veterinary fees and medicine .27      
15. Dairy supplies .37      
16. Fuel and oil .05      
17. Utilities .15      
18. Building repairs .11      
19. Machinery repairs .19      
20. Farm taxes 0.00      
21. Farm insurance .08      
22. Legal and professional fees .01      
23. Car and truck expenses .09      
24. Other dairy expenses .05      
25. (c) Interest payments .65      
26. Depreciation .35      
27. Total operating expenses 11.23      
28. Income over operating expenses 2.92      

Assessing the results

Now that you have worked through the exercise, it's time to interpret the results.

The annual worksheet provides an estimate of your per hundredweight income, operating expenses and income over operating expenses. Income over operating expenses represents cash that is available to meet principal payments, capital replacement and family living expenses. Anything left after that represents a return to management.

Your objective is to maximize income over operating expenses. That represents your profits. You should maximize profits by improving gross receipts and controlling operating expenses.

One way to improve profits is to improve your management skills, raise milk production levels and get higher milk premiums. Consult your veterinarian, feed consultant and other professionals for help there.

Another way to improve profits is to lower your operating expenses per hundredweight of milk shipped. Two major expenses on a modern dairy farm are feed and labor. How do your feed and labor costs per hundredweight of milk shipped look? Can you lower your feed costs without reducing your net income over variable expenses? Consult your nutritionist or feed company for this answer.

If your feed costs are much below $4.50 per hundredweight, you probably did not reflect all of your true costs. Likewise, what are your labor costs per hundredweight of milk shipped? If they are much higher than $1.50 per hundredweight, you may not be competitive. Go back to your operation and assess why these costs are so high. Perhaps your operation is too labor intensive. On the other hand, your labor costs may be much lower if you are primarily using unpaid family labor and did not adequately account for this.

Look over all of your other expenses and ask yourself how you can lower these costs without sacrificing profits. In many cases, you may find you can effectively lower some expenses. An example may be machinery or truck expenses. An older truck may do for the next year or so. On the other hand, don't cut necessary expenses if it will lower your profits. For example, you may decide to cut your veterinary expenses. However, production may suffer to the point where you lower overall profits. Remember, any decision to cut expenses should be made only with an eye toward improving profits.

This worksheet should help you focus on improving your bottom line and making decisions that will lead to greater profitability.

G3651 How to Compute Your Cost of Producing Milk | University of Missouri Extension

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