Dairy Information: Center Focus Column

Working on Margins — In a Barn or On a Plane

The dairy business is unique. Very few other occupations allow families the opportunity to build generational businesses while working with your children to teach them the values that can carry them through a lifetime. At the center, we often say that farming as a way of life can lead to a terrible business model, while farming as a business can offer a wonderful way of life.

WJohn-FreyNEWith milk prices and margins at all-time highs, many in the industry have a restored sense of enthusiasm for the dairy business and the way of life that it can offer. However, we cannot overstate how important times like these are to encourage interest in the business from the next generation and to use the current market environment as a business, risk, and financial management teaching opportunity.

The airline industry serves as an interesting comparison to the dairy industry. The level of competition in the flying business is fierce, and it has left its share of business failures along the way. Consumers aren’t any more interested in paying more than they have to for transportation than they are for any other product, including milk.

According to the US Airways Group, the costs associated with a 100-passenger flight, at an “average cost per seat” of $292 per trip, are broken down in the following order: 29 seats must be filled to pay for fuel, 20 seats must be filled to pay for salaries and other related compensation costs, 16 seats and 14 seats must be filled to cover ownership costs (debt coverage) and government fees and taxes, respectively, 11 passenger seats cover maintenance, and 9 passengers cover “other miscellaneous” costs. That leaves one passenger to achieve a profit on the average flight, and these costs are mostly the same regardless of whether there are 100 passengers or 10 passengers on the plane.

Similar to dairy farm owners and operators, airline managers have worked to lower “production” costs and improve margins. However, unlike dairy farmers, raising prices is always a possibility for an airline, but it is done so at the risk of losing more seats.

Just like airline passenger seats, dairy barns or, even more specifically bulk tanks, must be filled to capacity to achieve the highest level of profitability possible. While we don’t control the price of our product, we are competing in a world market just like the airlines are, with New Zealand and other countries providing competition for products produced here the U.S.

Each year, Farm Credit East, in conjunction with other Farm Credit associations in the Northeast, compiles an annual “Northeast Dairy Farm Summary” that looks at farms from New York, New England and New Jersey to review all aspects of dairy financial information from participating dairy farm businesses. The summary typically includes about 500 dairy farm operations. That data is typically released in the upcoming month.

In 2012, the average net earnings for these 500 farms, which averaged 343 cows per herd, was $415 per cow and $1.82 per hundredweight of milk. The average milk production for those farms was around 23,500 pounds. When comparing the average farm to farms in the bottom 25 percent, net earnings fell more than $733 per cow to a loss of $318, while milk production fell more than 1,550 pounds and cow numbers fell nearly 100 head.

This demonstrates the need to “fill the barn” and maximize capacity through added milk production per cow. Just like there are fixed costs associated with every runway lift off, there are fixed costs associated with every daily activity on a dairy farm, and they can be measured on a per stall and on a per hundredweight basis.

Current conditions in our dairy industry offer the opportunity to re-evaluate the vision of the family and the long term goals of the business. Getting away and visiting other farms is important, and you’ll hear more from the center, very soon, about our summer “Open Houses,” which will present such an opportunity. Pulling people together around the table in “profit or transition” discussions is also valuable time spent. This can result in establishing new areas of focus for achieving full capacity and reducing costs. I am reminded often how the dairy industry is unique. The world needs and wants our product, and eating is not a discretionary activity (like flying). However, sometimes we can learn a lot by comparing our business to other industries.

Contact the Center for Dairy Excellence at 717-346-0849 or info@centerfordairyexcellence.org for more information on resources to help your family business.