Factors Associated with Variations in Earnings

Jason Karszes, Cornell PRO-DAIRY

Comparison of Selected Measures and Costs by Quartile of Earnings 155 Dairy Farms, New York State, 2019

The 2019 year was a rebound in earnings from 2018 for farms that participate in the Dairy Farm Business Summary and Analysis Program. The average rate of return on capital without appreciation increased from 1.1 percent in 2018 to 5.6 percent in 2019. 1 While the average increased, variation continued to be wide in earnings. With 155 farms completed for 2019, the data was sorted by quartile of earnings, as measured by rate of return on all capital without appreciation. The following tables contain selected measures and costs associated with the four quartiles of farms and can be used to see differences across the farms. The lowest quartile of farms averaged -1.1 percent rate of return on all capital without appreciation, with the second quartile averaging 3.1 percent, the third quartile earning 5.5 percent, and the highest quartile of farms earning 8.8 percent.





Table 1 highlights selected measures of size, efficiency, costs, and profitability for the four groups. Confirming a trend that has been ongoing for some time, as earnings increased, so did herd size, with the lowest quartile of farms averaging the smallest herd size, and the highest quartile of farms by earnings averaging the largest herd size. While there is a trend towards larger farms averaging higher earnings, a range of herd sizes is represented in each quartile of farms. In Table 3, the quintile range of herd sizes for the lowest earning group of farms was from 57 to 1,035 cows and the quintile range in herd size for the highest earning farms was 556 to 3,408. The quintile range of farms is the average of farms by 20 percent increments for that measure.

Increase in herd sizes are correlated with increased worker equivalents and total tillable acres. However, with increased herd sizes, efficiency is increased, with milk sold per worker equivalent going from an average of 1,013,639 pounds for the lowest quartile of farms to 1,493,981 pounds for the highest quartile of farms. With this increase in efficiency, the highest quartile of farms achieved the lowest cost per cwt for hired labor, averaging 26 cents per cwt less than the next closest quartile. While working more acres in total, the acres worked per cow fell from 2.28 acres per cow for the lowest quartile of farms to 1.62 for the highest quartile of farms. This utilization of less acres per cow helped lead to a lower total capital investment for the highest quartile of farms, averaging $10,963 per cow, $2,205 less than the lowest quartile of farms.





The highest quartile of farms average the highest milk sold per cow, averaging 27,092. This was 1,031 pounds higher than the third highest quartile of farms and 1,931 pounds higher than the lowest group. While the average milk sold per cow does increase for the higher profit farms, as is reported in Table 3, there is a large range in milk sold per cow, with farms in the higher earnings quartile ranging from 24,948 pounds sold per cow to 28,916 sold per cow. Along with averaging the highest milk production, the highest quartile of farms by earnings had the lowest cull rate, averaging 33 percent for the year.

The average net milk price received also increased, moving from the lowest quartile of farms to the highest quartile of farms, from $18.04 to $18.33, or a difference of $0.29 per cwt. Part of this difference is explained by the highest quartile of farms averaging the highest percent protein.

Total costs to operate the farm decreased, moving from the lowest quartile of farms to the highest quartile of farms, with the average falling from $19.66 per cwt to $16.62 per cwt, a difference of $3.04 per cwt (Table 3). While part of this difference is explained by the higher milk sold per cow, this is also a result of lower total expenses per cow, with the highest quartile of farms averaging the lowest operating cost to run the farm on a per cow basis. With expenses divided into 31 different expense categories, differences can be highlighted across the four groups. The highest quartile of farms had the lowest average cost per cow on 19 of the 31 expense categories. Machinery repair, fuel, fertilizer, seed, spray and chemicals, and rent expenses all averaged the lowest of the four groups and can potentially be a result of less acres per cow and higher asset utilization. However, of the five expense categories that the highest quartile of farms were the highest per cow, custom boarding and purchased forages may be partially a result of less available acres.

With the highest milk production per cow and the highest milk price, the highest quartile of farms averaged the highest milk sales per cow. They also averaged the highest in dairy cattle revenue and crop revenue, even with the least acres per cow. Crop revenue per cow is comprised of crop sales plus change in inventory of

grown feeds plus crop insurance proceeds. The combined impact of all the revenue sources resulted in the highest quartile of farms averaging $275 dollars more revenue per cow than the next quartile and $516 higher than the lowest quartile of farms.

For the lowest quartile of farms, the operating costs to produce milk averaged $17.59 per cwt, with the highest quartile of farms averaging $14.53 per cwt. Incorporating depreciation expenses and values for family contributions of labor, management, and equity resulted in a total cost of producing milk of $22.52 per cwt for the lowest quartile of farms, and $17.96 per cwt for the highest quartile of farms as determined by the rate of return on all capital without appreciation.

Analyzing how your business compares to industry benchmarks can be useful to identify areas to consider making management changes. If you are interested in participating in the Dairy Farm Business Summary and Analysis Program, please reach out to the Cornell Cooperative Extension farm business management extension educator in your county.

 





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