Tough Management Yields - Dairy Profits

Donald J. Breece Ph.D., Southwest District Specialist, Farm Management 
Ohio State University Extension

The last three years in the dairy business has required decisive action and tough management by dairy farmers.  Yet, those Ohio dairy farms that controlled costs, especially feed, have shown good profits.  Farmers that did not plan for feed purchases or that failed to take control of production efficiency saw profits deteriorate.

Results of the Ohio Farm Business Summary clearly demonstrates the potential for profits on well managed dairy farms.  This report summarized over 90 Ohio farm businesses that used FINPACK for year-end analysis.  The report represents farms from 31 Ohio counties.  Participation is voluntary, through educational programs offered by The Ohio State University Extension and several FBPA programs.

The FINPACK computer program is a comprehensive financial planning and analysis system.  The data in the Ohio report were not collected from a random sample.  Therefore, caution should be exercised in generalizing results to the situation of Ohio farms. Rather, it is a useful example of differences between farms resulting from improved management.  The dairy enterprise analysis is sorted by return to overhead and is separated by lower and upper third of farms participating in the summary.

The management function most required by dairy managers is controlling.  It is measuring performance in order to ensure that plans are achieving enterprise objectives.  There are four steps in the control process: 
1. Establish performance objectives and   standards, 
2. Measuring actual performance, 
3.Comparing performance to standards, and 
4. Taking corrective action.

"Milk prices are what they are; a farmer must control his own efficiencies."  Cost control, quantity and quality production, are within a farm managers own realm of influence.  A farmer may choose $6.50 per hundred weight of milk as a performance objective for covering feed costs of the cows and replacements.  Feed records, including feed inventory changes, are required to measure performance.  Comparing results from records analysis and taking corrective action will follow.  Corrective actions may include improving forage quality, changing rations, controlling waste or using a total mix ration system.

The table, representing the top third of dairy farms, demonstrates the results of tough management and cost control.  Even with the higher than normal feed cost of 1996, net return per cow remains very good at $689 vs $358 for average farms.

"Our farmers, who get half their income from milk, are in economic trouble.  Add a penny to the price paid to farmers and you will add half a billion to their income."  No, this is not a modern quote, it comes from an article in Readers Digest, September 1942.  If we think about the changes in dairy farming, since 1942 can we really expect less for the future.  Certainly, milk price is an important factor in dairy farm profits, as it has always been.  But, it will be the tough dairy farm manager that will take control of their own efficiencies and make superior profits in the competitive dairy business. 

Average Rsults of Top 33 % of Dairy Farms  
-Ohio Farm Business Summary, 1996 -
Gross Return
Direct Expenses
Overhead Expenses
Net Return