Benchmark Your Cost Of Production
The cost of producing one cwt of milk varies widely throughout the U.S. The best business owners know that number down to the penny. Dean Strauss, Wisconsin farmer and managing partner of the 2,000-cow Majestic Crossing Dairy tracks the cost of production (COP) on a monthly, quarterly and annual basis.
“I work with my accountant on yearly and semi-yearly cost of production records on an accrual basis,” Strauss says. “I keep track of a monthly spreadsheet myself. Knowing your cost of production helps inform decisions on a daily basis.”
Just because you know what your cost of production is, doesn’t mean you know what it should be.
According to Matt Lange, a dairy business consultant with Compeer Financial, there are two simple ways to calculate your target cost of production:
1. The 10-year average Class III price plus your average basis over the same period of time. For example, say the 10-year Class III price is $15.61 per cwt and your basis over that period of time was $1.50. ($15.61 + $1.50 = $17.10) So, the farm in this example needs to keep their COP below $17.10 to have positive earnings over the 10-year time frame, Lange says.
2. Use your 10-year average mailbox price. For example, if my average mailbox price over the past 10 years was $16.90, my COP needs to stay below that level, Lange says. The lowest lows of 2009 and the highest highs of 2014 are two reasons the 10-year average works well in this calculation, Lange says. “If you use a 10-year average as a cap for your cost of production, you’re going to still have years where you’re going to lose money,” he says. “You have at least a shot at making it.”