How Much Does It Cost You to Produce a CWT of Milk?
What price are you getting per cwt of milk? Like most dairy farmers, you know the price or you can get it quickly by reviewing milk check receipts. How much does it cost you to produce a cwt of milk? Like many dairy farmers, you may not know. Dairy farming is complex, and determining your costs of production is sometimes difficult. Yet, your costs directly affect your profit, and it is important to understand them.
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If profit is too low or negative, using costs per cwt allows you to compare your farm to other farms to determine your strengths and weaknesses. Comparing total income and total costs of different farms is not very useful because farms are different sizes and production levels. By using costs per cwt, you can compare farms of different sizes and types as well as dairy herds of different production levels. As you try to increase profits to reach your goals, it is useful to think about the profit formula.
Profit = (price/cwt milk + other income/cwt – cost/cwt milk) x volume milk sold
To illustrate this formula let’s suppose you have a goal of making $90,000 profit per year on three million pounds of milk sold (i.e. 30,000 cwt.) per year. Assume you cannot increase volume since you are using your facilities at capacity, and your cows are relatively productive. Because you have little ability to influence milk price per cwt, you only have significant control over the cost per cwt of milk. If the milk price is $19.00 per cwt with $2:00 per cwt in other farm income (culls, calves, crops, custom work, etc.) you can see from the formula below that you must reduce your costs to $18.00 per cwt to achieve the goal of $90,000 profit per year.
$90,000 = ($19.00/cwt milk price + $2.00 other income/cwt - $18 cost/cwt) x 30,000 cwt milk sold
It is useful to analyze your costs by breaking them down by category such as the IRS schedule F categories. By comparing these individual category costs on a cwt basis to industry averages, you can determine your strengthens and weaknesses. For example, if your feed and crop costs are lower than industry average, then that is a strength in your business. If depreciation and repair costs are higher than industry average, then that is a weakness in your business and that is where you should focus your management. Analyzing your individual cost categories yearly will help you improve your management.
Each year since 1995, the University of Maryland Extension has conducted the Maryland Dairy Farm Business Summary education program. This education program provides Excel spreadsheets to help you calculate your costs of production per cwt to compare to industry averages. Or if you choose, an Extension Educator can visit your farm to complete the spreadsheet analysis and help you analyze your farm. To participate in the Maryland Dairy Farm Business Summary, contact Dale Johnson at 301-432-2767, ext. 325 or email dmj@umd.edu.
This article appears on the June 8, 2021, Volume 2, Issue 2 of the Maryland Milk Moo's newsletter.
Maryland Milk Moo's, June 8, 2021, Vol.2, Issue 2
Maryland Milk Moos is a quarterly newsletter published by the University of Maryland Extension that focuses on dairy topics related to Nutrition and Production, Herd Management, and Forage Production. To subscribe to this newsletter, click the button below to enter your contact information.
