Production Level

Costs per unit and net returns in a dairy enterprise are highly dependent on the level of milk production. Production levels vary for a number of reasons such as livestock genetics, weather, input levels, and management. Budgeting at multiple production levels can help producers examine the financial risk of a livestock enterprise that is directly related to production risk. The following estimated budget includes two production levels — 18,000 and 22,000. The 18,000 pounds reflects producers in the top 25 to 50 percentile (slightly above average); whereas, the 22,000 pounds is intended to reflect production levels of the top 5 to 10 percent of producers. The projected budget at the two production levels is presented on both a per cow and a per hundredweight (cwt) basis.

Capital Requirements

Capital invested in dairy facilities varies greatly depending on herd size, degree of mechanization, and type of facility. The capital needed to establish a new 2,400 lactating cow drylot dairy operation with modern equipment is estimated to be $4,396,970 with another $5,040,000 for the cows. A partial breakdown of the investment assumptions used for the cost return projections is shown in Table 1. This budget is based on a total herd size of 2,880 cows, with 2,400 cows (83 percent of the herd) being milked at any one time. Investment amounts are given as total for farm, per cow in the herd, and per lactating cow. Production can vary greatly depending on the amount of investment with a drylot dairy due to environmental stresses. For example, shades and windbreaks increase the investment but can help reduce stress and thus have a positive impact on milk production. Table 2 shows how the return on investment (Line I in the budget) varies at various investment and milk production levels.

Feed Costs

Dairy cows require high quality forage and grain. Concentrates and grain requirements increase as milk production increases. However, the value of increased production generally will offset the added feed cost associated with the higher production levels. Table 3 shows the amounts and cost of feed used for the different production levels in this budget. At over $1,000 per cow per year, feed is obviously the most important factor in the cost of production. Feed costs are based on market prices, thus, for dairy operations that produce some, or all, of their grain and forage requirements this allocates the cost of producing the feed to the dairy enterprise. Because feed costs are so important, Table 4 shows how the return on investment (Line I in the budget) decreases at various milk prices when feed costs increase by 10 percent.

Returns

Producers receive income primarily from the sale of milk. Additional income is received from the sale of calves and culled breeding stock. In this budget it is assumed that replacement heifers are purchased and thus all calves are sold. It is further assumed that approximately one-third (34 percent) of the cows are replaced each year due to culling and death loss. Cull income is assigned to 28 percent of the herd annually. The other 6 percent represents death loss and cows with no salvage value. Because milk sales make up the majority of income, returns are very sensitive to milk prices. Table 4 shows the return on investment (Line I in the budget) at two levels of feed cost and varying milk prices.

Item	Total	Per cow in herd	Per lactating cow
Number of cows	XXX	2,880	2,400
Drylot corrals	$576,000	$200	$240
Shades	$288,000	$100	$120
Feed storage: Hay barn	$123,530	$43	$51
Silage bunker	$866,668	$301	$361
Commodity shed	$117,321	$41	$49
Protein bin	$25,451	$9	$11
Milking parlor (80 stalls)	$1,040,000	$361	$433
Manure storage system	$720,000	$250	$300
Rolling equipment*	$500,000	$174	$208
Miscellaneous**	$140,000	$49	$58
TOTAL	$4,396,970	$1,527	$1,832
Breeding herd	$5,040,000	$1,750	$2,100
TOTAL INVESTMENT	$9,436,970	$3,277	$3,932

* Rolling equipment is all feed handling and processing equipment, tractors, trailers, pickups, etc.

** Miscellaneous is site preparation, electrical grading, water cooling system, etc.

Information Included in Budget – 2,400 Lactating cow dairy

1. Feed: includes total feed for the dairy cow on an annual basis (see Table 3 for details).

2. Labor: based on 16.55 full-time persons at an average of $34,000 (salary + benefits) per person divided by the number of cows in the herd.

3. Veterinary, drugs, and supplies: costs for prevention and treatment of disease.

4. Utilities and water: telephone, electricity, fuel, and water costs allocated to the dairy enterprise.

5. Fuel, oil, and auto expense: share of the farm car and trucks plus gasoline, diesel, and oil for scraping and hauling manure and for hauling feed to the dairy herd.

6. Milk hauling and promotion costs: milk-hauling costs at $0.65/cwt. and promotion costs at $0.15/cwt.

7. Building and equipment repairs: annual building and equipment repairs allocated to dairy enterprise calculated as 2 percent of the total investment.

8. Breeding/genetic charge:

a. Capital replacement: price of a heifer replacement times the replacement rate.

b. Semen, A.I. services, and supplies: includes semen, artificial insemination services, and supplies.

c. Interest: interest is charged on the value of the breeding herd, which is based on the cost of replacement heifers entering the herd.

d. Insurance: averages approximately 1 percent of the value of the breeding herd.

9. Professional fees (legal accounting, etc.): business costs allocated to the dairy enterprise.

10. Miscellaneous: miscellaneous costs (subscriptions, education, etc.) allocated to the dairy enterprise.

11. Interest on variable costs: calculated on one-half of variable costs at a rate of 8 percent.

12. Depreciation on buildings and equipment: depreciation is based on the total original cost less the salvage value of buildings and equipment on a per cow basis divided by the estimated life. The budget value is based on a total investment of buildings and improvements of $1,336 per cow and an investment of $191 per cow for equipment. The useful life is assumed to be 15 years for buildings and improvements and 5 years for equipment. A salvage value of 10 percent is assumed on buildings and improvements and equipment.

13. Interest on buildings and equipment: interest is charged on one-half the average investment [(initial cost + salvage value) ? 2] for buildings and improvements and equipment at a rate of 8 percent.

14. Insurance and taxes on buildings and equipment: based on the original cost times 0.25 percent (insurance) and 1.5 percent (taxes, buildings and improvements only).

15. Milk sales: based on the annual production per cow times milk price.16. Volume premium: dairies that can ship milk in semi loads at a time often get a premium based on volume. A premium of $0.50 per cwt. is included for a 2,400-cow dairy.

17. Calves sold: based on a 95 percent calf crop and selling all calves (heifers and bulls) at birth.

18. Cull cows sold: assumes cull income is realized on 28 percent of the herd even though 34 percent of the herd is replaced annually. The 6 percent with no income represents cow death loss and cows with zero salvage value.

19. Average selling price of milk to cover variable costs: represents the price per cwt. needed for milk to cover variable costs of production. Assumes calf and cull income and all costs remain constant.

20. Average selling price of milk to cover total costs: represents the price needed for milk per cwt. to cover total costs of production. Assumes calf and cull income and all costs remain constant.

H. ASSET TURNOVER: (returns per cow divided by total assets) Asset turnover is the percentage of total investment recovered by total returns. Inverting this measure allows different enterprises to be compared on the basis of capital required to generate a dollar of gross income.

I. NET RETURN ON ASSETS: [(returns over total costs + interest on breeding herd + interest on variable costs + interest on fixed costs) ? assets] Net return on assets is the percentage return on investment capital (both borrowed and equity). This measure enables comparisons to be made between enterprises as well as other investment alternatives.

Source: Kansas State University
Author: Department of Agriculture Economics