Dairy Economics………..Focus on the Cream!
Kevin Hoogendoorn, DVM
Everybody familiar with dairy knows what cream is. It’s the sweet, beautiful stuff that rises to the top of milk. It forms a thin layer there and we skim it off to make all kinds of goodies for ourselves and our families. Profits in the dairy farming business are very similar. They form that thin beautiful layer on top of all our expenses. It is also often a very thin layer. (Unfortunately, sometimes it is a non-existent layer.) But, this thin layer is where our eyes need to be focused at all times. What happens when there is a bit more of butterfat separated from milk it is hiding in? It rises to the top and joins the cream. It is the same with dairy finances. Think of a bucket of milk direct from the cow as all the money transactions on the dairy. The more molecules of butterfat that separate from the milk the thicker the cream layer will be on the top. In a similar fashion, every penny of expenses that we save on our dairies rises to the top and adds to the profit.
Let’s talk through a quick example. Class III Milk is currently selling for around $16.50 per hundredweight. If we assume $1.50 in premium bonuses, we will sell 100 lbs. of milk for $18.00. This $18.00 is equivalent to our entire bucket of milk that we get directly from the cow. To get to the cream/profits, we have to separate out the milk/expenses.
The feed that our cows consume is going to cost us $8.00. We’ll spend another $1.00 on interest, another $2.00 on labor, another $1.00 on supplies. We’ve already spent $12.00 of our bucket of milk and we have more expenses to cover. Depreciation/replacement cost, hauling, industry assessments, manure handling, repairs, utilities, veterinary, testing, etc. will spend another $5.00. So, our total spent is now $17.00. We’ve separated out that $1.00 of profit that rises to the top. Now we need to go back and look over this $17.00 of expenses. I am confident that we can separate off a penny here and a penny there. These pennies will all rise to the top and join our profit. If we can cut 1 penny off of 10 different expenses we will have increased our profit by 10 percent!