National Farm Business Management
Conference
Tools to help Ohio’s
dairy farmers manage in
challenging economic
conditions
Dianne Shoemaker
The Ohio State University
Extension
shoemaker.3@osu.edu
Class III and Support Price
25
COP
15
10
5
2003
2004
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0
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$ per cwt
20
2005
2006
2007
2008
2009
How do I know if I’m profitable?
How do I know if I’m
competitive?
How do I survive?
3
Simple and Useful:
Cost of Production
Worksheets
Dairy
Issue
Briefs
http://dairy.osu.edu
-Nutrition and feed costs
-Reproduction and health
-Calf and heifer management
-Business issues
-People and stress management
How should I take on additional debt…continued
Download at:
http://dairy.osu.edu
Purchase online at:
http://estore.osuextension.org/
Why the 15 Measures?

What are competitive NE & Midwest
milk producers doing?

Where does an individual farm stand
in relation to competitive dairy farms?
Ten Areas:

Rate of production
 Pounds

of milk sold/worker
Cost control
 Total
feed cost per cwt milk sold
 Milking herd feed cost/cwt milk sold
 Operating expense ratio

Capital Efficiency
 Dairy
investment per cow
 Asset Turnover ratio

Profitability
 Net
farm income
 Rate of return on farm assets
Ten Areas:

Liquidity
 Current

ratio and working capital
Repayment schedule
 Scheduled

debt payment
Solvency
 Debt
 Debt
to asset ratio
per cow
Mission
 Maintain standard of living
 Motivated labor force

The Measures Provide:

Number, ratio, percentage, or
description

Specific instructions for calculation

An example calculation

Brief description

Specific recommendations for firms that
are above or below the competitive level
How the 15 Measures may help:

Evaluate an existing business.

Help the farm get a better feel for where
the business could go.

Identify priority areas the farm needs to work
on to meet business objectives.

Cautions:
 Looking
at one or two measures does not a
complete evaluation make!
 Look
at the whole business.
Key measures for 2010
Working capital
 Debt/Asset ratio
 Debt per cow
 Debt repayment schedule


And…
Different
Farms…
...Different Costs
Worksheet 1*
Historic and Projected Out-of-Pocket Cost of Production
Records used for a sole proprietorship with most of the income coming from the dairy enterprise:
Federal Income Tax Schedule F, Form 4797, year beginning and ending inventories, cwt. of milk sold
for the calendar year.
Farm Calculation
Using
2000___ Financials
(year)
Schedule F Expenses1
853,603
+ Accrued Expenses2
+
5,000
- Prepaid Expenses3
-
45,670
- Schedule F depreciation4
-
70,000
- Non milk income5
+/- inventory growth (-);
decline (+)6
-
166,292
+/-
-0-
Out-of-Pocket Cost of
Production
$
576,641
 cwt. Milk sold8

61,720 cwt
Out-of-Pocket Cost of
Production per cwt.
(historic)
$
9.34
/cwt
Worksheet 2*
Historic and Projected Cash Flow Planning Cost
Records used for a sole proprietorship with most of the income coming from the dairy enterprise: Actual and
projected out-of-pocket costs of production from Worksheet 1, operator’s personal draw, operator’s retirement
investment, principal paid, depreciation, capital investment expenditures and actual or estimated income tax
obligations.
Farm Calculation
Using 2000
(year)
Financials
Out-of-Pocket Cost of
Production
(from Worksheet 1)
588,173
40,566
+
41,000
+
7,000
+
7,000
+ Replacement 11
+
81,423
+
82,000
+ Estimated taxes12
+
13,000
+
13,000
Historic Cash Flow
Needs
$
718,630 ___
Projected Cash Flow
Needs
$
731,173
 cwt. of milk sold8

61,720
_

61,720
Projected Cash Flow
Planning Cost
$
Historic Cash Flow
Planning Cost per cwt
576,641
+
Projected Out-ofPocket Cost of
Production (from
Worksheet 1)
$
+ Operator’s personal
draw9
+ Operator’s
retirement
investment10
$
Projection for
2001
(year)
$ 11.64
/cwt
11.85
0
/cwt
Examples of factors that would cause the out-of-pocket and cash flow milk production costs to
change:
!
!
!
!
Changes in debt due to retirement of old debt and/or new debt from purchase of assets. Debt
levels in the current year may include interest and principal payments representing only part of
the future debt commitments.
Changes in production with or without an associated impact on absolute costs. Careful thought
must be given to how production changes will affect costs per cwt.
Changes in major expense categories such as feed, labor, etc.
Sales of assets and what was done with the proceeds from the sale of assets. Were the proceeds
used in ways that will increase or decrease future production costs?
Working Notes
1
Schedule F Expenses - Total farm expenses from Federal Tax form 1040F, line 35.
2
Accrued expenses
- Two types of expenses fall into this category. Typically, we think of
expenses prepaid in the previous year for items used in the production of
milk in the current year for which calculations are being made. This is
often done to minimize income tax liabilities in high-income years. Also
include expenses for items that were used in the year being evaluated but
were not paid until the following year. This would include accounts
payable, line-of-credit or credit card balances if not included elsewhere.
3
Prepaid expenses
- Expenses paid during the year being evaluated for items that will be used
in the production of milk in the following year.
4
Schedule F
depreciation
- Schedule F depreciation from Form 1040F, line 16 is a tax-based
figure rather than a use-based figure to represent the use of assets such as
machinery, equipment and buildings in the process of production. It is
deducted here so that a figure more accurately representing the use of
assets such as machinery, equipment and buildings can be added later.
See Replacement11.
In Summary…
 Our
dairy farms are facing unique
challenges in 2010…following 2009!
 Successful farms must monitor key
competitive measures and their
costs of production
 Tools available at
http://dairy.osu.edu