Mary Kate MacKenzie, Farm Business Management Specialist, Cornell PRO-DAIRY
In “Six Year Trend Analysis 2022,” authors Jason Karszes and Lauren Augello present characteristics of the same 122 dairy farms that participated in the Cornell Dairy Farm Business Summary from 2017 to 2022. Their report illustrates changes over time in key performance and financial metrics for a subset of the NY dairy industry and compares the top 25% most profitable farms to the rest of their sample. This article shares highlights from their data to provide insight into possible drivers of success for individual farms and ways in which the NY dairy industry has been impacted by changes in broader economic and regulatory environments.
Farm profitability
From 2017 to 2022, average net farm income per cow without appreciation reached a low of $167 in 2018 and a high of $1,612 in 2022. The average rate of return on assets (ROA) without appreciation ranged from 1.4% in 2018 to 11.6% in 2022. The analysis compares average performance of the 30 most profitable farms with that of the remaining 92 farms as determined by average return on assets without appreciation over the six-year period. In 2018, the high profit group achieved a net farm income of $463 per cow, compared to net farm income of -$8 for the remaining farms. In 2022, the high profit group achieved a net farm income of $2,034 per cow, compared to $1,343 for the remaining farms. ROA ranged from 4.1% in 2018 to 14.9% in 2022 for high profit farms, and from -0.1% in 2018 to 9.6% in 2022 for the remaining farms. The following sections explore farm characteristics that may explain some of the differences in profitability between these two groups.
Farm size and milk production
From 2017 to 2022, the average herd size in this sample rose from 998 to 1,232 cows. The most profitable farms were larger, on average, and they grew at a faster rate. Tillable acres per cow declined for all farms over the same period, from 1.93 to 1.80. High profit farms managed fewer tillable acres per cow, averaging 1.50 in 2022 versus 1.95 for the remaining farms. Corn grain acres varied across the period, showing a slight increase from 2017 to 2022. Lower profit farms devoted 0.21 acres per cow to corn grain in 2022, which was 1.75 times the number of corn grain acres per cow reported by the high profit group.
High profit farms increased milk production per cow by 5.6% over the six-year period, averaging 27,906 pounds in 2022, while the remaining farms increased milk per cow by 2.8% to 26,658 pounds in 2022. Due to faster growth in herd size and milk per cow, the high profit farms increased their total milk shipped by 41% from 2017 to 2022, while the remaining farms increased milk shipped by 21%, on average.
Labor use, efficiency & cost
With New York’s Farm Laborers Fair Labor Practices Act (FLFLPA) taking effect on January 1, 2020, this six-year period is an interesting time to analyze changes in labor costs and efficiencies on dairies. Overall, the labor cost per hired worker equivalent (FTE) rose 28% from 2017 to 2022. With labor efficiency gains offsetting some of this cost increase, the labor cost per hundredweight rose 10% over the same period. High profit farms spent slightly more on hired labor per FTE, yet they used labor more efficiently and they improved labor efficiency at a faster rate. In 2022, high profit farms spent $3.00 per hundredweight on hired labor, an increase of 5.5% over 2017, while the remaining farms spent $3.42 per hundredweight on hired labor, an increase of 13.5%.
Production costs
With fewer acres per cow, the higher profit farms had lower variable and fixed costs in expense categories impacted by the crop enterprise. In all six years, high profit farms spent less per hundredweight on custom hire, machinery repairs and fuel; machinery depreciation; and crop inputs. The cost gap between high profit farms and remaining farms increased steadily over the six-year period, with high profit farms spending $0.63 less per hundredweight on crop-related costs in 2017 and $1.20 less per hundredweight in 2022. Despite working fewer acres per cow, high profit farms also spent less per hundredweight on purchased feed in five out of the six years. Only in 2022 did the lower profit farms spend less on purchased feed, yet the difference was only $0.08 per hundredweight.
Higher rates of inflation in 2021 and 2022 impacted production costs on NY dairies. From 2017 to 2020, feed costs on high profit farms ranged from $5.58 to $5.85 per hundredweight, on average, then rose by 13% in 2021 and 19% in 2022, reaching a high of $7.78 in 2022. A similar pattern is evident for other expense categories sensitive to inflation, chiefly machinery repairs, fuel, and crop inputs. Milk marketing expenses also increased at a faster rate in 2021 and 2022, reflecting various changes to marketing cost structure, including the choice by some managers to purchase base, ship milk pounds above the new base limits, or both. In 2022, milk marketing cost high profit farms $1.64 per hundredweight versus $1.74 on remaining farms.
Rising interest rates in 2022 impacted individual farms differently depending on their debt structure and the portion of their debt with fixed or variable interest rates. High profit farms had a lower debt to asset ratio and lower debt per cow in all six years compared to the remaining farms. High profit farms spent $0.40 per hundredweight on interest in 2022, on average, while the remaining farms spent $0.66. For both groups, the interest expense in 2022 was higher than in the prior two years, but lower compared to 2017, 2018 and 2019.
On high profit farms, the total cost of milk production rose 24% from $17.79 in 2017 to $22.07 in 2022. Total cost of milk production on the remaining farms rose 26% from $19.43 to $24.52 over the same period. The total of milk production includes operating expenses, depreciation expenses, the opportunity cost of operator labor and management, and a 5% return on equity.
Milk price
Historically high milk prices in 2022 helped farms offset inflation-driven cost increases. Gross milk sales per hundredweight averaged $27.02 for both profit groups in 2022, an increase of more than $7.00 over the previous year. Net milk price was higher for the high profit group in all six years, with the difference between the two groups ranging from $0.07 in 2021 to $0.36 in 2020.
Investment
The high profit farms had lower total investment per cow, yet the gap between high profit farms and the remaining farms narrowed from 2017 to 2022. Over this period, the average total investment per cow among high profit farms rose 14% to $13,442, while the average total investment among the remaining farms rose 10% to $13,600. The high profit farms reinvested more per cow back into the farm each year except in 2021.
Summary
High profit farms in this sample tended to be larger farms that utilized less labor, land, and capital per cow. They also produced more milk per cow, on average, spreading per-cow variable costs and fixed costs over more units of milk production. The data do not reveal the extent to which these differences are due to economies of scale versus strong management performance, but it is likely that both factors contribute to these farms’ financial success. The data do show clear evidence that variation in farm performance is driven more by differences in the cost of production than by differences in the milk price. Opportunities for managers to improve performance include pursuing efficiency gains across all areas of the dairy business and achieving incremental increases in milk production and net milk income while controlling costs.