Dairying: A Place Where Cents Make Dollars

Dr. E. Bruce Godfrey

USU Extension Farm Management Specialist

With the help of several dairymen in the state I have monitored the prices that were paid by each of the processors who purchased milk from producers in Utah since order 135 was eliminated on April 1, 2004. It has been interesting to observe the changes that have occurred over time. At the conclusion of a recent meeting I also had an official with one of the government agencies ask why I was doing this when �all (the processors) pay the same amount for the components.� I had to admit that the prices paid for butterfat, protein and solids was generally the same for most of the processors each month. However, I did indicate that the �PPD� for each of the processors was usually different. As a result, there was some variation in the prices paid by each processor every month. A review of the data indicated that the price paid by any one of the processors was not consistently greater than all of the others. There was generally an order that existed, but exceptions did occur. I also noted that the differences were typically small (a few cents per cwt). As a result, I had the impression that I may be making something out of nothing, and that this exercise was only for my benefit. However, impressions are often proven wrong by data. As a result, I recently took the opportunity to compare the total milk check a hypothetical producer would have received if he or she sold to each of the processors who bought milk from producers in Utah for a year. It was assumed this hypothetical producer sold 200,000 pounds of milk every month from 1 April 2004 through March 2005. This milk was also assumed to have a uniform test of 3.5% butterfat, 3% protein and 5.75% solids. When the total amount that would have been paid by each processor for this period was determined, the difference between the high and low paying processor surprised me. It was more than \$30,000. This would represent a net difference in net income if production costs were the same. This exercise clearly showed that a few cents each month (\$/cwt), when multiplied by a 2.4 million pounds or 24,000 cwt (200,000 pounds a month times 12 months) does make a difference!

The above exercise got me thinking about other cases where a few cents can result in many dollars. For example, I recently met with a dairyman who had received a quality bonus every month for more than a year. In this case, the cost of getting the bonus was not zero, but it is likely the bonus payment had made a significant difference in his bottom line in the long run.

I also looked at what difference a 1/10th of a percent change in either protein (3.1% versus 3.0%) or butterfat (3.6% versus 3.5) would produce in returns for the hypothetical farm above. This exercise showed that this small change, especially in protein, could result in as much as a \$0.40 per cwt change in the price paid for milk in some months. While there was some variation between processors, this small change in either component over a year would have changed gross receipts by more than \$10,500 for butterfat and more than \$16,500 for protein.

There are few areas where producers have greater ability to affect their bottom line than in the cost of producing milk. I recently had the opportunity of reviewing the data for dairymen who were associated with one of the technical college farm business management programs (Bridgerland, Uintah Basin, and Snow) in 2004. The difference in direct expenses (feed, breeding, DHIA, hauling, etc.) of producing milk by these dairy operations varied from \$13.69 per cwt for the low profit firms (bottom third) to \$7.63 per cwt for the high profit (upper third) firms. This resulted in a difference in the bottom line (return over direct cost) that was more than \$12 per cwt and more than \$2000 per cow! This is not a trivial amount, but smaller differences also have a major impact. If two farms had the same total revenue and one had costs that were \$0.20 per cwt less than the other, over a year the difference in net returns would be \$4,800 (assuming they both produced 200,000 pounds each month) and \$4,800 or \$400 a month may be the difference in survival for some producers.

The relatively high prices for milk that have existed for the last several months are not expected to continue in 2006. In fact, the recent decline in the futures market suggests that milk prices could be less than \$12 per cwt during much of the coming year. If that occurs, �penny pinching� on costs and/or looking for ways to get a few more cents out of the milk produced may be the only way that producers will survive in the coming year. Remember a few cents in revenues or costs per cwt can make a big difference in a year!