Dairy Benchmarking in an Extraordinary Year by: Jim Moriarty

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Source: Compeer Financial

Last year was a year like no other in the dairy industry. We encountered a sudden demand interruption when the pandemic hit in March. Then went from dumping milk and forced production cutbacks to increased retail demand and rising milk prices over the summer and fall. Along the way, we had several significant government programs to assist in the recovery. When it was all summed up, we actually ended up with a financially successful year.

For those who use benchmarking to help test their farm business performance, it is useful to benchmark your 2020 results given these extraordinary circumstances? While we do need to factor in the unique aspects of the past year, we believe there is still important information to gain from benchmarking your 2020 results.

Effective benchmarking
We’ll start with a few reminders on effective benchmarking. First, it’s important to use accrual income statements and not cash statements (such as tax returns) to compare results. Accrual statements will adjust for the effects of reducing payables or increasing inventories, which will use up cash but reflect as profitability on accrual statements. Second, make sure the information you are benchmarking against is consistent with your information. Third, benchmarking against your own historical results is as important, if not more important, than comparing to results of external benchmarks or peer groups. Evaluating on your own trends helps point out areas of progress as well as areas that are not moving ahead.

For 2020, benchmarking on net profit or cost of production may not be as relevant as other years. Last year’s income and cost of production varied widely between farms, depending on government payments, variances in milk price with wide basis swings and production limitations with some processors. In general, we are seeing strong net profits in 2020 results, with government payments making up over half of the profit margin. However, government payments as a proportion of net income varies significantly across farms, depending on farm size and ownership structures. We also caution that simply subtracting government payments from net income as a way to look at true farm profitability is misleading. Government payments may have distorted other factors like basis and risk management for the farm. Net income less government payments should be positive for 2020. If not, it is a cause for further evaluation.

Related: The Numbers Coach: learning modules, tools and resources to help you position your farm for long-term success.

When we look beyond net profit, there are many areas from last year that are effective to benchmark. These areas would include the following:

  • Milk production and herd health results. That would include energy corrected milk production per cow, SCC, preg rates, and other related production factors.
  • Feed cost per cwt. Focus on the efficiency of milk produced per lb. of feed versus gross feed costs, especially as commodity costs swing widely. Income over feed cost can be another good comparison measure.
  • Labor costs per cwt. Labor costs are an area where it is particularly important to make sure that the operations you are using for comparison have similar operational characteristics as your farm. There is a significant difference in labor costs between an operation that is strictly a milk production enterprise and one that also grows and harvests crops, raises heifers and hauls their own manure.
  • Herd replacement cost per cwt. This measure would track the cost of cows culled and died less cull cow income. Low death loss and involuntary culling and good value cull cows will strengthen this area.
  • Other Production Costs per cwt. This category would capture other  expenses such animal health, supplies, manure management, bedding, etc.

While last year was certainly full of unique circumstances, there is still much to be gained by comparing key production and financial results with both your prior year results and those of peers. The final step in benchmarking is to convert the evaluation into action by implementing plans to address areas that are lagging or could be further improved.