Over the past three years, expenses on dairy farms have surged significantly with feed, wages, energy, and supplies all experiencing dramatic jumps. Many of these expense hikes seemed beyond our control.

The rise in expenses resulted in considerably higher production costs, with the cost of production for top-performing farms soaring from under $17 per hundredweight (cwt.) in 2018 and 2019 to well over $20 per cwt. in the past two years. Although milk prices were higher during parts of this period and helped offset the greater expenses, they softened in 2023. This led to a considerable tightening of dairy profit margins, turning negative for some months.

As we focus on generating profit margins in 2024 and beyond, our management attention shifts to regaining control of the cost of production and reversing the upward trend of the past three years.

Many things add up

When evaluating the differences between farms with a consistently lower cost of production and those at higher cost levels, the factors contributing to the variance are generally a series of small advantages rather than one or two significant areas. Attention to detail, high-level cow care, and the ability to hire and develop high-quality employees are among the distinguishing factors. Here are some specific management strategies for reducing your cost of production.

Boost production per cow and maintain healthy cows: The foundation for managing the cost of production continues to be improving production per cow and maintaining healthy cows. Higher production allows farms to spread expenses over more output, while having healthy cows helps minimize the cost of herd turnover.

We observe a growing number of Holstein herds reaching 6.5 pounds or more of combined butterfat and protein per cow per day. Additionally, they are reducing removal rates from sickness or inability to breed back to less than 30% of the herd annually. Jersey and crossbred herds are also experiencing proportional increases in production. With continually improving genetics and cow management, it’s crucial to ensure that your farm is on track to maximize production per cow.

Measure cost of production on an energy or component corrected basis: Since butterfat and protein levels on farms have climbed significantly in recent years, it is important to standardize for the higher component levels to effectively compare progress on cost of production over time or with other farms.

Price feed to take advantage of falling commodity prices: Feed is the most significant area where farms should be able to lower the cost of production in 2024, as corn and soybean prices have dropped substantially. Depending on your location and whether you raise or buy forages, the ability to lower feed costs could be 75 cents to $1.50 per cwt. of milk produced.

While the commodity trend does appear to be downward, it may be good to lock in some of the lower feed costs now for the summer and fall, as weather or other events could cause a price spike during the growing season. If feed prices do trend lower over the summer, look to extend feed contracts or hedging into the winter and next spring.

Enhance the productivity of your workforce: Wage rates have climbed significantly with the tighter labor market and higher living costs. Technology may provide options to accomplish some of the more routine tasks and allow your workers to focus on higher priority work. Robotic teat dippers, automated feed pushers, and alley scrapers are potential tools for completing repetitive tasks. Cow identification systems and improved sort gate performance are enabling more cow care work to be done as cows exit the parlor, rather than spending time locking up or finding cows in the barn. Reducing bottlenecks to cow flow and tightening milking protocols may allow you to get cows through the parlor faster.

Budget expense categories and monitor performance throughout the year: Establish realistic goals for all expense categories on a monthly basis and then capture actual expenses in your financial system. This allows you to evaluate whether you are on track on a monthly or at least quarterly basis, adjusting as needed if something is off track.

Control interest expense by prioritizing capital expenditures: Short-term interest rates have jumped almost 5% over the past two years. Target capital investments to items that enable higher milk production and labor efficiency (technology or dairy facility upgrades) to support a higher return to cover the interest costs. It may make sense to defer purchases that provide a lower return in the short term (farm equipment or land) or that can be put off until rates lower somewhat.

While it may seem like expense levels and cost of production are beyond our control, we can take steps to lower the cost of production, even with expenses still at elevated levels. The foundation is continuing to improve the productivity of your herd through genetics and cow care to spread expenses over higher production levels. A well-established and timely financial record system will enable you to track expense and cost of production trends monthly, or at least quarterly, to ensure you are on track to hold expenses in line with your goals. While you may not be able to return to cost levels of three or four years ago, it is reasonable to stop the uptrend and make progress in reducing the cost of production in 2024.