It is not really all that much — just 70 cents per hundredweight of milk. It’s not even three quarter coins. After monitoring years of accrual adjusted income statements, 70 cents appears to be the difference between the average dairy producers and the top one-third. Analyzing all the income and expenses from top accounting firms and other farm income statements, the difference in net income is less than $1 per hundredweight.
Pieces of the puzzle
It does not seem to matter what year it is. Regardless of milk price, the income from livestock or the volatility of expenses, the gap remains the same. In some years, due to the economics, all dairies will show a loss. However, the difference between the two groups remains the same, some just lose less. In years when there is enough profit to go around for everyone, top herds are just that much further ahead.
It starts to make sense when real money is applied to the cow numbers. Using an example of an average herd producing 24,000 pounds of milk, 70 cents per hundredweight calculates out to $168 per cow. For someone milking 100 cows, this means that top producers are $16,800 ahead of the average dairy farmer within that group. A 200-cow example comes out to $33,600; 500 cows at $84,000; and 1,000 cows at $168,000 ahead of others. From there, one can see how the math adds up to real money.
The amount of additional money involved may only be 70 cents, but the real dollars allow for some serious asset building. First of all, top herds will be in a better position to keep the bills paid. Surplus cash keeps the checking account healthy. Adding or replacing capital items such as parlors, buildings, machinery, and land can be planned. And how about off-farm investments like retirement accounts? Certainly owners of dairies who do well financially are able to pay themselves, family, and key employees better.
The question is, “How does one become a part of the top third group?”
What it takes
The first step is to have good financial information to work with. It all starts with the balance sheet that is completed at the end of the operating year. It must have real inventory numbers — not just rounded estimates. Items such as livestock numbers and values have to be compared to the previous year. If there are more cows than last year, that is additional income and is noted on the income statement. The same goes for stored crops. Less crops compared to the previous year would mean a loss. Again, an adjustment made on the income statement.
The next step is that income statements must be accurate. This is the most important document for determining true profitability. It contains all of the year’s income and expenses, and it goes much further. There are adjustments for prepaid expenses or bills not paid. Prepaid expenses have to be removed because they are for the following year. If there are bills not paid such as feed bills, rents due, or other operating bills, they must be added back in for the year. The idea is to try to make adjustments for the real dollars that came into the checkbook and went out.
Stored feed inventories also must be compared from last year’s balance sheet to the current balance sheet. If there is more feed on hand than last year, that means more value, which is considered income.
Other accrual adjustments to the income statement can be discussed with your accountant to help establish true income. Note that most properly prepared income tax returns for agricultural production are prepared on a cash basis. Therefore, accrual adjustments are not part of the process. Depreciation done for a tax return may make full use of allowable depreciation. A properly prepared income statement will use economic depreciation or how the values drop based on wear and tear.
Attention to details
The top one-third of dairy producers pay attention to details. Small things add up, like making sure water and feed consumption are at a maximum. Somatic cell counts may be lower. Herd health, in general, may be better. These farmers know how to keep livestock comfortable. In some cases, forward marketing of milk and purchased feed becomes important for them. They give good thought to purchases of all kinds. Larger expenses have a pencil or spreadsheet run to decide if having custom work hired out is better than owning certain pieces of equipment. Most of all, they are not bosses. They know family and hired help are a must. Therefore, they are coaches, explaining “why” things are done on the farm.
Top producers do many things right. It is their choice. They have a heightened level of awareness. The income is a few cents higher and expenses are a few cents lower. In the end, 70 cents per hundredweight is their reward.
