Building a Dairy Budget for the Future

Steve Taylor
New England Correspondent

BATAVIA, N.Y. — Coming off possibly the worst year for dairy producers in a generation, farm operators more than ever need to get serious about financial and production records so they can build budgets that will give them an idea of what the future will look like.

That was the assessment of Gary Snider, vice president of farm business consulting for Farm Credit of Western New York, which recently merged to become part of Farm Credit East. Snider was speaking on a teleconference with farmers, lenders and other dairy industry people this week sponsored by the Pennsylvania Center for Dairy Excellence.

Building a budget for 2010 must start out with basic records for management. Financial records already have to be kept for preparation of tax returns and to meet requirements of farm lenders, so they can easily also become tools for understanding the farm business and making informed decisions.

Putting financial records together with production data gives producers information for setting farm goals, measuring performance, evaluating outcomes and making decisions that will affect the future performance of the enterprise. More important, this process can become the foundation for constructing the budget for the coming year, which in turn will provide an idea of what the future will look like.

Snider says farmers need to determine their actual cost of production and their break-even to know where they’re headed financially. Cost of production is a true economic measure, consisting of all expenses plus depreciation divided by the total hundredweights of milk sold. The break-even is the number determined by adding all expenses and principal payments and dividing by total hundredweights sold. Care must be taken to count everything: income, expenses, living draws, payments, borrowed funds and capital purchases.

Knowing the numbers for cost of production and break-even can steer an operator on key decisions such as capital purchases, herd expansion or restructuring debt. “Farming by pencil” instead of by hook or by crook can prevent or mitigate mistakes, Snider said, and if farmers aren’t doing it yet they should try it, for “they might like it.”

Developing a whole farm budget for 2010 will be an effort to anticipate what the coming 12 months will look like in big picture terms and project where net cost of production and break-even will be. Most will try to test for the year, or perhaps multiple years, but “if you really want to get your financial arms around the business” try to do it monthly, he said.

Projecting ahead in a budget requires consideration of variable expenses and how they move depending on changes in milk output and other factors and of inflation, particularly in the cost of labor and real estate taxes. Then factors that determine gross income need to be considered, including estimates of cow numbers, a realistic calculation of herd production levels and, trickiest of all, figuring out what milk prices are likely to be.

For forecasting what milk prices will be the best Snider can offer is to track Class III milk futures.

He counsels farmers to take a hard look at two key dairy efficiency factors, cows per worker and pounds of milk sold per worker. Comparative data for Northeastern dairy farms in these areas can be obtained from Farm Credit and other agricultural lenders and from Cooperative Extension sources.

And he says it’s good to look back at what the farm’s performance for the last couple years looked like and then write down what’s likely to be different in 2010.

“And don’t get overwhelmed by the data,” he adds. “To be a good problem solver, use your data. After all, it’s results that count.”