Dairy Enterprise Budget: Cost Per Cow, Cost Per Hundredweight and Break-Even

Dairy farmers are famous for working hard and knowing less than they should about what each cow earns. Milk checks arrive, bills go out and the difference is either enough or not. An enterprise budget turns that guesswork into numbers. It assigns every cost to the dairy, divides by cows and hundredweight of milk and tells you your cost of production and your break-even milk price. It is the single most useful financial tool a dairy can build.

This guide explains how to build a simple dairy budget. The numbers in the examples are made up to show the math, not predictions or benchmarks, and costs vary widely by farm, region and year. Work with an accountant, lender or extension farm management specialist to build your own. If you want to find dairy business workshops near you, agriculture.directory can help you find agriculture events in your area.

What an Enterprise Budget Is

An enterprise budget lists the income and costs of one enterprise on the farm, in this case the dairy herd, over a set period, usually a year. It is expressed per cow, and per hundredweight of milk, abbreviated cwt, which is 100 pounds. This makes it easy to compare with other farms and published benchmarks. Programs like farmdoc at the University of Illinois and University of Wisconsin Extension publish budgeting tools and benchmarks, and the USDA Economic Research Service publishes milk cost and return estimates.

Income

Milk sales. Pounds shipped times the price received, including component premiums and deductions.
Cull cow sales. Cows sold for beef.
Calf and heifer sales. Bull calves, crossbred calves and surplus heifers.
Other income. Government program payments, manure sales or custom work, if they belong to the dairy.

Costs

Feed. Purchased feed, plus the cost of raising home-grown forage and grain. This is usually the largest cost, often over half of total costs.
Labor. Hired labor and an honest value for family labor.
Replacement costs. The cost of raising or buying heifers, less the value of cull cows. Our guide to raising Holstein heifers discusses it.
Veterinary, medicine and supplies.
Breeding. Semen, supplies and technician fees.
Utilities, fuel and repairs.
Hauling and marketing, milk checkoff and fees. The national dairy checkoff program at dairycheckoff.com is funded by assessments on milk sales.
Interest, depreciation, insurance, taxes and rent. Overhead and capital costs.

A Simple Worked Example

Imagine, for illustration only, a herd of 100 cows producing an average of 24,000 pounds of milk per cow per year. That is 240 cwt per cow, or 24,000 cwt for the herd. Suppose milk sells for 22 dollars per cwt. Milk income is 22 times 24,000, or 528,000 dollars. Now suppose total costs for the dairy, all in, are 560,000 dollars. The cost per cow is 5,600 dollars, and cost per cwt is 560,000 divided by 24,000, or about 23.33 dollars per cwt. That is above the milk price of 22 dollars, so the dairy is losing about 1.33 dollars per cwt before counting cull and calf income, which might make up the difference. The break-even milk price, the price at which income equals cost, is the cost per cwt after subtracting other income per cwt. This is the kind of calculation that tells you where you stand.

Key Ratios

Feed cost per cwt. Total feed cost divided by cwt of milk.
Income over feed cost. Milk income minus feed cost, per cow or per cwt. It is a quick indicator of profit potential.
Labor cost per cwt. Shows efficiency.
Cost per cow per day. Total costs divided by cows and days.
Herd turnover rate. Percentage of cows leaving each year, which drives replacement cost.

Sensitivity: What If?

Once you have a budget, test it. What happens if milk price drops by two dollars per cwt? If feed costs rise 10 percent? If production per cow improves by 1,000 pounds? Sensitivity analysis shows which numbers matter most for your farm. Many dairies find that milk production per cow, feed cost per cwt and replacement costs have the largest effects. Our forage guide explains how better forage can lower feed cost.

Benchmarks

Compare your numbers to farms of similar size and region. Many extension programs and dairy cooperatives publish benchmarks. Be careful with comparisons, since farms account for costs differently, and remember that benchmarks are guides, not targets that suit every farm. The USDA National Agricultural Statistics Service publishes data on milk production and prices.

Common Budgeting Mistakes

Leaving out family labor. It has a real cost.
Ignoring depreciation and replacement. Equipment and heifers wear out or leave.
Using tax numbers only. Tax accounting differs from economic costs.
Not updating. Prices change.
Treating one year as typical. Look at several years.

Using the Budget

Use the budget to decide on investments, such as a barn improvement, to set marketing goals and to talk to your lender. Update it at least once a year. Many lenders and cooperatives offer help.

Farm.fm's page on a Wisconsin dairy farmer who sells wholesale and buys retail is a humor piece on dairy economics, and for another, see farm.fm's piece on a dairy processing investment and farmers' actual cows.