National Farm Business Management Conference

Tools to help Ohio’s dairy farmers manage in challenging economic conditions

Dianne Shoemaker

The Ohio State University Extension

shoemaker.3@osu.edu

Class III and Support Price

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How do I know if I’m profitable?

How do I know if I’m competitive?

How do I survive?

Simple and Useful:Cost of Production Worksheets

-Nutrition and feed costs-Reproduction and health-Calf and heifer management-Business issues-People and stress management

Dairy IssueBriefs

http://dairy.osu.edu

How should I take on additional debt…continued

Download at:http://dairy.osu.edu

Purchase online at:http://estore.osu-extension.org/

Why the 15 Measures?

What are competitive NE & Midwest milk producers doing?

Where does an individual farm stand in relation to competitive dairy farms?

Ten Areas: Rate of production

Pounds of milk sold/worker Cost control

Total feed cost per cwt milk sold Milking herd feed cost/cwt milk sold Operating expense ratio

Capital Efficiency Dairy investment per cow Asset Turnover ratio

Profitability Net farm income Rate of return on farm assets

Ten Areas: Liquidity

Current ratio and working capital Repayment schedule

Scheduled debt payment Solvency

Debt to asset ratioDebt per cow

Mission Maintain standard of living Motivated labor force

The Measures Provide: Number, ratio, percentage, or description

Specific instructions for calculation

An example calculation

Brief description

Specific recommendations for firms that are above or below the competitive level

How the 15 Measures may help: Evaluate an existing business.

Help the farm get a better feel for where the business could go.

Identify priority areas the farm needs to work on to meet business objectives.

Cautions:

Looking at one or two measures does not a complete evaluation make!

Look at the whole business.

Key measures for 2010

Working capital Debt/Asset ratio Debt per cow Debt repayment schedule

And…

Different Farms…

...Different Costs

Worksheet 1* Historic and Projected Out-of-Pocket Cost of Production

Records used for a sole proprietorship with most of the income coming from the dairy enterprise: Federal Income Tax Schedule F, Form 4797, year beginning and ending inventories, cwt. of milk sold for the calendar year.

Farm Calculation Using 2000___ Financials (year)

Schedule F Expenses1 853,603

+ Accrued Expenses2 + 5,000

- Prepaid Expenses3 - 45,670

- Schedule F depreciation4 - 70,000

- Non milk income5 - 166,292 +/- inventory growth (-); decline (+)6

+/- -0-

Out-of-Pocket Cost of Production $ 576,641

cwt. Milk sold8 61,720 cwt

Out-of-Pocket Cost of Production per cwt. (historic) $ 9.34 /cwt

Worksheet 2* Historic and Projected Cash Flow Planning Cost

Records used for a sole proprietorship with most of the income coming from the dairy enterprise: Actual and projected out-of-pocket costs of production from Worksheet 1, operator’s personal draw, operator’s retirement investment, principal paid, depreciation, capital investment expenditures and actual or estimated income tax obligations.

Farm Calculation Using 2000 (year)

Financials

Projection for 2001 (year)

Out-of-Pocket Cost of Production (from Worksheet 1) $ 576,641

Projected Out-of-Pocket Cost of Production (from Worksheet 1) $ 588,173

+ Operator’s personal draw9 + 40,566

+ 41,000

+ Operator’s retirement investment10

+ 7,000

+ 7,000

+ Replacement 11 + 81,423

+ 82,000

+ Estimated taxes12 + 13,000

+ 13,000

Historic Cash Flow Needs $ 718,630 ___

Projected Cash Flow Needs $ 731,173

cwt. of milk sold8 61,720 _

61,720 0 Historic Cash Flow Planning Cost per cwt

$ 11.64 /cwt

Projected Cash Flow Planning Cost $ 11.85 /cwt

Examples of factors that would cause the out-of-pocket and cash flow milk production costs to change: ! Changes in debt due to retirement of old debt and/or new debt from purchase of assets. Debt

levels in the current year may include interest and principal payments representing only part of the future debt commitments.

! Changes in production with or without an associated impact on absolute costs. Careful thought must be given to how production changes will affect costs per cwt.

! Changes in major expense categories such as feed, labor, etc. ! Sales of assets and what was done with the proceeds from the sale of assets. Were the proceeds

used in ways that will increase or decrease future production costs?

Working Notes 1Schedule F Expenses - Total farm expenses from Federal Tax form 1040F, line 35. 2Accrued expenses - Two types of expenses fall into this category. Typically, we think of

expenses prepaid in the previous year for items used in the production of milk in the current year for which calculations are being made. This is often done to minimize income tax liabilities in high-income years. Also include expenses for items that were used in the year being evaluated but were not paid until the following year. This would include accounts payable, line-of-credit or credit card balances if not included elsewhere.

3Prepaid expenses - Expenses paid during the year being evaluated for items that will be used

in the production of milk in the following year. 4Schedule F - Schedule F depreciation from Form 1040F, line 16 is a tax-based depreciation figure rather than a use-based figure to represent the use of assets such as

machinery, equipment and buildings in the process of production. It is deducted here so that a figure more accurately representing the use of assets such as machinery, equipment and buildings can be added later. See Replacement11.

In Summary…

Our dairy farms are facing unique challenges in 2010…following 2009!

Successful farms must monitor key competitive measures and their costs of production

Tools available at http://dairy.osu.edu