Rogers² offers a number of key steps to control dairy business costs. First, the manager must know their costs of production by knowing how many pounds of milk were sold and the total costs of doing it. Second, investment decisions must be made in terms of whether or not costs per cwt. milk sold will be lowered by the decision. Finally, the business should be monitored for how competitive it is at cost control by 'benchmarking' both costs and other performance factors that drive costs. In essence, all decisions and activities are focused around how much it costs the business.

To demonstrate the effect that cost control has on dairy farm profitability, a sample of dairies participating in the Dairy Business Analysis Project were sorted into three groups by total expenses per cwt. milk sold. While the statistics that are presented in the table are based on operating conditions unique to Florida, several concepts about cost control are demonstrated that are important to any dairy business. The accompanying table lists selected financial performance statistics for fiscal year 1997.

 

Table 1: Selected 1997 Financial Performance Statistics by Total Expenses per Cwt. Milk Sold Group
	Total expenses per cwt. milk sold
Category	<$17.00	$17.00-$19.00	>$19.00
Number of dairies	10	10	7
Number of cows	923	1,537	2,279
Milk sold per cow (pounds)	16,310	17,859	16,811
Total revenues (per cwt. milk sold)	17.77	18.39	18.97
Total expenses (per cwt. milk sold)	16.47	17.74	20.64
Net farm income1 (per cwt. milk sold)	1.30	0.65	(1.67)
Number of expense categories2 above average	1	4	6
Number of expense categories2 below average	8	5	3
1Net farm income from operations is defined as accrual adjusted revenues minus accrual adjusted expenses. This represents the return to unpaid labor, management, and capital.
2Expense categories were defined as personnel, purchased feed, crops, machinery, livestock, milk marketing, real estate, other, and depreciation. The average for each group was compared to the project average for each of the categories to determine if the group was above or below average.

So we can see that total expenses were drastically different between expense groups. A prudent manager may ask, 'How do I know if I am effectively controlling costs in my business?' Because every dairy faces a unique situation, control of individual expenses is key to effective cost control. The degree to which the groups controlled individual expenses can be seen by looking at the number of expense categories above or below average.

In the project, expenses were separated into nine different categories: personnel, purchased feed, crops, machinery, livestock, milk marketing, real estate, other, and depreciation. For each expense category, it was determined if the expense group was above or below the project average for the category. The low expense group had eight of nine expense categories below the project average. Conversely, the high expense group had six out of nine expense categories above the project average. This suggests that cost control is defined as keeping all costs low not just one or two as did the high expense group.

You may ask, 'What about the dairies between the extremes of the high and low groups?' The characteristics of the middle expense group ($17.00-$19.00 per cwt. milk sold) demonstrate what happens with partial cost control. For instance, the medium group was below project average for five out of the nine expense categories. This translated into net farm income of $0.65 per cwt. milk sold, 50% below the $1.65 of the low expense group. These dairies might be focusing on two or three expense areas (i.e. low feed cost) but have high expenses in other areas which may offset any savings.

These results support the benchmarking recommendation by Rogers. Since cost control is so important to business profits, dairy managers should continually understand how competitive their business is for all expenses, not just one or two. While your dairy may have a low cost ration, high expenses in other areas may cause you to lose out on potential profits. (It happens to be that the middle expense group had purchased feed expense below the project average.) So the question that remains is, 'How well do you control costs on your business?

1 Manager, Dairy Business Analysis Project, Dept. of Dairy and Poultry Sciences, University of Florida. Contributing authors include R. Giesy, P. Miller, M. Sowerby, B. Tervola, D. Solger, P. Joyce, T. Seawright, C. Vann, and M. DeLorenzo. Also L. Ely, Animal and Dairy Science Dept., University of Georgia.
2 Rogers, D.A. 1998. Southeast dairy herd management conference proceedings. Smith, J.W. editor. Univ. of Georgia Cooperative Extension Service. Athens.