The Florida Dairy Business
(Acrobat version)

Volume 3 Issue 3

The March Basic Formula Price (BFP) fell $.51. The fall was not unexpected because of weakness in the cheese markets for the past six weeks or so. The March BFP is still $.32 higher than March 1997. This is shown in the Basic Formula Price graph below.

This price is used in calculating Class I and Class II prices for May. Because the co-op premiums will be constant for March through May, mailbox milk prices will largely track the BFP, lagged two months. The table at the bottom left shows the Class I prices and premiums for March through May. Expect a small increase in your April mailbox price and then about a $.50 drop for May.

Milk production figures for February from the USDA-NASS show Florida down 9% from a year ago. Remember that 1997 was an exceptional year because of favorable weather for milk production. This year we had excessive rain. Reported cow numbers are the same for February 1997 and 1998 at 160,000 (see graph below).

The Florida Milk to Feed Price Ratio has been climbing with the unexpectedly strong milk prices and falling commodity prices, especially soybean meal. The change in direction of milk prices should return this to the more seasonal pattern - decreasing in spring.

Is your business working its assets off to make the business successful?

An accepted measure of asset efficiency is the asset turnover ratio. The asset turnover ratio measures how many dollars in gross revenue are generated for every dollar of assets invested in the business. In essence, the ratio measures asset "output" efficiency similar to pounds milk per pound feed, except this ratio is financial.

For the 1996 Dairy Business Analysis Project, we separated participating dairies who provided complete financial information into groups based on the asset turnover ratio. Table 1 displays the results. The groups are defined as high turnover (>1.0), medium turnover (0.7-1.0), and low turnover (<0.7).

The first observation is the wide variation in asset efficiency as measured by the asset turnover ratio. There is a 0.63 point difference in the asset turnover ratio between the high and low turnover group. In other words, the high turnover group is generating $0.63 more revenue per dollar invested than the low group, a 102% difference! If the two groups were groups of cows, the low group would be producing 16,000 pounds of milk versus the high group producing 32,320 pounds.

The largest factors driving asset turnover is the size and composition of the asset base. Table 2 lists the assets per cow for the three asset turnover groups. Assets per cow includes the value of the cow. By subtracting the average value per cow ($1,046) we can see the remaining assets per cow for each group. This remainder is a simple measure of the composition of the asset base without the cow value. The high turnover group had $1,799 assets per cow remaining, the medium group had $2,781, and the low group had $4,104. This means the high turnover group had $982 less invested per cow than the medium turnover group and $2,304 less than the low turnover group. This difference affects profitability.

While high asset turnover rates do not guarantee high profitability, they certainly affect the rate at which profits can accrue. The high asset turnover group also controlled costs very well (operating profit margin of 0.13) and had the highest milk sales per cow (16,690 lbs.). All of these factors combined generated higher profitability for the high turnover group.

How does your dairy business compare to these groups? Contact your extension agent and join the Dairy Business Analysis Project to find out. It may be time to change the ration of assets you are feeding your business.

Many dairy managers tell us that their greatest challenge is providing a consistently productive labor force to their dairy at a reasonable cost. We looked to the Dairy Business Analysis Project (DBAP) for information about how dairies controlled labor costs. We sought answers to two questions. How much opportunity did managers have to affect/control labor costs? What factors affected labor costs?

A.  Opportunity for cost control?

Labor costs are a major expenditure. The average personnel costs of 32 DBAP dairy participants in 1996 was $2.46 per cwt. However, significant variation existed. Table 1 shows the range was from $1.10 to $3.73 per cwt. This was about 5% to over 21% of total revenues. Some dairies were much more labor efficient than others.

Activity. More activities (dairy, cropping, replacements, etc.) require more labor.

Efficiency. We compared cows per full-time worker and milk sold per worker.

Substitution of machinery and equipment for labor or vice-versa.

Design of facilities for housing, feeding, milking and handling cows.

Supervision of personnel: recruiting, training, motivating, and rewarding.

Of these factors, DBAP provides insight into (1) activity and (2) efficiency.

Efficiency. Table 3 shows a tremendous difference in how efficiently dairies utilized personnel. Milk per worker, probably the best efficiency indicator, ranged from about 387,000 lbs. to more than 1.5 million lbs. The more labor efficient dairies sell four times more milk per worker than the least efficient.

Summary

The cost of providing labor to the dairy farm is a major expenditure and management challenge. DBAP data shows that there was a considerable variation between dairies, even after accounting for the number of enterprises. The most efficient dairies sold four times more milk per worker.

Thanks to DBAP participating dairies for sharing their data which makes this kind of information available to everyone. How does your dairy compare?