.4, ~. ~k ,6 ..._ .. _Af Bulletin 568 Ainbaro Agrcultural Experiment Station Gale A. Buchanan. D;rector July 1985 Auburr, Univerity Auburn University, Alaboa PREFACE This bulletin is a contributing study to Southern Region Research Project S-166, "The Impact of Changing Costs, Institutions, and Technology in the Southern Dairy Industry." Appreciation is expressed to the dairy farmers who participated in the study. In addition to making their financial records available for analysis, the dairy farmers assisted in the evaluation of the information. The cooperation of Jackie Jones and Roger Chappell of the Alabama Production Credit Associations is acknowledged. The counsel of Rob Martin and Jerry Crews of the Alabama Cooperative Extension Service was invaluable in developing the dairy budgets and interpreting results. CONTENTS Page PREFACE ............................................................. .................... .... INTRODUCTION .............. .............................. PURPOSE AND METHOD OF STUDY ......................................... DAIRY ENTERPRISE ANALYSES ............. ........................ 3 5 7 9 Dairy Number 1 .......................... ..................... Dairy Number 2 ....................................... ...................... Dairy Num ber 3 ..... ..................... Dairy Num ber 4 ............................................ Dairy Number 5 ....................................... Dairy Num ber 6 ........................................... Dairy Num ber 7 ............................................ Dairy Number 8 ............................................. ................. Implications .................................. TRANSITION PLANNING ..................... 12 14 15 17 18 20 21 23 24 28 29 33 33 35 36 37 ...................... 28 The Model .................................. .... . ........... Selection of Dairies for Transition .............................. Description of Changes to be Made and A nalysis of Results ....................................................... D airy N um ber 1 ........................................................... Dairy N um ber 5 ..................................... ...................... Evaluation ............................................. SUMMARY AND CONCLUSIONS ........................... LITERATURE CITED ......................................... ..................... ...................... 39 FIRST PRINTING 3M, JULY 1985 Information contained herein is available to all persons without regard to race, color, sex, or national origin. AN ECONOMIC ANALYSIS OF SELECTED ALABAMA DAIRY FARMS, 1982 J.F. SIMS and L.E. WILSON' 20 INTRODUCTION OVER 20 years, the number of milk producing units in Alabama has been declining. Total milk marketings by Alabama dairies have been declining since the early 1970's. Consumption of milk and dairy products in the State remains strong and exceeds in-state produced supply, requiring the importation of milk from other states. High Class I (fluid) utilization, coupled with Class I location differentials, provides the opportunity for Alabama dairy farmers to market their milk at greater than national average prices. However, according to USDA cost and return analyses, the Southern Region of the United States has the highest costs and lowest net returns of any region in the nation (3). Only a limited number of studies have been made on cost of production in the Southern Region. However, some studies are made on a continuing basis, three of which are summarized in table 1. In a nationwide study, the Economic Research Service of USDA estimated total costs and net returns to operator, family labor, and management for the years 1979, 1980, and 1981. Data were obtained via a 1980 survey and then indexed for 1979 and 1981. This series of reports has been updated annually since 1974. Production cost studies were mandated by Congress in 1975. Total costs of dairying for the entire United States were found to be $10.61, $12.20, and $13.00 per hundredweight, respectively, for the 3 years reported in 'Agricultural Economist, Georgia Federal Milk Marketing Order, and Former Research Assistant, and Professor of Agricultural Economics and Rural Sociology. F OR OVER FOR 6 TABLE ALABAMA AGRICULTURAL EXPERIMENT STATION 1. COMPARISON OF PER HUNDREDWEIGHT COSTS AND RETURNS TO DAIRYING, VARIOUS STUDIES, 1979-82 1979 Dol. Costs Results, by year 1980 1981' Dol. Dol. 1982 Dol. USDA U.S. (all region av.) ............ Appalachian .................. Southern Plains ..................... North Carolina ......................... Kentucky .............................. Returns USDA2 10.61 11.72 10.71 12.20 13.59 12.92 14.35 13.00 14.49 14.14 17.18 15.53 1.97 .70 1.73 -2.27 .18 16.29 U.S. (all region av.) ............. 2.81 2.13 Appalachian .. .................. 1.86 .94 Southern Plains ...... 3.69 2.10 3 North Carolina ......................... Kentucky3 . .. ... .. ....... . . . . . .. ... .... . ..... 2.17 .42 'Preliminary for the USDA study. 2Net returns to operator, family labor, and management. 'Return to management. -1.64 this study. In 1981, costs per hundredweight ranged from $12.34 in the Pacific Region to $14.49 in the Appalachian Region. Total costs in the Southern Plains were reported to be $10.71, $12.92, and $14.14 per hundredweight, respectively, for the study years. Within the Appalachian Region (the study region nearest Alabama) costs were $11.72, $13.59, and $14.49 per hundredweight, respectively, for 1979, 1980, and 1981. Net returns reported for 1981 ranged from $0.70 in the Appalachian Region to $2.43 in the Upper Midwest Region. Net returns for the entire United States were $2.81, $2.13, and $1.97, respectively, for the 3 years reported. Net returns in the Southern Plains Region were $3.69, $2.10, and $1.73 per hundredweight, and $1.86, $0.94, and $0.70 per hundredweight in the Appalachian Region for the years, respectively. North Carolina researchers found total costs per hundredweight to be $17.18 in 1981 and $16.29 in 1982, for that state. Return to management per hundredweight was found to be -$2.74 and -$1.64, respectively, for the 2 years reported (2). Costs and returns to dairying in Kentucky were also studied. Total costs per hundredweight were $14.35 and $15.53 for 1980 and 1981, respectively. Net returns for the years 1979, 1980, and 1981 were $2.17, $0.42, and $0.18 per hundredweight, respectively (5). ECONOMIC ANALYSIS OF ALABAMA DAIRIES 7 Due to differences in study methods and definition of net returns, direct comparison of the findings of these reports cannot be made. However, the general consensus of low returns to dairying in the South when compared to national averages and to other regions of the country should be noted. This study reports net returns to operator's land, labor, and management, since no charges were made for these items in the enterprise analyses. PURPOSE AND METHOD OF STUDY The perplexing problem facing the Alabama dairy industry is why, in the presence of strong demand and above average prices, dairies continue to leave production. The need for information about costs and returns to dairying in Alabama was felt. This study provided enterprise analyses for eight Alabama dairies for 1982. Each analysis is presented in budget format, similar to previous Auburn University budget publications. Each dairy is described in some detail, with the good and bad points of each operation identified. Also, a financial planning and projection procedure is presented. An analysis of the profitability of dairying in Alabama as an agricultural enterprise was made by utilizing budget-like tables developed for eight Alabama dairy farms. All of these dairies used the Production Credit Association's AGRIFAX computerized farm records service. Cost and return data were obtained from these records with the consent of the eight farmers. The records were a consistent information source that provided concise, useful information well suited to the analysis procedure. The analysis process involved the gleaning of receipts to be credited to and costs to be deducted from the dairy enterprise. Sales of calves, cull cows, heifers, and milk products were all credited to the dairy enterprises. Calves sold at or before weaning were considered part of the dairy enterprise, while sales of older calves as beef (other than culls) were not. Receipts were relatively easy to allocate, with only a few exceptions. However, cost allocation was somewhat more complicated. Costs of capital ownership and use (machinery, equipment, and livestock inventory) were obtained from each farmer's depreciation schedule and were distributed to the dairy in proportion to their use by the dairy. Cost allocation ratios were, for the most part, provided by the eight participating 8 ALABAMA AGRICULTURAL EXPERIMENT STATION dairy farmers. For example, a tractor with a book value of $7,500 that was used 50 percent by the dairy represented an investment of $3,750 by the dairy. Ownership costs were based on $3,750 of investment and variable costs were allocated as one-half to the dairy. The depreciation schedules used were all AGRIFAX generated. Labor hours and wages were similarly distributed among enterprises. In the case where production of all other agricultural products was small in comparison to the dairy's total sales, the ratio of sales of all other farm production to dairy enterprise sales was used to reduce input costs. For example, if a dairy generated $96,000 in income and there was also $4,000 in income from the sale of wheat, all input costs shared by the wheat and dairy enterprises were reduced by 4 percent when included in the dairy enterprise budget. This assumes an equal rate of return on input investment between alternative enterprises and the dairy, which is likely erroneous. However, miscalculations caused by this assumption represented only a small error in the analyses. As was the practice with previous Auburn University dairy budgets, background budgets were employed to determine pertinent variable and fixed cost figures for silage, pasture, and other on-farm produced inputs. These background budgets, for the sake of brevity, are not provided in this study, but were accurate to the greatest degree possible. The dairy budgets are presented in a form similar to the Auburn University Budget Generator format, the budget generator used by the Alabama Cooperative Extension Service and Alabama Agricultural Experiment Station. However, because of limitations of the data, sales of cattle and calves were grouped and not divided into culls, steers, etc. Also, additional fixed cost information was available and hence this area was somewhat expanded over the previous budgets. No fixed cost values were included for annual forages, since such costs as land maintenance and fencing were included as variable costs for the 1982 year. Fixed costs for perennial forages were the prorated establishment costs for each forage (4). Net returns were defined as the residual funds available from the dairy enterprise receipts after payment of fixed and variable costs. The value of any unpaid labor, including operator labor, was not deducted as a cost. Hence, net returns represent returns to unpaid labor, land, and management. ECONOMIC ANALYSIS OF ALABAMA DAIRIES 9 Interest rates used in the budgeting analysis were determined in the following manners (6). 1. Interest on operating capital: 14.6 percent, the arithmetic mean of quarterly announced Production Credit Association production-type loans for 1982. 2. Interest on intermediate investment: 12.8 percent, the arithmetic mean of 1-, 2-, 3-, and 5-year U.S. Treasury Notes and Bonds, Constant Maturities for 1982. 3. Interest on mortgage: 12.3 percent, the arithmetic mean of quarterly announced Federal Land Bank real estate loan rates for 1982. The latter interest rate is not necessary for the budget analysis, but will be employed in the Transition Planning procedure, which is a computerized financial program for use in analysis of investment changes in the farm business. Average production per cow and cow numbers were determined from individual farmer and Dairy Herd Improvement Association (DHIA) records. Price received per hundredweight for dairy products was calculated by dividing dairy product income by the number of hundredweights of milk marketed. The value of any milk used on the farm was not included in the enterprise analyses. Enterprise analyses for the eight participating Alabama dairy farms are presented in the following pages in ascending order by dairy product sales. Weaknesses of each are noted, along with suggestions for improvement. DAIRY ENTERPRISE ANALYSES The eight dairies included in this study were diverse. Size ranged from 45 to 400 cows in 1982, and the feeding systems ranged from utilizing only purchased feeds and silage to the production of five different feeds on the farm. In order that comparisons of the eight dairies could be made, a system of internal ratios was developed. Table 2 provides 16 ratios and production rates calculated for each of the eight dairies, along with the arithmetic means for each of the 16 ratios. Because of the diversity of the dairies studied, the ratio means should be viewed with some caution. These means were calculated for use in comparison only, and are not intended for use as a strict standard. W& TABLE 2. COSTS AND EFFICIENCY FACTORS FOR EIGHT DAIRY FARMERS, ALABAMA, 1982 Var. Feed otas per w. Dol. 7.30 5.18 8.83 5.58 9.82 6.35 7.64 8.92 7.45 cost AII- DiyProduction numbr nubrcow per Price per cwt. Price per cwt. after hauling Variable cs cotos Fixed ot per per w. Dol. 4.41 5.19 3.26 5.28 2.79 4.35 2.94 3.98 4.03 Total cs cstot per ct pct. of Lb. 1................................... 14,629 2................................... 10,800 3................................... 10,500 4................................... 12,500 5 ................................... 9,000 6................................... 12.976 7................................... 12,298 8................................... 13,622 Mean................................ 12,041 Dol. 15.53 13.54 15.93 15.42 15.31 15.55 15.66 15.74 15.34 and mkt. Dol. 13.40 13.02 15.42 14.88 14.81 14.66 13.91 14.06 14.27 ct Dol. 12.43 7.97 15.43 11.69 14.53 12.35 12.18 14.89 12.69 Dol. 16.84 13.16 18.69 16.97 17.32 16.71 15.12 18.87 16.71 dairy rev. Pct. 67 54 85 71 91 74 68 87 75 Continued FiIi D r 4I5-I 3ICD C) m I 0 z m 0 0 z 0 z (0 TABLE 2 (CONTINUED). COSTS AND EFFICIENCY FACTORS FOR EIGHT DAIRY FARMERS, ALABAMA, 1982 Fixed cost Total cost Feed cost Feed cost Livestock inv. Mach. inv. I as Milk check 0 -n r- Dairy number as pct. of dairy rev, Pct. as of dairy rev, Pct. 91 as of dairy rev, Pct. 39 as of milk check Pct. 55 as of dairy rev, Pct. 95 as of dairy rev, Pct. 14 pct. pct. pct. pct. pct. pas pc.r dai re. of Pct. 108 pct. of dairy rev. Pct. 72 ret. per Dol. 18.57 ret.pc~ per Dot. 1.73 wo v 1......:............................. 24 2 ................................... 3 ................................... 4 ................................... 5 ................................... 6 ................................... 7 ................................... 8 ................................... Mean ................................ 35 18 32 17 26 16 23 24 88 103 103 108 100 84 110 98 35 49 35 62 38 42 52 44 40 57 37 66 43 55 63 52 118 44 100 61 80 50 68 77 81 43 52 20 35 9 14 34 199 87 152 82 115 59 82 110 88 85 90 93 85 77 82 84 14.82 18.06 16.55 15.94 16.77 18.07 17.21 17.00 1.66 -. 63 -. 41 -1.37 .06 2.95 -1.67 .29 mn CO) J 12 ALABAMA AGRICULTURAL EXPERIMENT STATION Some of the ratios provided in table 2 require explanation. Dairy revenue is the sum of milk sales, plus cattle and calf receipts. All the hundredweight ratios were calculated using the number of hundredweights of milk sold during 1982. Price per hundredweight after hauling and marketing represents milk check receipts. This was calculated primarily to test the cost of the feeding program as a percent of the milk check. The ratios for these farms provided no clues that could consistently flag problem areas within a dairy. For example, the two largest dairies both had low machinery complements, as compared to dairy revenue. However, these two were the least and the most profitable dairies in the study. No other ratios provided consistent indicators to dairy profitability, not even feed cost. Thus, no single ratio can be singled out as a good indication of dairy profitability; rather, the combination of management practices present on the farm eventually decides the profitability of each dairy. Dairy Number 1 Dairy Number 1 was a husband and wife operation, milking 45 purebred Holstein cows during 1982. The farm consisted of 170 acres, of which 110 acres were tillable. The operators had been dairying for 8 years and were using a milking barn that was over 20 years old. This dairy produced hay, silage, and some grain, and purchased feed during the study year, table 3. This farm produced a positive net return of $1.73 per hundredweight in 1982, due mainly to high production (14,629 pounds marketed per cow and the highest in the study) and low labor and machinery costs. Machinery investment was low, resulting from utilizing equipment purchased as used equipment, which in 1982 was almost fully depreciated. Labor was hired only during peak need periods. No other family members worked as unpaid labor on the farm. In comparison to the other seven study farms, four cost areas were somewhat high: hauling and marketing, utilities, interest on livestock capital, and veterinarian and medicine. The $2.13 per hundredweight charge for hauling and marketing was partially negated by the fairly high price received for dairy products ($1.70 of the $2.13 per hundredweight charge was for hauling). Utilities amounted to $72.87 per head, the highest in the study. Excess capacity in the milking barn and ECONOMIC ANALYSIS OF ALABAMA DAIRIES 13 TABLE 3. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 1 (45-Cow HERD, 14,629 POUNDS OF MILK MARKETED PER COW), ALABAMA, 1982 Item 1. Gross receipts Dairy products .................. Cattle and calves............... Total ....... ............. 2. Variable costs Labor .......................... Repairs and main ......... Feed .................. Supplies ........... ............. Breeding ............... Utilities ..................... Hauling & marketing ........ DHIA ................. .... Vet & medicine ............ ........... Corn silage .. Hay ................... Corn for grain ............... Pasture ..... ........... Fuel (dairy) ........................ Int. on op. cap.................. Total variable costs ....... 3. Income above var. costs........ 4. Fixed costs Int. on livestock cap ........ Depr. on livestock cap ..... Int. on mach. & equip ..... Depr. on mach. & equip.... Hay ... ....................... Pasture .............................. Other fixed costs ............. Total fixed costs ............ 5. Total costs ........................... Unit Price or cost Dol. 15.52 Q Q)uantity -cost 6,583.00 Value or Dol. 102,247 19,981 122,228 1,367 6,787 37,948 2,397 898 3,279 14,026 1,104 2,083 4,183 2,933 1,725 1,279 835 980 81,824 40,404 14,835 2,621 2,175 6,483 461 178 2,279 29,032 110,856 11,372 cwt. hr. mo. ton hd. unit hd. cwt. mo. hd. acre acre acre acre 3.00 565.58 216.85 53.27 10.44 72.87 2.13 92.00 46.29 119.50 97.75 115.00 85.25 1.15 14.6% 455.67 12.00 175.00 45.00 86.00 45.00 6,583.00 12.00 45.00 35.00 30.00 15.00 15.00 721.09 6,710.05 dol. dol. dol. dol. acre acre dol. 12.8% 12.8% 15.35 11.89 115,900.00 16,911.00 30.00 15.00 6. Net returns to operator's land, labor, and management ...................... holding facilities caused this high charge. Present facilities could handle a 75-cow herd with no modification. The operator placed a high value on his animals, mainly due to their productive ability, which resulted in the large charge for livestock ownership. Veterinary and livestock expense was likewise the highest in the study. No explanation of this high cost was available. The cost of the feeding program employed on this farm during 1982 totaled 55 percent of the milk check, slightly above the mean of the eight study dairies, table 2. The high production per cow and high butterfat percentage (over 3.8 percent annual average) suggest this feeding program was effective. All other costs and returns were acceptable. 14 ALABAMA AGRICULTURAL EXPERIMENT STATION This dairy fared relatively well in 1982, when compared with the remaining study dairies. No major alterations in the feeding program or managerial practices would be advised, based on observations of the other dairies. However, the potential for growth of this dairy is present. The ability to double-crop in the production of forages, capacity of the dairy's physical facilities, and the owners' management abilities provide an excellent opportunity for expansion of herd size. The breeding program already present on the farm would allow growth without the purchase of any cattle. Further explanation and analysis of these ideas are presented later in the transition planning analysis for this dairy farm. Dairy Number 2 Low variable costs allowed a positive net return for Dairy Number 2 in 1982, table 4. This dairy farmer milked 100 grade Holsteins during the study year and produced 40 acres of corn silage. The lowest milk price of the eight dairies, low production per cow, and high fixed costs did not prevent this dairy from earning $1.66 per hundredweight in net returns. The low-cost feed program utilized by this dairy stimulated only 10,500 pounds of milk per cow, quite low in comparison to the other Holstein herds in the study. Poultry litter was used as silage fertilizer on this farm, and was included at a cost of $19 per acre in the variable cost of silage. However, high silage yields were obtained, keeping the necessary number of acres small, thus lowering total feed costs. Variable costs totaled only $7.97 per hundredweight, $4.72 per hundredweight less than the study average. The operator and his wife provided the majority of the labor for the farm, which kept hired labor costs to $0.89 per hundredweight, well below the study average of $1.61. The summing of feed and labor costs yielded $7.07 per hundredweight, leaving only $0.90 per hundredweight for all remaining variable costs. Fixed costs for this farm amounted to $5.19 per hundredweight, 29 percent greater than the eight-dairy mean. A large machinery complement, 81 percent of dairy revenue in value and the greatest in the study, along with the highest valued cattle in terms of dairy revenue forced up the fixed costs. The cost of breeding should be explained. This dairy farmer owned stock in a bull, which paid dividends in the form of semen, thus keeping breeding costs to only $206 for the year. ECONOMIC ANALYSIS OF ALABAMA DAIRIES 15 TABLE 4. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 2 (100-Cow HERD, 10,800 POUNDS OF MILK MARKETED PER COW) ALABAMA, 1982 Item Unit Price or cost Quantity Dol. 1. Gross receipts 146,284 13.50 10,800.00 cwt. Dairy products .................. 13,834 Cattle and calves............... 160,118 Total ......... ................ 2. Variable costs hr. 3.50 Labor .................... 2,760.00 9,662 12.00 2,500 mo. 20.83 Repairs and main ......... 50,681 180.36 281.00 Feed ...................... ton 15.44 1,544 hd. 100.00 Supplies ......... ............... 206 Breeding ...... 44.21 hd. 100.00 4,421 ....... Utilities ......... .52 10,800.00 5,582 cwt. Hauling & marketing ........ 12.00 1,289 107.42 D HIA .......... ................. mo. hd. 100.00 24.71 Vet & medicine ............ 2,471 123.80 40.00 acre 4,940 ............. Corn silage .. 15.00 acre 20.00 Pasture .. ................ 300 .00 0 acre 250.00 Temporary grazing'. 1,415 1,230.43 1.15 .......... Fuel (dairy) ..r. gal. 7,084.25 1,034 14.6% Int. on op. cap ................ ol. 86,045 Total variable costs ....... 74,073 3. Income above var. costs ...... 4. Fixed costs 12.8% 189,200.00 dol. 24,218 Int. on livestock cap ........ 2,554 Depr. on livestock cap.. dol. 16,576 12.8% 129,500.00 Int. on mach. & equip.. dol. 10,175 Depr. on mach. & equip... dol. 11.89 238 acre Pasture .............................. 20.00 2,347 dol. Other fixed costs ............. 56,108 Total fixed costs ............ 142,153 5. Total costs ........................... 6. Net returns to operator's land, labor, and 17,965 management .................... 11982 was the first year this farm planted winter grazing. None of the grazing was available in 1982, hence no cost was allocated to the 1982 budget. Value or cost Dol. In spite of the apparent negative factors, the success of this dairy does not allow many suggestions. However, an increase in feed should increase milk production, and likely increase net returns. Some machinery could probably be eliminated, allowing a lower charge for this investment, thus lowering fixed costs. Dairy Number 3 A herd of registered Jersey cattle averaged 10,500 pounds of milk marketed per cow for 192 cows on this farm during 1982. Above average variable costs resulted in a net return of -$0.62 per hundredweight during the study year. Dairy Number 3 was the only dairy in the study that did not feed any silage, table 5. 16 ALABAMA AGRICULTURAL EXPERIMENT STATION 16 ALABAMA AGRICULTURLEPRMN TTO TABLE 5. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 3 (192-Cow HERD, 10,500 POUNDS OF MILK MARKETED PER Cow) ALABAMA, 1982 tem 1. Gross receipts Dairy products ......... Unit Price or cost Dol. Quantity Value or cost Dol. 236,887 31,635 268,522 42,220 12,399 1,074 105,980 1,698 2,418 7,836 5,537 3,133 14,305 10,268 700 6,618 7,616 2,752 43,968 cwt. 15.93 14,870.00 2. 3. 4. 5. 6. Cattle and calves........ Total................ Variable costs Labor ................. Repairs and main ....... Rent................... Feed.................. Machinery hire......... Supplies............... ......... Breeding... ......... Vet & medicine DHIA................. Alfalfa hay purchases. Pasture................ Hay ........................ Utilities................ Hauling & marketing. Int. on op. cap.............. Total variable costs ... Income above var. costs.. Fixed costs Int. on livestock cap. ... Depr. on livestock cap... Int. on mach. & equip... Depr. on mach. & equip.. Pasture ..................... Ha y ......................... Other fixed costs .......... Total fixed costs....... Total costs .................. Net returns to operator's land, labor, and management ................ hr. mo. yr. ton mo. hd. unit hd. mo. ton acre acre hd. cwt. dol. 4.22 1,033.75 1,074.00 155.00 141.50 38.64 18.55 28.84 261.08 181.08 36.03 14.00 34.47 .51 14.6% 10,100.00 12.00 1.00 683.74 12.00 192.00 422.40 192.00 12.00 79.00 285.00 50.00 192.00 14,870.00 18,881.26 224,554 dol. dol. dol. dol. acre acre dol. 12.8% 12.8% 11.89 15.35 117,255.00 115,080.00 285.00 50.00 15,009 2,354 14,720 8,218 3,389 595 4,231 48,516 273,070 -4,548 Several variable cost items proved to be above average for this farm. Feed cost, which was $1.38 greater per hundredweight than the eight-dairy mean, totaled only 57 percent of the milk check. A high milk fat test of 4.4 percent held down this relative cost. Labor costs were about one dollar per hundredweight more than the study average. Semen cost averaged $18.55 per unit, compared to an average of $11.00 for the six dairies that purchased similar amounts of semen. Low fixed costs kept this dairy from experiencing further losses. Livestock value was small when related to total dairy revenue. The 44 percent of dairy revenue ratio was the smallest in the study. Depreciation of $10,572 likewise kept down the level of fixed costs. ECONOMIC ANALYSIS OF ALABAMA DAIRIES 17 ECONOMIC ANALYSIS OF ALABAMA DAIRIES 1 The trimming of only a few costs would have allowed a positive net return for this dairy in 1982. Use of silage to reduce feed costs and wiser use of labor would probably erase the $0.63 per hundredweight loss. Other costs were not unusual, when compared to the other dairies, and given the relatively favorable condition of this dairy during the study year, should not be altered greatly. Dairy Number 4 The fourth dairy in the study had the smallest loss of the four with negative net returns. During 1982, 160 Holstein cows were milked. Extensive use of forages produced on the TABLE 6. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 4 12,500 POUNDS OF MILK MARKETED PER COW) ALABAMA, 1982 V lNlllni (160-Cow HERD, Item 1. Gross receipts Caitle and calves........... Total ...................... Variable costs Labor ....................... Repairs and main ....... Rent................... Feed................... Breeding.................... ..... Vet & medicine.... Supplies................ Utilities................ ......... Machinery hire DHIA....................... Hauling & marketing... Silage....................... Bermudagrass hay ..... Winter grazing ............. Pasture ..................... Fuel (dairy).................. Int. on op. cap.............. Total variable costs ... Income above var. costs.. Fixed costs Int. on livestock cap. ... Depr. on livestock cap... Int. on mach. & equip... Depr. on mach. & equip. Bermudagrass hay ..... Pasture ..................... Other fixed costs .......... Total fixed costs....... Total costs .................. Net returns to operator's land, labor, and management............... ~ ~m vn~ C Unit Price or cost Dol. 15.42 Quantity Value or cost Dol. 308,387 22,627 331,014 28,572 21,330 2,500 96,283 2,153 5,876 12,967 9,313 8,812 2,159 10,865 9,240 560 5,000 435 14,849 2,809 233,723 97,291 42,630 0 21,912 16,466 614 1,724 22,250 105,596 339,319 -8,305 cwt. 20,000.00 2. hr. mo. yr. ton unit hd. hd. hd. mo. mo. cwt. acre acre acre acre 5 ol. al. 2.50 1,777.50 2,500.00 161.78 7.08 36.73 81.04 58.21 734.33 179.92 .54 42.00 14.00 10.00 3.00 1.15 14.6% 11,429.00 12.00 1.00 597.00 304.00 160.00 160.00 160.00 12.00 12.00 20,000.00 220.00 40.00 500.00 145.00 12,917.00 19,242.83 3. 4. dol. dol. dol. dol. acre acre dol. 12.8% 12.8% 15.35 11.89 333,050.00 171,190.00 40.00 145.00 5. 6. I ~ 18 ALABAMA AGRICULTURAL EXPERIMENT STATION farm kept feed cost low at $5.58 per hundredweight, over $1.80 less than the study mean. Net returns were -$0.41 per hundredweight during an admittedly poor year, according to the operator, table 6. Only one dairy had lower per hundredweight variable costs than this dairy. The $11.69 per hundredweight total was respectable in comparison to the other study dairies. However, the highest fixed costs in the study forced the negative net returns for this dairy. Livestock investment was nearly equal to total dairy revenue, and was 23 percent above average in this category. Machinery investment was 18 percent above the study average, in terms of percent of dairy revenue, at 52 percent. Livestock values seemed excessive in light of the herd production average, and lessening of machinery complement should lower fixed costs to a more reasonable level. This dairy received 90 percent of its total revenue from the milk check, the greatest in the study. Relatively small hauling and marketing costs, coupled with below average sales of cattle and calves during 1982, kept this value high. Dairy Number 5 Dairy Number 5 was a family operated farm, milking 230 Jersey cows during the study year. This farm totaled 1,100 acres, 740 of which were owned by the operator. The balance was rented from family members, hence the low per acre rent charge. A stanchion-type milking barn was used on this farm with a pipeline milking system in the parlor. Three different silage crops were grown, totaling 125 acres. A large pasture was utilized, and hay was grown on 250 acres. A net return of -$29,482 was experienced during 1982, or -$1.37 per hundredweight, table 7. This was the only farm in the study that did not use the DHIA record-keeping system. When comparing this dairy to the remaining seven studied, several cost items were notably different. Early in 1982 this dairy purchased bulls, eliminating the need for artificial breeding, so semen costs were only $75 for the year. Feed costs amounted to 66 percent of the milk check, highest of the study. In spite of high feed costs, production per cow was only 9,000 pounds. The major cause of the low production was management, via reduced attention to details of animal health. The low veterinary and medicine cost per head of only $5.72 helped support this fact. Need for upgraded phys- ECONOMIC ANALYSIS OF ALABAMA DAIRIES 19 ECONOMIC ANALYSIS OF ALABAMA DAIRIES TABLE 7. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 5 9,000 POUNDS OF MILK MARKETED PER Cow) ALABAMA, 1 (230-Cow 1982 HERD, Item 1. Gross receipts products ......... Cattle and calves ........ .............. Total... 2. Variable costs Labor................. Repairs and main ....... ............ Pasture rent ................ Feed.. ......... Machinery hire ............... Supplies Breeding................ ......... Vet & medicine .............. Utilities.. Hauling & marketing. ......... Sorghum silage ............ wheat silage ....... Corn silage.... .......... Pasture... Hay.. ................. Fuel (dairy).................. Int. on op. cap.............. Total variable costs ... 3. Income above var. costs.. 4. Fixed costs Int. on livestock cap. ... Depr. on livestock cap... Unit Price or cost Dol. 15.31 Quantity Value or cost Dol. 317,172 13,109 330,281 51,206 9,176 2,463 185,270 7,555 6,418 75 1,315 4,456 10,270 3,553 1,692 5,414 2,400 5,125 1,053 3,604 301,045 29,236 25,920 46 8,659 9,736 5,707 3,838 3,811 57,717 358,762 -28,481 Dairy cwt. 20,717.00 hr. MO. yr. ton mo. hd. hd. hd. cwt. acre acre acre acre acre ,lf. 3.55 764.67 2,463.00 162.58 629.58 26.73 5.72 19.37 .50 101.52 56.40 90.24 5.00 20.50 1.15 14.6% 14,440.00 12.00 1.00 1,140.00 12.00 230.00 230.00 230.00 20,717.00 35.00 30.00 60.00 480.00 250.00 916.00 24,687.69 Int. on mach. & Depr. on mach. & equip. Pasture ..................... Ha y.......................... Other fixed costs .......... Total fixed costs....... 5. Total costs..................... 6. Net returns to operator's land, labor, and management................ equip. .. dol. dol. dol. dol. acre acre dol. 12.8% 12.8% 11.89 15.35 3 c 202,500.00 67,651.00 480.00 250.00 ical facilities also resulted in reduced milk production by causing animal stress and contributing to the associated health problems. Attention to animals should not have been a factor, since this farm utilized above average amounts of hired labor. The relatively small loss experienced by Dairy Number 5 can be attributed to low fixed costs. Livestock and machinery investment were both below average, resulting in low interest charges; depreciation on livestock capital amounted to only $46, and machinery depreciation was quite low at $9,736. Total fixed costs per hundredweight amounted to $2.79, the lowest of the study dairies, $1.24 per hundredweight less than average. 20 ALABAMA AGRICULTURAL EXPERIMENT STATION 20 ALABAMA AGRICULTURLEPRMN TTO Changes necessary for this dairy all relate to the need for increasing production per cow. Without radical changes in the feeding program, the farmer believes that an increase in production per cow of 1,500 pounds could be achieved over the next several years. Greater attention to detail and improved physical facilities would permit this increase. These ideas are further explained and analyzed when this dairy is altered through transition planning. Dairy Number 6 Dairy Number 6 provided a slight positive net return in 1982, table 8, and, unlike the other farms, no single cost area proved to be notably excessive. Above average milk price and TABLE 8. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 6 (i74-Cow HERD, 12,976 POUNDS OF MILK MARKETED PER Cow) ALABAMA. 1982 Item 1. Gross receipts Dairy prdcs.......... Unit Price or cost Dol. 15.55 Quantity Value or cost Dol. 351,202 27,429 378,631 46,364 11,400 26,419 115,270 2,800 7,058 4,168 4,672 5,560 20,095 2,223 1,356 9,150 10,620 735 7,700 3,354 278,944 99,687 38,659 46 16,896 26,222 4,280 307 11,856 98,266 377,210 1,421 j cwt. Cattle and calves........... ................ Total 2. Variable costs Labor ....................... Repairs and main ....... Rent ......... ........ Feed......................... Machinery hire ......... Supplies.................... ......... Breeding .......... Vet & medicine ......... Utilities....... ......... Hauling & marketing. DHIA....................... Fuel (dairy).................. Corn silage ............. Pasture 22,579.00 ................ 3. 4. 5. 6. Hay .......................... Purchased hay.............. Int. on op. cap.............. Total variable costs ... Income above var. costs.. Fixed costs Int. on livestock cap. ... Depr. on livestock cap... Int. on mach. & equip... Depr. on mach. & equip.. Pasture ..................... Ha ........................... Other fixed costs .......... Total fixed costs....... Total costs .................. Net returns to operator's land, labor, and management ............... o tltP hr. mo. yr. ton mo. hd. unit hd. hd. cwt. mo. gal. acre acre acre ton dol. 4.25 950.00 26,419.00 149.46 233.33 40.56 15.96 26.85 31.95 .89 185.25 1.15 61.00 29.50 36.75 70.00 14.6% 9,700.00 12.00 1.00 805.00 12.00 174.00 261.00 174.00 174.00 22,579.00 12.00 1,179.00 150.00 360.00 20.00 110.00 22,979.92 dol. dol. dol. dol. acre acre dol. 12.8% 12.8% 11.89 15.35 302,025.00 132,000.00 360.00 20.00 n \Iy ECONOMIC ANALYSIS OF ALABAMA DAIRIES ' 21 production of 12,976 pounds per cow from the herd's grade and registered Holsteins allowed its positive net returns. Total costs per hundredweight of milk for this dairy were equal to the average. Fixed costs were slightly above the study mean, but the difference was not appreciable. Variable costs were below average, in response to a $6.58 per hundredweight feed cost. Hired labor costs totaled $1.83 per hundredweight, $0.04 above average. No other cost items seemed unreasonable or excessive. Possible improvement for this dairy would be to stimulate higher production per cow to increase milk income. The strategy for this increase is debatable, given current cost alignments. This dairy provided an excellent example of the premise previously mentioned, the need for comprehensive management, since the only area noticeably in need of improvement was production per cow. Dairy Number 7 Dairy Number 7 was the largest dairy to provide a positive net return in the study. Despite disease problems which lowered milk production, this dairy amassed a net return of over $90,000 in 1982, table 9. This dairy was the only farm that purchased silage during the study year. The purchase of silage, at $40 per ton, reduced the need for extensive crop production machinery. Four different hay crops were raised on the farm, but equipment required for the 212 acres of hay production was minimal. The $80,000 investment in machinery and equipment was only 9 percent of dairy revenue, the lowest in the study. Likewise, livestock investment was below average, at 50 percent of receipts in value. Depreciation accounted for nearly one-half of this dairy's fixed costs, which was more than $1.50 below the study average. No variable cost items were glaringly low; however, labor costs were somewhat below average on a per hundredweight basis. The breeding program of this herd is worthy of some detailed discussion. The 1,010 units of semen used arose from 3.9 breedings per conception. Throughout 1982 this herd was plagued with the disease Haemophilus somnus, a viral disease which causes abortion during early pregnancy. Cows aborting caused increased breedings per calving, and lowered milk 22 ALABAMA AGRICULTURAL EXPERIMENT STATION 2' ALAB~MA AGRICULTURLEPRMN TTO HERD, TABLE 9. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 7 12,298 POUNDS OF MILK MARKETED PER Cow) ALABAMA, 1982leo (259-Cow Item 1. Gross receipts Dairy products......... Unit Price or cost Dol. 15.66 Quantity ccost Vaco Dol. cwt. 31,853.00 Cattle and calves........ Total ................. 2. Variable costs Labor..... ............. Repairs and main........ Feed................... ...... Hay purchased. Supplies ............... 498,969 75,805 575,774 32,850 9,199 172,529 2,500 12,414 6,284 8,506 8,487 55,632 3,532 57,500 2,663 1,984 3,578 2,644 2,990 4,662 387,954 187,820 36,464 26,403 7,040 19,450 720 2,459 1,118 93,654 481,608 94,166 Breeding ............... Vet & medicine ......... Utilities ................ Hauling & marketing. DHIA.................. Silage purchased ........ Bermudagrass hay. Alfalfa hay ............. Rye hay................ nt. on op. cap .......... Total variable costs ... Income above var. costs.. Fixed costs Int. on livestock cap. ... Depr. on livestock cap... Int. on mach. & equip... Depr. on mach. & equip.. Bermudagrass hay ..... Alfalfa hay.................. Other fixed costs .......... Total fixed costs....... Total costs .................. Net returns to operator's land, labor, and management ............... hr. mo. ton ton hd. unit hd. hd. cwt. MO. ton acre acre acre acre 4.00 766.58 175.00 55.56 47.93 6.22 32.84 32.77 1.75 294.33 40.00 44.88 62.00 47.70 58.75 1.15 14.6% 8,212.50 12.00 986.00 45.00 259.00 1,010.00 259.00 259.00 31,853.00 12.00 1,438.00 60.00 32.00 75.00 45.00 2,600.00 31,928.22 3. 4. dol. dol. dol. dol. acre acre dol. 12.8% 12.8% 12.00 76.84 cc 284,875.00 55,000.00 60.00 32.00 5. 6. production due to longer dry periods. Production per cow in this herd averaged 12,208 pounds, too low for Holsteins. The discovery of this disease forced extra culling of dairy cattle, reducing the size of this herd from that of previous years. Profit lost as a result of the disease can only be loosely estimated, but an increase in herd production average to 13,500 pounds per cow would have provided additional milk receipts of almost $80,000. Costs added from this increase would probably have been minimal. The only suggestion for this farm was calfhood vaccination for Haerophilus somnus and all other infectious diseases. The eradication of this disease from the herd should enhance profits even further than were realized in 1982. ECONOMIC ANALYSIS OF ALABAMA DAIRIES 23 ECONOMIC ANALYSIS OF ALABAMA DAIRIES 2 Dairy Number 8 Dairy Number 8 milked 400 grade Hoisteins during the study year. Five forage crops were raised on the farm, and additional hay and mixed feeds were purchased. Net returns in 1982, or -$1.65 per hunfor this dairy were dredweight. This farmer owned 743 acres and rented an additional 450 acres, at a cost of $17,875, table 10. The farm is owned by brothers, with many of the hired laborers being family members. -$90,260 TABLE 10. COSTS AND REVENUE ANALYSIS FOR DAIRY NUMBER 8 (400-COW HERD, 13,622 POUNDS OF MILK MARKETED PER COW) ALABAMA, 1982 Y-Lccost Item 1. Gross receipts Dairy products Unit Price or cost Dol. uantity Va ceo Dol. cwt. 15.74 54,490.00 857.673 Cattle and calves........ Total ................ 2. Variable costs Labor................. Repairs and main ....... Rent.................. Dairy cow rental........ Feed .................. Mach. hire .. .......... Supplies... ............... Breeding ......... Vet & medicine Utilities................ Hauling & marketing. Ha y................... Alfalfa haylage ............. Silage....................... 80,370 938,043 104,917 22,254 17,875 9,000 hr. mo. yr. cwt. ton mo. hd. unit 1,855.00 17,875.00 2.50 4.00 26,230.00 12.00 1.00 3,600.00 239.00 hd. hd. 244.67 44.34 7.73 20.66 1,750.00 12.00 400.00 418,250 2,936 17,734 3. 4. 5. 6. Hay purchased ............. Temporary grazing .... Pasture ..................... DHIA....................... Fuel (dairy).................. Int. on op. cap.............. Total variable costs ... Income above var. costs.. Fixed costs Int. on livestock cap. ... Depr. on livestock cap... Int. on mach. & equip... Depr. on mach. & equip.. Ha y......... Alfalf a.hay ................. Pasture ..................... Other fixed costs .......... Total fixed costs....... Total costs .................. Net returns to operator's land, labor, and management ............... cwt. acre acre acre ton acre acre mo. 40.12 1.68 47.50 71.43 86.00 46.88 28.75 15.00 880.00 400.00 400.00 65.35 35.00 475.00 160.00 160.00 510.00 12.00 6,804 8,262 16,049 91.543 54.490.00 3,087 2,500 40,850 7,500 4,520 9,150 5,756 gal. dol. 479.67 1.15 14.6% 10,870.00 66,790.58 12,500 9,751 811,238 126,805 81,664 27,329 16,208 60,814 dol. dol. dol. dol. acre acre acre dol. 12.8% 12.8% 15.35 UE re1 538,000.00 26,625.00 76.84 11.89 65.00 35.00 510.00 943 910 6,064 217,065 1,028,303 - 90,260 23,133 24 ALABAMA AGRICULTURAL EXPERIMENT STATION The cost of the feeding program amounted to 63 percent of the milk check, somewhat higher than average. A poor crop year forced increased purchases of feed, resulting in the high feed bill. This dairy was the only farm in the study leasing cattle during the study year. A contract of $0.025 per pound of milk produced by 30 rental cows amounted to a $9,000 payment to the leasor. The cost effectiveness of this outlay was unknown, however these cows would not have been leased had seriohs cash-flow problems not already been present. Fixed costs were near the study average, both on a per hundredweight and percent of dairy revenue basis. All other costs and return items seemed reasonable. Production per cow was 13,622 pounds during the study year, which needed improving. Breeding efficiency improvements would allow cows to re-enter the herd quicker, increasing production per year. Some physical changes in the dairy might also boost production. Concreted walkways and reduction of mud in alleys would lessen animal stress, which might improve production rates. Implications The eight dairies studied were probably not a representative cross section of Alabama dairies. The managers of these dairies would likely be considered above average. In addition, the fact that these farmers are concerned enough about their operations to keep adequate records says a good deal about their managerial abilities. However, the input costs faced by these dairymen should be representative of costs for most Alabama dairies during 1982. Comparisons were made of cost elements and revenue on a per cow basis for the eight herds, table 11. These calculations provide a more direct method of viewing costs among the operations studied. A simple or unweighted average was determined for the eight operations. Wide ranges in both costs and revenues were found among the dairies. However, caution should be exercised in interpreting and evaluating these costs and returns differences. Cost differences per cow arose from a number of factors, including variations in milk production levels and structural variations in elements of both variable and fixed costs. One important disparity involved the handling of labor cost. Some operators who utilized primarily unpaid family labor had low 0 0 z 0 TABLE mn 11. MEASURES OF COSTS AND REVENUE PER Cow, EIGHT ALABAMA DAIRY FARMS, 1982 z 8 400 13,622 195 12,041 175.46 71.29 756.60 15.56 3.00 It~~.m i Acui ~Dairy 1 2 3 Cows per dairy, number .......... Production per cow, pounds .... Variable cost, dol. Labor ................................... Repairs and maintenance ...... Purchased feed and hay ........ Perennial hay crops............. Temporary hay crops ......... 45 14,629 30.38 150.82 843.29 65.18 100 10,800 96.62 25.00 506.81 - 192 10,500 219.90 64.58 626.48 3.65 - farmArrcP 4 5 230 12,500 9,000 160 6 174 12,976 266.46 65.52 706.72 4.22 - 7 259 12,298 126.83 35.52 897.80 17.94 24.02 - (0 178.58 133.31 601.77 3.50 57.75 2.72 31.25 55.08 81.04 13.46 222.63 39.90 805.52 22.28 - 262.29 55.64 1,064.38 7.72 - I- w 0n Grown silage and grains ..... : 131.29 Pasture...................... 28.42 Temporary grazing.............. Machine hire ..................... Supplies ........................... 53.27 Breeding 49.40 3.00 - 53.48 - 46.34 10.43 - 52.59 61.03 - 108.38 22.88 11.30 55.72 22.74 5.32 .......................... 15.44 2.06 8.84 12.59 40.81 19.96 Vet and medicine ............... 46.29 Utilities............................ 72.87 Hauling and marketing..... 311.69 DHIA.............................. 24.53 Fuel (dairy) ....................... 18.56 Land rent............Livestock rent .................... Interest on operating capital 21.78 Total variable - - -- ----------------1,818.33 cost............. - I - - - - - - 24.71 44.21 55.82 12.89 14.15 - 28.84 34.47 39.67 16.32 - 5.59 - 36.72 58.21 67.91 13.49 92.81 15.62 - 32.85 27.90 .33 5.72 19.37 44.65 - 4.58 10.71 - 16.09 40.56 23.95 26.85 31.95 115.49 12.78 7.79 151.83 - - 47.93 24.26 32.84 32.77 214.80 13.64 11.54 - 7.34 44.34 17.01 20.66 40.12 228.86 14.39 31.25 44.69 22.50 15.02 40.38 17.73 27.83 41.75 134.86 13.51 22.58 28.56 2.81 10.34 860.45 14.33 1,169.55 17.56 1,460.78 15.67 1,308.88 19.28 1,603.11 18.00 1,497.89 24.38 2,028.13 17.67 1,468.39 Continued )C" TABLE 11. (CONTINUED). MEASURES OF COSTS AND REVENUE PER COW, EIGHT ALABAMA DAIRY FARMS, 1982 Item 1 2 3 78.17 12.26 76.67 42.80 17.65 3.10 22.04 252.69 1,422.24 1,398.55 1,169.55 229.00 252.69 1,422.24 -23.69 Dairy farm 4 266.44 0 136.95 102.91 10.78 3.84 139.06 659.98 2,120.76 2,068.96 1,460.78 608.18 659.98 2,120.76 -51.80 5 112.70 .20 37.65 6 222.18 .26 97.10 150.70 24.60 1.76 68.14 564.74 2,167.86 2,176.04 1,603.11 572.93 564.74 2,167.86 8.18 7 140.79 101.94 27.18 75.10 0 12.27 4.32 361.60 1,859.49 2,223.07 1,497.89 725.18 361.60 1,859.49 363.58 8 204.16 68.32 40.52 152.04 15.16 4.63 57.83 542.66 2,570.79 2,345.11 2,028.13 316.98 542.66 2,570.79 -225.68 Average 199.54 33.35 78.77 101.46 12.42 6.57 47.76 479.87 1,948.25 1,995.64 1,468.39 527.25 479.87 1,948.25 47.39 > Fixed costs, dol. Interest on livestock capital ... 329.66 242.18 Depreciation on livestock capital ......................... 58.24 25.54 Depreciation on machinery and equipment .................. 48.33 165.76 Interest on machinery and equipment .......................... 144.07 101.75 Permanent pasture ............. 3.96 2.38 Permanent hay crops ............ 10.24 0 Other fixed costs ................... 50.64 23.47 Total fixed costs ................... 645.14 561.08 Total costs, dol ................. 2,463.47 1,421.53 Other measures per cow Total income ................. 2,716.18 1,601.18 Total variable costs ........... 1,818.33 860.45 Income above variable costs ................................... 897.85 740.73 Total fixed costs ................... 645.14 561.08 Total costs ....................... 2,463.47 1,421.53 Net returns ............................ 252.71 179.65 42.33 24.81 16.69 16.57 250.95 1,559.83 1,436.00 1,308.88 127.12 250.95 1,559.83 -123.83 > D c C rm M m m z -I -I -i z ECONOMIC ANALYSIS OF ALABAMA DAIRIES 27 labor costs. Influence of this apparent cost saving shows up for these dairies in the need for relatively higher net returns, which include returns to operator and other unpaid labor. In another area, the dependency on purchased feed versus grown grains and forage affects allocation of costs between fixed and variable costs. Operators depending primarily on purchased feed reported higher feed costs than would be associated with feed and forage production. Probably a more meaningful estimation of costs, both fixed and variable, would be obtained by following the expenditure patterns of the dairies over several years. Keeping in mind the structural differences in farm operations affecting costs and net returns, net returns per cow ranged from -$225.68 to a positive return of $363.58. Dairy Number 8, in particular, experienced substantial losses, and unless costs can be reduced or revenue increased, it could not remain in business long. While the development of a single dairy enterprise budget from the available data was not possible, some important information was obtained. Labor and feed provided the major variable cost items for the majority of the eight dairies. Labor cost averaged $1.61 per hundredweight and feed cost averaged $7.41 per hundredweight. During 1982, commercial feeds purchased by these dairies averaged $180 per ton. Feed costs averaged 52 percent of the milk check, near the old thumb rule of 50 percent. Four of the eight dairies studied failed to produce a positive net return in 1982. Sixteen production and external ratios were developed and calculated from the enterprise analyses, but no factor was statistically significant in determining net returns. Likewise, when comparing each analysis and ratios of the eight dairies, many conflicts were found, signaling the need for comprehensive management within a dairy to achieve a positive net return. It should be noted that all eight dairies had positive incomes over variable costs, suggesting that even the dairies with negative net returns should be able to continue production in the short run. However, the continued failure to cover fixed costs or debt obligations by these dairies would make the future uncertain. USDA marketing assessments and higher costs in 1983 likely lessened net returns for these and all Alabama dairies that year. Policy decisions and a reduction in the dairy support 28 ALABAMA AGRICULTURAL EXPERIMENT STATION price reduced prices again in early 1984. Thus, the outlook for dairy farmers in Alabama is less than optimistic. Comprehensive farm and financial management will be necessary to insure the survival of Alabama dairy farms. Presented below is a tool which may help meet the needs of farm managers and dairy farmers in decision making. TRANSITION PLANNING This section provides a brief description of the transition planning model, its purposes and function, the selection of two dairies for transition analysis, and the results of the transition procedure. The Model Transition planning is a Fortran IV-based computer model originally developed by Ed Carson at Purdue University in the early 1970's and first named long range financial planning. Modifications were made in the program by Herman Harrison in 1975, A. Y. Chow in 1980, Jeffrey Sims in 1983, and others at various institutions (7). The adjustment by Sims was made to reflect Alabama and U.S. income tax structure for 1982, and to adjust for changes in the self-employment tax rate for that year. The transition planning model analyzes the effect of a change in investment in the farm business on cash flow, solvency, credit needs, and capacity and profitability over time. Information required by the model includes general farm information, crop and livestock budget data, non-farm business information, balance sheet and change in investment values, undistributed costs, and miscellaneous information. The model can easily accommodate 5 crop and 2 livestock budgets and 11 change-in-investment budgets. With minor modification, 15 crop budgets, 15 change-in-investment budgets, and 5 livestock budgets can be employed. Tables outputted by the model are: (1) summary of input information, (2) projected profit and loss statement, (3) profitability, debt servicing, and payback, (4) balance sheet and analysis, and (5) flow of funds summary. At the discretion of the user, the transition can be projected over 1 to 4 years, with all information provided for each year. The balance sheet provides additional beginningof-the-year information for year 1. The program provides an option for the analysis of increased or decreased product ECONOMIC ANALYSIS OF ALABAMA DAIRIES 29 prices. The user specifies a given percentage factor for these output price adjustments. All tables are automatically provided under the altered pricing option (transition planning model). In simpler terms, transition planning provides financial information over time, caused by a change in the level of investment in the farm business. These changes in investment may be represented by alterations in the number of crop acres, crop mix, livestock numbers, machinery and equipment complement, production rates, inventory, nonfarm investment, or a mix of these business alternatives. It should be noted that transition planning makes no alterations in the farm enterprise mix to increase efficiency or profitability. The model only evaluates changes imposed on the present farm and does not select the changes to be made. Selection of enterprise mix must be made outside the transition planning model, through use of linear programming, personal preference, or other objective function-maximizing techniques. Input data required for the model involve budget values for all enterprise changes and for present enterprises. Crop, livestock, and nonfarm budget information includes the number of units of each enterprise each year, variable cost per unit, yield or production rates, direct labor in hours per unit, and the price per unit of production. Some balance sheet information is required for the beginning of the transition period, and is then calculated automatically for the remaining years, while other data are required specifically for each year. Input and output prices may be altered during the transition years, or held constant. This provides the opportunity for possible error, if expectations and reality are not alike, via substantial changes in input or product prices in the future. Selection of Dairies for Transition Of the eight dairies evaluated, two were selected for alteration and analysis through transition planning. Because of their sizes and present lack of alternative enterprises on the farm, Dairies Number 1 and 5 were selected. The absence of alternative enterprises provides the opportunity for analysis of changes in cash flow, profitability, and solvency due only to changes in the dairy enterprise. No effect of other enterprises will bias the analysis. Changes to be made were selected at the request of the two dairy operators. No quantitative profit-maximizing techniques 30 ALABAMA AGRICULTURAL EXPERIMENT STATION were utilized, hence all changes are personal preference. Alterations selected by an objective function-maximizing procedure would likely differ from the changes that were imposed. Input data for each dairy were obtained from the enterprise budgets developed, and from additional AGRIFAX records. Coefficients used in the transition that did not appear on these records were obtained from the operators or estimated with their supervision. Because of the extended planning horizon analyzed by transition planning, projections on costs and returns must be made 4 years in advance. Using the enterprise analyses developed as a 'year 0' base, these projections were made for the 4 transition years. Table 12 provides yearly adjustment factors TABLE 12. ADJUSTMENT FACTORS USED IN TRANSITION PLANNING Variable cost per cow ............ Variable cost per acre (forages) ...................... Milk price s .... .... ... . . . . . . . . ... .. Value of animals ................ Interest .................................. Machinery and equipment ..... Beef price ......... .................. Family living4 ............................ Value of the . . . . . . . .... .. operator's labor4 ....... 'Change from the previous year 'Refer to Literature Cited. 'Reduction of milk price in year 4 lmplicit price deflator. (3) (1) (1) (1) (6) (1) (1) - Percentage of adjustments per year' Year 1 Year 2 Year 3 Year 4 +5.3 +5.3 +5.3 +5.3 +7.8 -8.0 +9.2 0 +9.2 +9.2 +7.0 +7.0 +7.8 +8.0 +9.2 0 +9.2 +9.2 +7.0 +7.0 +7.8 +6.0 +9.2 0 +9.2 +9.2 +7.0 +7.0 +7.8 +6.0 +9.2 0 +9.2 +9.2 +7.0 +7.0 1. used in the transitions, and the sources from which these factors are derived. All factors were determined by averaging the annual percentage changes in each particular category from 1977 to 1981. The price of milk was reduced $0.65 per hundredweight in year 1, and then increased to the year 0 base due to the imposition of two $0.50 assessments in 1983. Interest rates were held constant due to the uncertainty of future rates and wide variability of recent rates. Selected measures of profitability and solvency are shown in tables 13 and 14, and were drawn from the model output (6). Each dairy was transitioned under three output pricing scenarios, once under the 'best guess' pricing system presented in table 12. The second scenario ignores the decline in milk m 0 0 TABLE 13. SELECTED MEASURES OF PROFITABILITY AND SOLVENCY, DAIRY NUMBER 1 Year 1 Total adj. farm cash income, dol ........................... 127,063 Variable cash exp., dol............ 102,683 Other cash exp., dol ............... 41,253 Total cash exp., dol ................. 143,937 Net profit after tax, dol...........-18,136 Av. farm invest., dol ............. 338,975 Rate earned on farm invest., pct .............................0.4 Change in invest., dol............7,765 Years to repay debt, yr............ 99999 Assets, dol. Current .......................... 138,770 Intermediate..................... 10,743 Long-term ....................... 233,902 Total........................... 373,515 Liabilities, dol. Current........................... 92,733 Intermediate..................... 56,944 Long-term ....................... 125,885 Total........................... 275,562 Net worth, dol..................... 97,953 Scenario number one Year 2 Year 3 165,229 126,137 50,645 176,782 -11,815 342,726 3.9 -262 999 149,870 4,260 219,123 373,523 150,736 43,194 118,085 312,015 61,238 155,870 13,377 214,344 383,591 216,227 48,944 110,285 375,456 8,135 198,638 142,883 73,836 216,719 -27,243 347,764 1.4 10,388 Year 4 226,451 161,665 86,100 247,776 -31,527 351,827 2.9 -2,212 999 162,420 9,394 209,565 381,379 292,412 36,694 102,485 431,591 -50,212 Year 1 146,122 102,684 41,253 143,937 923 338,975 5.3 7,765 999 138,870 10,743 223,902 373,515 73,674 56,944 125,885 256,503 117,012 999 149,870 4,260 219,123 373,253 104,110 43,194 118,085 265,389 107,864 Scenario number three Year 2 Year 3 190,013 126,137 47,862 174,000 15,752 342,726 11.1 -262 999 155,870 13,377 214,344 383,591 133,532 48,944 110,285 292,761 90,830 228,433 142,883 67,029 209,911 8,826 347,764 9.9 10,338 Year 4 260,418 161,665 74,027 235,692 14,514 351,837 12.6 -2,212 999 162,420 9,394 209,565 381,379 163,676 36,694 102,485 302,855 78,524 z z r- O' rn 0 '1 I- 5NN TABLE 14. SELECTED MEASURES OF PROFITABILITY AND SOLVENCY, DAIRY NUMBER 5 Item and unit Year 1 Seai Year 2 number onee ubroe_____________________ Year 3 Year 4 Year 1 451,598 314,319 169,578 483,897 -44,995 940,140 1.7 -12,696 999 247,380 Year 2 479,220 298,411 148,446 446,857 19,666 952,836 6.9 -12,696 999 247,380 hScenario Year 3 Year 4 519,337 314,319 151,286 465,604 36,305 940,140 8.9 -12,696 999 247,380 ra Total adj. farm cash 362,256 income, dol ........................... Variable cash exp., dol..............280,804 142,033 Other cash exp., dol ................ Total cash exp., dol ................. 422,837 Net profit after tax, dol........... -70,232 Av. farm invest., dol ................ 970,032 Rate earned on farm invest., pct........................... Change in invest., dol .............. -21,696 Years to repay debt, yr............ 999 Assets, dol. 416,713 298,411 156,445 454,856 -50,839 952,836 .4 -12,696 999 247,380 500,892 333,545 182,490 516,035 -27,840 927,444 4.2 -12,696 999 247,380 420,044 280,804 142,033 422,837 -15,444 970,032 3.1 -12,696 999 247,380 576,025 333,545 152,328 485,872 64,416 927,444 12.3 -12,696 9.3 247,380 -2.5 G) C Current........................... 247,380 Intermediate..................... Long-term ....................... Total........................... Liabilities, dol. Current .......................... Intermediate .................... Long-term........................ Total........................... Net worth, dol .................... 76,264 648,040 971,684 133,165 126,799 97,935 357,899 613,785 66,528 645,080 958,988 204,642 103,466 87,935 396,042 562,946 56,792 642,120 946,292 270,275 80,132 77,935 423,342 517,950 47,056 639,160 933,596 318,751 56,799 67,935 443,485 490,111 72,264 648,040 971,684 78,377 126,899 97,935 303,111 668,573 66,528 645,080 958,988 79,348 103,466 87,935 270,749 688,239 56,792 642,120 946,292 63,681 80,132 77,935 221,748 724,544 47,056 639,160 933,595 19,902 56,799 67,935 144,635 788,961 x m z -I CA 0 z ECONOMIC ANALYSIS OF ALABAMA DAIRIES 33 price in year 1, and allows milk prices to increase 6 percent each year. Scenario number three upwardly adjusts all output prices 15 percent from the best guess pricing scheme. Description of Changes to be Made and Analysis of Results Dairy Number 1 The owner of Dairy Number 1 wished to increase his herd from the 45-cow level during 1982 to 75 cows over the transition period. Hay crops and temporary grazing were to be increased to 50 acres each. No additional cattle would be purchased, heifers were to be brought into the herd over the usual replacement of culls at a rate of 10 in each of years 1 and 2, and 5 in each of years 3 and 4. During year 1, a $15,000 hay barn was to be built to meet increased hay storage capacity requirements. A mixwagon and feedbunks totaling $19,500 were to be purchased in year 3, and hay baling equipment valued at $8,000 was to be acquired in year 4. The operator owned no haying equipment and all hay harvesting was done by a custom operator. The silo capacity was adequate only for the 50 acres of silage presently produced and used, hence increases in cow numbers necessitated a decrease in silage fed per cow. This decrease was to be made up by increases in purchased feed and the increased acres of hay and pasture. The operator expected sales of $10,000 in breeding stock, above the usual sale of cull cows, in each of years 3 and 4. Finally, a full time laborer would be hired in year 3 and kept through year 4. In comparison to the positive net returns the dairy experienced in 1982, the increasing of herd size and subsequent changes in forage acres and purchases of machinery and buildings proved unprofitable, table 13. The attempt to expand during a period of depressed milk prices and high (and rising) input costs resulted in losses to the operator, increased debt load, and eventual negative net worth in year 4, under the best guess pricing scenario. The dairy was unable to produce a positive profit in any of the 4 transition years, which increased current debt from $92,733 in year 1 to $292,412 in year 4. Current debt increased $251,380 from the year 0 base. The dairy's total liabilities increased from $275,562 in year 1 to 34 ALABAMA AGRICULTURAL EXPERIMENT STATION $431,591 in the last transition year, versus total assets of $373,515 and $381,379, respectively, for years 1 and 4. Average farm investment remained fairly stable throughout the transition period, moving from $338,975 to $351,827. Total assets likewise were not greatly affected over the 4 transition years. The major cause of the financial difficulties during this period was the increased debt load incurred by the dairy. In year 4, differences in total cash receipts and total cash expenses accounted for only $23,315 of the total farm loss. The transition procedure carries each year's operating loss into the next year as a current liability. Thus, the inability to reduce debt in any year and the further acquisition of assets by borrowing forced the reduction in net worth. Under the assumption of no decrease in milk product prices, Dairy Number 1 continued to make poor progress. Net profit after tax was positive in years 2 and 4, but negative in years 1 and 3, the years when the substantial additional borrowing was made. Net worth declined from $139,089 in year 0 to $47,051 in the last transition year. The need for short-term credit increased from $75,273 to $453,090 throughout the transition. The third scenario allowed all output prices to increase 15 percent over the best guess pricing system. Even under these conditions, the expansion of this dairy by the methods described was unwise. Even though a positive net profit after tax was obtained in all 4 years, there were insufficient funds for repayment of previous debt and debts acquired during the transition period. Net worth dropped 33 percent from year 1 to year 4, from $117,012 to $78,524, but did not become negative as in the first pricing scenario. Farm assets were identical to the first pricing system, but total liabilities were reduced nearly $130,000 in year 4 over the first pricing system. The effects of changes imposed on Dairy Number 1 were predictable. The addition of new debt in a period of increasing costs and reduced returns proved unwise under all three pricing schemes. Likewise, the use of more expensive production inputs increased the difference between costs and returns. Thus, the opportunity for this dairy to expand during the time frame analyzed, under the assumptions given, was not present. ECONOMIC ANALYSIS OF ALABAMA DAIRIES 35 Dairy Number 5 Alternatives imposed on Dairy Number 5 provide an example of transition planning's use when most investment changes are made by increasing variable costs and production rates. During 1982, the year 0 base, this dairy had an average production of only 9,000 pounds per cow. Due to personal problems, the operator admitted allowing too little time for care of his animals. The decision was made to increase fertilizer used on pastures and to hire an additional full-time laborer. Also, the operator stated he would increase his management time on the farm. The latter increase was not charged monetarily to the dairy, but should aid in the attempt to increase production. An investment of $10,000 to place concrete around the milking parlor was to be made in year 1. This should decrease animal stress and provide additional production potential. Increases in average production would be as follows: in year 2, average production would climb to 10,000 pounds per cow, and in year 4 to 10,500 pounds per cow. This allows 4 years for an increase in herd average of 1,500 pounds per cow, which is by no means an unattainable goal. Herd size was to remain at 230 cows. In comparison to Dairy Number 1, this dairy began the transition with a lighter debt load and greater total assets. Its profitability potential was greater than Dairy Number 1, due mainly to larger herd size and lower fixed cost per cow. Under the best guess pricing scenario (scenario number one), this dairy failed to show a positive net profit after tax in any of the 4 years. Unlike Dairy Number 1, however, net profit increased each year throughout the transition, table 14. Assets declined somewhat during the 4-year period, due mainly to depreciation. However, debt load increased each year, reducing net worth from $613,785 to $490,111 between years 1 and 4. The increased debt load was due to borrowing to cover net losses the previous year, since current liabilities were the only debts that increased. Intermediate and longterm liabilities decreased during the transition period. Given this pricing system, the dairy would never be able to repay its total debt. However, if input and output prices continued the trend anticipated in the 4-year transition period beyond the analyzed 4 years, the dairy might show a positive profit in either year 5 or 6. This points to a weakness in 36 ALABAMA AGRICULTURAL EXPERIMENT STATION transition planning-the 4-year planning horizon. In effect, the transition is begun and the analysis ended some time before the full effects would be known. In other words, transition planning leaves the farmer somewhat in the middle of a transition rather than analyzing its full effect. There is no easy solution to this problem, since furthering the time frame projection only allows the possibility of increased error in projection of prices and outputs. Under transition scenario two, when the fall in milk product prices was ignored, Dairy Number 5 fared'very well. Net profit after tax was -$34,628 in year 1, but became positive in all succeeding years, eventually becoming $42,335 in year 4. Net worth fell from the year 0 base in the first year, but increased each following year. Current liabilities rose, peaked in year 3, and fell in year 4. Total farm assets were identical to the best guess pricing scenario, since all profit above the need for current expense and current liabilities was applied to intermediate and long-term debt. No asset-increasing purchases or changes in inventory were made. The effect of pricing within scenario number three proved even more profitable for this dairy. Like scenario number two, net profit after tax was negative in year 1 but rose to $19,666 in year 2, and to over $64,000 in the last transition year. Unlike any of the previous pricing schemes, for either dairy, this scenario allowed the repayment of all debt in 9.3 years if the current trends held throughout the years following the transition. In year 4, total liabilities of $144,635 had fallen to less than half the year 1 total of $303,111. Net worth rose over $100,000 during the 4 years. Current liabilities fell from $78,377 in year 1 to $19,902 in the final transition year. Evaluation Given changes in investment in the farm business, transition planning provides useful financial information over time. The 4-year time frame proved too short for analysis of substantial changes in the farm, but the short-term effects were easily retrieved. As with any financial projection system, the results are only as good as the assumptions. Three pricing scenarios were used for projections into the future for two dairy examples. Neither dairy produced a positive net profit after tax under scenario number one. The ECONOMIC ANALYSIS OF ALABAMA DAIRIES 37 period of increasing costs and declining returns made any increased investment impossible. Within the framework of scenario two, Dairy Number 1 provided a positive profit in 2 of the 4 years, due to increased investment with borrowed funds in year 3. Dairy Number 5 was profitable under the first transition scenario. This dairy was similarly profitable under the third scenario, only with ever greater net profit. Dairy Number 1 produced a positive profit in all 4 years under this pricing scheme, but was never able to repay its current liabilities. In general, expansion by increasing debt load during the period of reduced profit potential was unwise, as illustrated by Dairy Number 1. Dairy Number 5 provided an example of increased production rates by greater use of variable inputs. This investment procedure allowed greater net returns when the cost-price squeeze period was over. Transition planning should be of interest to farm planners and agricultural credit institutions, due to the excellent information it provides in the short run. However, analysis of a farm over extended time periods proves risky if there is a divergence of reality and the assumptions made. SUMMARY AND CONCLUSIONS In spite of a favorable market for milk in Alabama, the number of dairy farmers and total milk marketings in the State have been declining since the early 1970's. The continued exit of milk producers in Alabama while national milk production rose suggested that dairying may be less profitable in the State than in other areas of the country. Comparison of U.S. and Southern region studies on the cost of producing milk indicated narrowing profit margins faced by Southern dairy farmers. To examine the profitability of dairying in Alabama, eight dairy farmers were studied. All used the Production Credit Association's AGRIFAX farm records system and should have been above-average operations. Enterprise budgets were developed for each farm. These dairies varied greatly in size, organization, and feeding systems. During 1982, the two smallest dairies and the second largest dairy provided positive net returns to operator's labor, land, and management. This finding is somewhat in disagreement with the historical evaluation of dairy structure in the State which revealed that larger 38 ALABAMA AGRICULTURAL EXPERIMENT STATION dairies tend to remain in business longer, whereas smaller operations either became larger or exited. The budgeting analysis provided no factors which consistently pointed to problem or benefit areas within the dairies studied. The organization of cost and return data to provide a single enterprise budget was not undertaken, however some comparisons were made among the study dairies. Variable costs per hundredweight of milk marketed ranged from $7.97 to $15.43, averaging $12.69. Fixed costs ranged from $2.79 to $5.28 per hundredweight, averaging $4.03. Net returns averaged $0.29 per hundredweight with a range of -$1.67 to $1.73. Feed costs as a percent of the milk check averaged 52 percent. Also, a substantial difference existed among the operations in the dairy revenue per hundredweight of milk marketed, ranging from $13.54 to $15.93. Caution should be exercised in interpreting and comparing these cost and return differences as the budgets were not standardized. Two of the study dairies were further analyzed using a computer program known as transition planning. Adjustments in the investment level and production rates and costs were projected over a 4-year period. In both cases, the changing of investment in the farm under the best guess pricing system proved unprofitable. The addition of costs during a period of depressed milk receipts and escalating input prices resulted in reducing already thin profit margins to negative levels. The smaller dairy could not repay extra debts incurred even when output prices were raised 15 percent. However, under these optimistic projections the larger dairy became more solvent in the fourth year, due primarily to greater profit potential and a lower beginning debt load. In general, the decision to increase costs during a period of slight profit margins proved unsound. The eight dairies studied may or may not provide a representative sample of dairies in Alabama. Likewise, assumptions made about future costs and returns may have been realistic, but possibly were not. It was shown, at least for these dairies, that dairying in Alabama was likely unprofitable in 1982, and attempts to expand or increase costs in the near future may lead to increased debt loads and insolvency. The future of the dairy industry in Alabama is uncertain. This analysis has provided information on costs and returns to dairying in the State; however, further investigation into the causes of the continued loss of producers is needed. ECONOMIC ANALYSIS OF ALABAMA DAIRIES 39 LITERATURE CITED (1) Agricultural Prices. USDA, SRS. Various issues. (2) BENSON, G.A. 1983. The Cost of Producing Milk on N.C. Grade A Dairy Farms, 1982. Department of Economics and Business. N.C. State Univ. (3) Costs and Returns of Producing Milk in the United States-1979, 1980 and Preliminary 1981. 1982. USDA, ERS. (4) Farm Management Manual. 1982. Ala. Coop. Ext. Ser. Auburn Univ. (5) JUSTUS, FRED E. AND CHARLES L. MOORE, SR. 1983. Costs and Returns of Dairying in Kentucky. Coop. Ext. Ser. Agr. Econ. Ext. No. 47. Univ. of Ky. (6) MELICHAR, EMANUEL AND PAUL T. BALIDES. 1983.Agricultural Finance Databook, Division of Research and Statistics, Board of Governors, Federal Reserve System, Washington, D.C. (7) SIMS, JEFFREY FRED. 1984. Structural Adjustments and Profitability of Alabama Dairying, 1982. Unpublished M.S. thesis, Auburn Univ. AL"BIUPUN 1'NIVERSITY With an agricul tural research unit in every major so il 'area, Auburn University serves the needs of field crop, livestock, forestry, and horticultural producers in each region in Alahama. Every citiZen of the State has a stake in this research program, since any advantage from new and more economical wxays of produc- l 0 I I C 0 i 0 ( ing and handling farm products directly benefits the consuming public. at d i; p lh' ®l9 oifvijc do n t ® Main Agricultural Experiment Station, Auburn. 7 E. V. Smith Research Center, Shorter. Tennessee Valley Substation, Belle Mina Sand Mountain Substation, Crossville North Alabama Horticulture Substation, Cullman. Upper Coastal Plain Substation, Wintield Forestry Unit, Fayette County. Chilton Area Horticulture Substation, Clanton Forestry Unit, Coosa County Piedmont Substation, Camp Hill. Plant Breeding Unit, Tallassee. Forestry Unit, Autauga County. Prattville Experiment Field, Prattville. Black Belt Substation, Marion Junction. The Turnipseed-Ikenberry Place, Union Springs. Lower Coastal Plain Substation, Camden Forestry Unit, Barbour County. Monroeville Experiment Field, Monroeville. Wiregrass Substation, Headland. Brewton Experiment Field, Brewton. Solon Dixon Forestry Education Center, Covington and Escambia counties Ornamental Horticulture Substation, Spring Hill. Gult Coast Substation, Fairhope.