Heather Weeks dairy Perspectives

With cull prices down Pennsylvania for the last year, many farmers are questioning their culling strategy. Cattle are simply not bringing in the same prices as they did in the recent past.

Dairy farms rely on “non-milk” income, particularly cull sales, to provide additional financial support. As Class III milk futures prices stay below $15 per hundredweight in the short term, the lower cull cow prices add insult to injury.

Because of stronger cow health and reproductive practices, many farms are better able to select which cows to cull from the herd. On average, farms have more heifers than required to maintain the herd.

Voluntary culling is the process of deciding which animals to cull, rather than the cow culling herself because of poor health or injury.

In this market, however, the common feeling seems to be that because cull prices are so low, keeping the cow in the herd is better than taking her to auction.

That may not be an accurate assessment. The cow not covering her cost of production is charging the farm every day she stays in the herd.

The calculation to measure this is fairly simple: divide variable costs (or costs of goods sold) by milk price to determine the pounds of milk a cow must produce to cover her variable costs.

In the 2017 AgChoice Farm Credit dairy success and profitability review benchmark (Dairy SPR), the average farm’s variable costs totaled $10.58 per hundredweight. With a $17 per hundredweight milk price, the breakeven production on the average farm is 62.2 pounds per cow per day.

Managers should assess any cow producing her breakeven to determine if she should remain in the herd, be culled or added to the do-not-breed list.

However, farmers should not automatically send every cow that produces less than 62.2 pounds per day to auction.

Consider mitigating factors, such as whether or not she is bred and due to calve, her health history, stage of lactation, etc.

Two variables affect breakeven production: variable costs (or costs of goods sold) and milk price. Variable costs on farms in the 2017 Dairy SPR benchmark ranged from a low of $3.26 per hundredweight to a high of $19.89 per hundredweight.

Using $17 per hundredweight gross milk price, every cow producing over 19.2 pounds per day would be able to cover her variable costs on the lowest farm. On the highest farm, only cows producing over 117 pounds per day would cover their costs.

With the average farm only receiving $19 per hundredweight for its milk in 2017, a $19.89 per hundredweight cost of goods sold means the farm is losing money even before covering its overhead, such as repairs, taxes and interest payments.

It’s safe to say that the high and low farms in this benchmark represent extremes.

The other variable in this equation is the gross milk price.

Farmers have more control over their variable costs than they do over gross milk price. Managers should consider how their variable costs impact their overall costs of production and what factors they can adjust to help control costs.

To calculate variable costs and cost of production, farms should work with their financial advisers to monitor these benchmarks monthly or, at least, annually.

Farms have many decisions about which cows to cull and which to keep. Consider using breakeven production as one factor in these decisions.

Heather Weeks is a loan officer with AgChoice Farm Credit.