Dairy Financial Performance: How Did 2020 Compare to Previous Years?

By Tim Beck

Dairy financial performance over the past five years has been challenging. During this time, farms included in the Extension Dairy Team’s data summary had a negative $314 per cow Net Return Over Labor and Management and an average $19.29/cwt cost of production. This has been a challenging period for the dairy industry. However, the 2020 data compared to the previous four years is showing some encouraging trends in dairy profitability. The 2020 farms marketed the most milk per cow at 25,702 lbs./cow and had an average milk price of $18.25 compared to the $18.03 five-year average. However, a large portion of the profit improvement shown in 2020 was due to an average of $696/cow in government payments. Additional compensation during the COVID-19 pandemic made a strong contribution to 2020 profitability.

Table 1 illustrates some key differences between the 21 high and low profit farms in the 2020 data set. One unique item is that the high 20% profit farms did not market the most milk per cow. Generally, more milk income translates into higher profit and a lower cost of production. The 2020 data illustrates high milk yield alone is not enough if costs are too high. The high 20% profit farms had a feed cost of $2,149/cow/year, while the low 20% group spent $2,807/cow/year. These costs include purchased feed and the value of home-raised feed for all animal groups on the farm. A large difference in labor cost per cow also contributed to the high profit group’s advantage. The high profit group spent $282/cow/year on hired labor while the low 20% group spent $705/cow/year. The lower feed and hired labor costs were also reflected in a lower cost to produce heifers. The high profit group spent $1,626/head sold or transferred while the low 20% group had a cost of $3,119/head. Sold or transferred refers to the way heifer costs are analyzed in this method. Heifer calves are "transferred" to the heifer enterprise when born and are later “transferred” back to the milking cow enterprise when freshened. Heifers sold for cash instead of staying in the herd are also counted in this total head sold or transferred. While all farms had an average cost of production including labor and management of $17.96/cwt, the high profit group had a cost of $14.49/cwt. This data illustrates the importance of balancing farm management decisions to achieve the best financial results. It is not enough to sell the most milk if that income results in expenses that are too high for the added revenue generated. The most profitable farms achieve a balance of revenue and costs that results in an improved financial outcome.

Table 1. Dairy Cow and Heifer Enterprise, Farms sorted by Net Return over Labor and Management, 2020

¹Feed costs reflect total feed costs including the lactating cows, dry cows, and heifers.

Comparing 2020 to previous years, the trends in Table 2 show some interesting improvements. Across several profitability measures, 2020 appears more favorable than the previous four years. The average of all farms in 2020 showed a $72/cow/year Net Return Over Labor and Management. This was the only positive Net Return year during the past five years. The high profit group returned $987/cow/year (Table 1) while the low 20% group had a negative $976/cow/year Net Return. In previous years even the high profit group had a negative return per cow. Some of this advantage can be attributed to the higher amount of milk sold per cow at higher than the five-year average price, but a bigger share was due to the high government payments these farms received. Revenue per cow averaged $5,609/cow/year compared to the multiple year average of $4,911. Feed costs were challenging in 2020 at $2,556/cow/year compared to the five-year average of $2,383/cow/year. Heifer production cost also trended in the wrong direction at $2,336 per head sold or transferred compared to the multiple year average of $2,022/head. A large share of this increase can be attributed to increased heifer feed costs.

Table 2. Dairy Cow and Heifer Enterprise, Farms sorted by Year, 2016-20

¹Feed costs reflect total feed costs including the lactating cows, dry cows and heifers. 

Corn silage production cost was higher at $33.03/ton in 2020 compared to an average of $31.83/ton over all years. Yield per acre was lower in 2020 at 17.09 tons/acre average compared to the 18.48 tons/acre for the multiple year average. Yield is a very important issue in the cost per unit for forage and grain crops.

Table 3 provides some data to objectively compare the whole farm financial health for each year. Paying bills on time has been a major challenge for farms over the last five years. This is reflected in the 1.34 current ratio shown across all years. The current ratio refers to the amount of readily available cash that can be used to pay bills compared to the balance of current debt for items like accounts payable, lines-of-credit and credit card debt. In this data, this means the farm had $1.34 available to pay each $1 of current debt. Only in 2019 and 2020 did the farms average a current ratio that met the comfort benchmark of 1.70. This improvement in Working Capital means accounts payable and current debt were reduced during 2020. This improvement in current ratio is a welcome change given the previous year’s history.

Table 3. Financial Standards Measures, Farms sorted by Year, 2016--20

While producers often comment that farms are exiting due to a heavy debt load, the solvency issue was not changed appreciably in 2020 from previous years. Farms averaged 42% debt to asset ratio over the five years with a 40% average in 2020. Lenders suggest keeping loan payments of principal and interest less than $750/cow/year. This modest improvement in debt to asset ratio was likely due to a reduction of short-term current debt and accounts payable.

As a group, the 2020 farms achieved a cost-based Rate of Return on Assets of 7.1%. While still short of the goal of 8% return, this was a significant improvement over the 2.6% group average. Higher profit on the farm also makes it more likely that all loan payments can be made on time and the Term Debt Coverage of 2.09 was substantially better than the 1.10 multiple year average. The added profitability of the farms provided stronger cash flow to pay principal and provide owner draw for the family. This is reflected in the stronger Term Debt Coverage.

The driver for the change in profitability is shown in the Operating Expense Ratio. The 2020 farms had a 77.7% operating expense ratio compared to the average of 85.0% from all years. That means 77.7 cents of every dollar went to pay operating expenses before paying for interest and depreciation. This does not meet the recommended benchmark of <60%, however experience suggests dairy farms should try to achieve a 70% ratio as a starting goal and then work to improve this ratio over time. The higher milk volume and price in 2020 benefited these farms as both led to increased milk revenue. When dividing the same expenses by more revenue, a lower percentage of income is required to pay operating costs. The large purchased feed expense on dairies makes it challenging to reach the 60% goal. The farms had 13.7% Net Farm Income available for profit after taking out the amount for Operating Expenses, Interest, and Depreciation. That is well below the goal of greater than 20%, but it is a step in the right direction compared to the 5.8% multiple year average.

While 2020 certainly brought many unforeseen circumstances due to COVID-19, it is encouraging to see that 2020 financial performance was improved over previous years. It appears 2021 is showing some signs of improvement with milk price trending higher in the closing months of the year, but high feed prices are still reducing the margin farms are receiving. The Dairy Margin Coverage program was triggered 10 months in a row during 2021, so this will help make up some of the shortfall because of lower government payments. Producers should continue their focus on high milk production balanced against costs that are appropriate for the revenue generated.