Dairy Farm Summary:  It Should Be Required Reading For Any Ag Business

Facts and figures address key management questions, e.g., does bigger mean better?

by Dean W. Moreau, president and CEO, Yankee Farm Credit

The 2004 Northeast Dairy Farm Summary (DFS) is out. I think it is required reading, especially the section on preparing for the next downturn and gross margin analysis.

Each year the DFS compares results from across herd sizes (e.g., less than 89 cows; 90 to 149; 150 to 299; and more than 300) and by profit quartiles (bottom, second, third, top). I like to play with numbers, so I was curious to see how the best (the top 25 percent profit quartile) stacked up with the biggest (the over 300 cow group).

I knew this wouldn’t be a perfect statistical comparison because some of the over 300-cow group are also in the top 25 percent group. However, I thought something of value might pop up.

In order to smooth out any advantage one group might have over the other, due to recent high milk prices, I averaged 2002, 2003 and 2004 results so two low milk price years were offset by one high year. After comparing a couple dozen categories, I found that the following were the most interesting top 10.

"I know from experience that the best of the biggest dairy farms generate returns comparable with corporate America, and that biggest doesn't automatically mean best."

Here’s some food for thought from this exercise:

• The biggest farms are more asset efficient. That is, they have less investment per cow and more sales for every dollar of assets invested. However, the asset efficiency seems to be all in the barn and parlor. Machinery cost per cow and acres per cow are about the same in both groups.
   

• There seems to be surprisingly little labor efficiency gain in a 527-cow group versus 212-cow group.
   

• Income per cow was higher and expenses were lower in the top 25 percent group. That is, I found nothing big in any one area, just differences in most all income and expense categories. Farms are getting larger because there are financial advantages to size, but I’m pretty sure it’s a lot harder to manage 527 cows and 10.7 people than 212 cows and 4.3 people. Stuff happens.
   

• It’s possible to get double the return on equity (ROE) and the same net earnings per farm for managing 212 cows and 4.3 worker equivalents versus 527 cows and 10.7 worker equivalents.

I know from experience that the best of the biggest dairy farms generate returns comparable with corporate America, and that biggest doesn’t automatically mean best. What hit home for me after crunching these numbers is that there’s more than one way to skin a cat. While getting bigger may be the smart answer for some managers, others can succeed by simply maximizing strengths and minimizing weaknesses, regardless of the size of their operation.  

This letter appeared in the Summer 2005 issue of Financial Partner (F.P.) magazine, Yankee Farm Credit's customer publication. Click here if you would like to start receiving F.P. magazine in the mail.

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