Among all the financial indicators a dairy farmer should take note of, guess which one is the most important? Cost of milk production of course! Knowing the cost of your production is very important. It would be able to help you answer the question: Should I make the investment or should I reserve my resources.

Milk prices will fluctuate from year to year. By knowing the cost of your production, you are able to determine your financial performance. For example, you are able to calculate your net profit (income - cost of production) which will allow you to build your working capital and reinvest the money into the business. If you are making a loss, then you will have to use your working capital reserves in order to continue to run the farm.

Most of the farm expenses can be divided into 4 categories: a) feed b) labour c) custom expenses d) variable expenses. It is crucial to at least control 3 out of 4 of these expense category.

Feed

• Accounts for 30-40% of your expenses.

• Crucial to work with nutritionist in order to develop a budget to go along with the cows' diet.

Labour

• Accounts for approximately 10 - 15% of your expenses.

• Mainly varies according to the size and complexity of the operation.

Custom Expenses

• Can range from 5 - 20%.

• Varies according to a) whether you pump your own manure or have it hired b) plant and harvest your own crops or have it hired.

Variable Expenses

• Variable expense is the hardest to control.

• There could be unexpected machinery or equipment that needs to be repaired.

• With that being said, these expenses should not have wide fluctuation.

• Take the 3-5 average cost of these expenses for your budget.

Continuous Process

Once you know your cost of production, you will have a better understanding of your margins. If you need to increase your margins, review each of the following expenses above and see if you can find ways to cut cost while maintaining productivity. One tip is to start with the biggest expenses and try to go from there. Another way is to benchmark your cost with similar dairy operations.

Not knowing the cost of your milk production can put your business in jeopardy. You would not know if you are overpaying for labour cost or feed costs. By having a good grasp of the cost of milk production, you are able to strategise for market opportunities and make the best decisions for your farm.