MADISON, Wis. – What separates the top 20 percent of dairy farms from the remainder of their peers?
    Jason Karszes, senior Extension associate with the PRO-DAIRY program at Cornell University, shared insights he has gained from studying New York dairy farms with those in attendance at his presentation at the PDPW Business Conference March 13-14 at the Alliant Energy Center in Madison, Wis.
    Karszes has worked with the same 128 dairies during the Dairy Farm Business Summary and Analysis project.
    “When we look at performance, we don’t want to make decisions on any given day, week, month or year,” Karszes said. “We know the dairy industry cycles and changes. We are trying to look at our data over a longer time frame.”
    Karszes said when they are evaluating the numbers and data that come in from these farms, they split the top 20 percent from the remainder and look at what is being done differently between farms in those two segments.
    Over the time period of the study, the same farms were not necessarily always in the top 20 percent.
    “Some of the farms that were originally in the top 20 percent aren’t any longer,” Karszes said. “Depending on what decisions were being made, they might go up or they might go down.”
    Over the six years, the average herd size of the 128 herds has increased from about 700 cows to 900 cows. The average milk production has gone up from 25,570 pounds per cow to 26,050 pounds. The feed and crop expense per hundredweight of milk has decreased from $8.41 to $7.20.
    Labor efficiency has increased, with the average number of cows per farm worker going from 44.1 to 47.1 cows. With that increase in labor efficiency, however, has come an increase in labor costs, rising from approximately $37,000 per hired worker to $42,500.  
    “Minimum wage is going up, and in New York we’ll probably soon have to worry about overtime costs,” Karszes said. “For a lot of years, our dairies were relatively unchanged on labor efficiency, but the last two years it’s become a big concern that we are starting to changes on the farm to try and address that.”
    The total cost of producing 100 pounds of milk on these New York farms has gone down slightly, from $19.15 per hundredweight in 2012 to $18.99 in 2017. However, during that same time period, the net milk price received per hundredweight has decreased $1.55, going from $18.94 in 2012 to $17.39 in 2017. The net milk price has only been above the total cost of production twice in the six-year time period: being over by 57 cents in 2013 and by $3.42 in 2014.
    Overall farm capital per cow has increased nearly $2,000, rising from $10,291 in 2012 to $12,184 in 2017.
    The overall rate of return on all capital without appreciation figured in has dropped from 6.1 percent in 2012 to 3.6 percent in 2017, with a high point of 14.1 percent in 2014 and a low point of 1.2 percent in 2015.
    In contrast to the overall average return on capital without appreciation of all 128 farms, when the top 20 percent (26 farms) are segregated from the remaining 80 percent, the top 20 percent dropped from 10.1 percent in 2012 to 6 percent in 2017, with a high of 18.6 percent in 2014 and a low of 3.8 percent in 2016. The remaining 80 percent dropped from 4.4 percent in 2012 to 2.4 percent in 2017, with a high year of 12.1 percent in 2014 and a low year of -0.2 percent in 2015.
    Despite those numbers, the overall average farm net worth on these farms has risen from $5 million to over $7.5 million.
    “What is the difference between these farms?” Karszes said. “This is where we got to the top 20 percent versus the remaining 80 percent. One thing we always want to remember is that every decision we make on the farm impacts the profitability equation in some form. We need to know what that means to our earnings and our rate of returns as we move ahead.”
    In the equations Karszes uses to determine profit and profitability, where profit equals volume times price minus cost, and profitability is determined by dividing that result by the investment.
    The top 20 percent had a higher investment per cow at an average of $7,233 compared to an average investment per cow of $5,868 in the remaining 80 percent. Farm capital per cow in the top 20 percent has increased from $9,543 in 2012 to $11,809 in 2017, while farm capital per cow in the remaining 80 percent has increased from $10,531 to $12,379.
    “When we see this, it’s a very interesting question coming from my side,” Karszes said. “What are these farms doing? Investment is one of the key things. We are starting to see more conversations on management practices.”
    Karszes said the most profitable farms invested more money into their farms than the remaining 80 percent.
    “To sum it up, the top 20 percent did about $7,200 of reinvestment,” Karszes said. “That’s machinery, land, implements, land, expansion cows, whatever the capital investment is to be appreciated.”
    Karszes urges producers to think in terms of replacement versus enhancement when reinvesting into their farms.
    “If all our investments are done on replacement only, our cost structure is probably going to go up,” Karszes said. “If we get enhancement of some aspect of the business, hopefully we have more dollars somewhere to offset that.”
    When talking to the top 20 percent about farm enhancements, can labor efficiency be increased by the labor hour to accomplish more things with better tools? Can making this investment increase cost efficiencies? Can the amount of milk per cow be increased?
    Karszes said that size and growth is driving the gross revenue on these farms. The top 20 percent grew an average of 38.5 percent, increasing from 1,094 cows to 1,515 cows. The remaining 80 percent grew an average of 23.2 percent, increasing from 604 cows to 744. Production on the top 20 percent of farms saw an increase of 0.4 percent while the remaining 80 percent increased by 2.5 percent.
    Karszes said no one strategy for profitability will work for all farms as every farm is different and can take varying approaches provided they keep the profitability equation in mind. And, just as importantly no one strategy is guaranteed to work forever, rather avoiding stagnation is the key.