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Cost of Production Per Hundredweight

You cannot manage what you have not measured. Knowing what it costs to make a hundredweight of milk is one of the most useful numbers a dairy owner can have.

What the number tells you

Cost of production per hundredweight, or cwt, is the total cost of running the dairy divided by the number of hundredweight of milk sold. A hundredweight is 100 pounds. The result lets you compare your cost with your milk price and see whether each unit of milk is making or losing money.

It also lets you track change over time, compare with similar farms and test the effect of a decision before you make it.

A farm that does not know its own number is relying on feel. A farm that knows it can decide whether to expand, hold steady or cut back based on facts rather than hope.

Gather the right records

Start with a full year of financial records if you can. Use tax records, bank statements, feed bills, payroll and loan statements. Add milk statements to get total hundredweight sold. Consistency matters more than perfection, so use the same method each year.

If your records are scattered, that is itself a finding. Set up a simple system to categorize expenses each month.

Do not wait for the perfect set of books. A rough first pass is better than none, and each year the quality of your records and your figure will improve.

• Milk statements for total hundredweight sold
• Feed purchases and homegrown feed costs
• Labor, including family labor
• Veterinary, supplies and breeding
• Fuel, repairs, utilities and insurance
• Interest, depreciation and taxes

Which costs to include

A full cost figure includes both cash costs, such as feed and fuel, and non-cash costs, such as depreciation. It also includes a fair value for the unpaid labor of the owner and family, and a return on the capital invested in the farm. Leaving these out makes the number look better than the truth.

Homegrown feed should be valued at a consistent, defensible figure. Ask your extension specialist or accountant how to handle it so the result is useful.

Separate the dairy from other enterprises

Many farms raise crops, beef or other products alongside the dairy. Costs should be assigned to the right enterprise so one does not hide the other. Replacement heifers are also part of the picture, since raising them costs real money.

Income that is not from milk, such as cull cows and calves, is usually subtracted or reported separately depending on the method. Pick a method and stick with it.

If part of the farm is rented, make sure rent and the cost of the land used for feed are counted. Leaving them out understates the real cost of the milk.

Using the result

Once you have the number, compare it with your milk price and with benchmarking data from your extension service or a farm business group. Look at which cost categories are largest, since that is where small improvements pay the most.

Feed is often the largest category, so look at feed efficiency, waste and purchasing. Then look at labor use, herd health, culling and reproduction. Make one change at a time and measure the effect.

Common mistakes and what to ask

Common mistakes are ignoring family labor, forgetting depreciation, mixing dairy and crop costs and using one bad year as a rule. Another is calculating once and never updating.

Ask your accountant, lender or extension farm business specialist to review your method. Update the figure at least once a year and after any major change.

• Did I include unpaid family labor?
• Did I count depreciation and interest?
• Are dairy and other enterprises separated?
• Am I comparing to similar farms?
• When will I update the figure?

Turning the number into a plan

After you calculate the figure, set it beside a few scenarios. What happens to your margin if the milk price falls, or if feed costs rise? Which cost lines could you reduce without hurting cow health or milk quality, and which would cost you more in the long run?

Share the results with your lender, nutritionist and veterinarian. Each can point to opportunities in their area, from feed efficiency to reproduction and herd health. Focus on changes that can be measured so you can see whether they worked.

Many farms repeat the calculation every year and keep the results in a simple table. A multi-year view shows trends that a single year hides, and it makes conversations with lenders much more productive.

More in Milk Quality, Business & Sustainability

• Profitability by Cow vs. by Herd
• Benchmarking Dairy Farm Finances
• Cash Flow Planning for Dairy Farms
• Farm Loan Preparation Checklist
• Insurance for Dairy Farms
• Direct-to-Consumer Milk Sales