II E> R.AR.Y OF THE UNIVERSITY OF ILLINOIS \\o. 574- NOTICE: Return or renew all Library Materials! The Minimum Fee for each Lost Book is $50.00. The person charging this material is responsible for its return to the library from which it was withdrawn on or before the Latest Date stamped below. Theft, mutilation, and underlining of books are reasons for discipli- nary action and may result in dismissal from the University. To renew call Telephone Center, 333-8400 UNIVERSITY OF ILLINOIS LIBRARY AT URBANA-CHAMPAIGN DEC 2 \ ?no4 L161 O-I096 Figuring MILK PRODUCTION v.L/3 J in Northern Illinois Results of study Ways to find costs in individual herds By R. H. WILCOX Bulletin 583 UNIVERSITY OF ILLINOIS AGRICULTURAL EXPERIMENT STATION CONTENTS PAGE SCOPE OF THE STUDY 3 DETERMINING COSTS 4 Level of Production Must Be Considered 5 Feed and Labor Expenses 6 Expenses Other Than Feed and Labor. . 8 Deductions From Costs 9 Expenses for 1 00 Pounds of Milk 10 COMPUTING CURRENT MILK COSTS 10 SUMMARY . . .16 Charts for quick computation of milk costs are given on pages 11 to 13. Urbana, Illinois December, 1954 Publications in the Bulletin series report the results of investigations made or sponsored by the Experiment Station FIGURING MILK PRODUCTION COSTS IN NORTHERN ILLINOIS By R. H. WILCOX, Professor of Farm Management THE COST of producing milk is a problem that interests not only producers, but consumers and dealers also, especially in areas where milk production is an intensive business and consumers are concentrated in the larger cities. This study was made to deter- mine costs in the northwestern Illinois portion of the Chicago milk- shed. Its further aim is to express these costs in such a way as to make them useful over a considerable period of shifting dollar costs. Though the study was confined to selected farms in only six counties, the results probably apply to a large part of northern Illinois. Knowledge of the kinds and amounts of feed fed to dairy herds, the hours of man labor required per unit of milk produced, and the percentage of the net cost which feed and labor constitute give a basis for computing, with reasonable accuracy, the cost of milk pro- duction under varying price conditions. This study showed that when the entire herd was used as the basis for computing costs, feed and man labor made up over 90 percent of the net cost of producing milk. I SCOPE OF THE STUDY The farms used for this study are in six counties located in the northwestern corner of Illinois: Carroll, Jo Daviess, Ogle, Stephen- son, Whiteside, and Winnebago. The center of the area is about 100 miles from Chicago. In 1949, 28 farms were included in this study and in 1950, 30 farms. Although all these farms are potential sources of fluid milk for the Chicago market, only 65 percent of the farmers actually sold to Chicago distributors. But these farmers who did sell to Chicago dis- tributors produced 76 percent of all the milk considered in this study. The number of cows per farm averaged 20, annual milk produc- tion per cow, 9,366 pounds. Production per cow was 1,038 pounds above production per cow on a selected group of farms used for a cost study 1 in the Chicago milkshed in 1936 and 1937. 1 Cost of Producing Milk in Northern Illinois, Agricultural Experiment Station Bulletin 511. 1945. 4 BULLETIN No. 583 [December, DETERMINING COSTS Study made among selected farmers. All the farmers cooperating in this study were enrolled in the Illinois Farm Bureau Farm Man- agement Service. 2 In addition, 51 percent were members of dairy herd improvement associations. They were more efficient producers than the average dairyman in the Chicago milkshed, their average yearly production per cow being about 1,700 pounds above the average of other producers in the area. Herd used as unit of cost. The entire herd was used as the unit for computing production expenses because animals used as replace- ments were not purchased but raised on the farms. In the two years of the study, an average of less than one cow or bred heifer was purchased per farm. In herds that produced a yearly average of 10,000 to 12,000 pounds of milk per cow, the total number of animals was larger than it was in herds that maintained production at lower levels. But the percentage of cows, bulls, heifers, and calves was essentially the same in herds at all three levels of production, as the following figures show. Average annual milk production per cow 10,000-12,000 8,000-10,000 6,000-8,000 pounds pounds pounds Total number of animals per herd. . 48 35 34 Percentage of animals per herd Milk cows 52 52 53 Bulls 2 2 1 Heifers, over 1 year 23 26 20 Calves, under 1 vear . . 23 20 26 Depreciation in the value of milk cows that had passed their peak of production does not appear directly as an expense of production. Depreciation does, however, influence the cost of production since it is subtracted from the total value of the byproducts and their value is deducted from costs. Interest at 5 percent a year on the capital invested in the milking herd was included as a cost of production. Charge made for management. The operator's services as man- ager were included as an expense of milk production. The charge to landlord for management of the entire farm commonly made by a number of commercial farm managers in Illinois during the years of 1 The Illinois Farm Bureau Farm Management Service is a cooperative, paid service available to farm operators in Illinois. Its purpose is to help farmers with their farm financial accounts, to give them an annual farm business analysis, to furnish information on markets, and to provide advice on farm problems. 1954} FIGURING MILK PRODUCTION COSTS the study was 7 percent of the total farm income minus purchases of feed and feeder stock. This charge for the entire farm was divided by the aggregate value of all farm expenses to obtain a management charge per $1 of farm expense. The management charge was then allocated to each productive enterprise on the farm by multiplying the expenditures for the enterprise, other than management, by the management charge per $1 of expenses for the farm. Level of Production Must Be Considered In this study, expenses in herds of high-producing cows were not as high in relation to the amount of milk produced as expenses in low- Table 1. YEARLY COST OF MAINTAINING A MILK COW, Northwestern Illinois, 1949 and 1950 (Average for entire herd) Item Costs in herds having annual milk production per cow indicated 10,000-12,000 8,000-10,000 pounds pounds 6,000-8,000 pounds Maintenance cost Feed.. $249.18 $234.76 $188.37 Man labor 88.41 80.92 68.79 Buildings 22.35 26.32 13.21 Dairy equipment 9.88 11.09 8.03 Power and machinery 15.44 15.32 14.49 Water system 1.68 1.28 1.08 Other cash expenses 20. 68 13 . 54 11 . 18 Interest on investment in herd. .. 10. 14 11. 19 9.04 General overhead expense 35 . 55 33 . 87 29 . 32 Bedding 7.26 9.79 7.24 Management 24.75 19.11 15.05 Gross cost 485.32 457.19 365.80 Deductions from cost Increase in inventory 2.92 8.00 5.98 Net stock sales 108.02 86.84 74.02 Manure 16.28 16.16 14.14 Total deductions 127.22 111 .00 94. 14 Net cost per cow 358.10 346.19 271.66 Value of milk 346.90 283.02 210.02 Loss per cow 11.20 63.17 61.64 Production per cow Milk, pounds 11,066 9,231 7,167 Butterf at, pounds 386 328 259 Net cost of milk and butterfat Milk, 100 pounds $3.24 $3.75 $3.79 Butterfat, 1 pound .93 1 .06 1 .05 6 BULLETIN No. 583 [December, producing herds. The reason is that some expenses, such as those for buildings and equipment, change very little as the milk yield per cow increases and other items, such as feeds, which increase, do so less rapidly than milk yield. In this study, for example, cows in herds that gave 10,000 to 12,000 pounds of milk per cow per year produced 54.4 percent more milk each than did cows in the low-producing herds (Table 1). But the value of the feed consumed by a cow in herds pro- ducing 10,000 to 12,000 pounds of milk per cow per year was only 32.3 percent more than the value of the feed that a cow in the low- producing herds consumed (Table 1). In herds of high-producing cows, the cost of man labor likewise was not as high in relation to milk yield as it was in herds of low-producing cows (Table 1). Feed and Labor Expenses The principal grains fed were corn and oats, about 1% to 1% times as much corn as oats being used (Table 2). An average of 3,312 pounds of grain per cow was fed in herds producing 10,000 to 12,000 pounds of milk per cow. Herds producing 6,000 to 8,000 pounds of milk per cow were fed an average of 2,608 pounds of grain per cow. Herds that produced 10,000 to 12,000 pounds of milk per cow were fed about twice as much protein meal and minerals as were herds in which milk production was low. Alfalfa was the principal hay fed. Corn and grass silage were a far more important part of the ration in herds having high produc- tion than in herds having low production. There was no material difference in the number of days per year the herds were on pasture. When the whole herd was used as the basis for computing costs, feed made up about two-thirds of the net cost of producing milk (Table 3). During the years of this study the farm price of alfalfa hay was $19.25 a ton, silage, $5 a ton, and protein meal, $95. The farm price of shelled corn was $1.25 a bushel, and of oats, $.70. The percentage of the net cost of producing milk that was made up of feed and labor varied only from about 91 to 95 (Table 3). In high-producing herds feed and labor made up about 95 percent of the net cost; in herds producing 8,000 to 10,000 pounds of milk, about 91 percent; and in low-producing herds, about 94 percent. In herds producing 8,000 to 10,000 pounds of milk per cow, a yearly total of 127 hours of man labor per cow was required to milk, 1964^ FIGURING MILK PRODUCTION COSTS Table 2. AMOUNTS OF FEED AND LABOR USED YEARLY PER COW (Herds maintaining three levels of production) Requirements in herds having annual milk production per cow indicated Item 10,000-12,000 8,000-10,000 6,000-8,000 pounds pounds pounds Grain, pounds Corn and corncob meal 2,005 1 ,846 1 ,640 Oats 1,307 1,109 968 Total 3,312 2,955 2,608 Protein meal and minerals, pounds Soybean meal 668 545 311 Minerals 8 3 12 Total 676 548 323 Hay and fodder, pounds Alfalfa ... 5,666 6,060 5,032 Clover 154 303 4 Mixed legume 918 876 1,161 Soybean 113 48 Corn fodder" 60 200 Total 6,851 7,299 6,445 Silage, pounds Corn ... 7,690 6,751 4,018 Grass 1 ,807 914 422 Total 9,497 7,665 4,440 Whole milk, pounds 210 263 139 Pasture, days 267 284 273 Man labor b , hours Direct 118 105 99 Indirect 21 22 18 Corn fodder is the entire corn plant, grown primarily for forage. b For discussion of differences between direct and indirect labor, see below. feed, care for the herds, and keep the dairy buildings and equipment clean (Table 2). Of this amount, 105 hours were directly expended on the dairy and 22 hours were indirectly spent on such items as the dairy buildings, water system, fences, and lots. The cost of labor in these herds was 23 percent of the net cost of producing milk (Table 3). The hours of labor required per cow and the percent of the net cost of producing milk that went for labor in herds of varying levels of production are shown in Tables 2 and 3. During the two years of this study, hired men in the area were being paid $115 to $122 a month in cash and enough of them were furnished room and board or BULLETIN No. 583 [December, Table 3. COST OF FEED AND LABOR AND RETURNS TO FEED AND LABOR Costs and returns for herds having annual milk production per cow indicated 10,000-12,000 pounds 8,000-10,000 pounds 6,000-8,000 pounds Number of herds 20 3.5 85.0 95 70 25 $ 1.25 19.25 95.00 24 3.6 62.5 91 68 23 $ 1.25 19.25 95.00 14 3.6 50.0 94 69 25 $ 1.25 19.25 95.00 Average butterfat test of milk, percent Grade A milk, percent Feed and labor, percent of net cost Feed and labor Feed Labor Feed prices Shelled corn, per bushel Alfalfa hay, per ton . Protein meal, oer ton. . Labor costs, per hour $ .64 $ .64 $ .59 Returns to feed and labor Per $100 of feed fed a $190.00 $168.00 $161.00 Per hour of labor b .56 .14 .06 Breakeven point on $100 of feed fed c $195 . 00 $195.00 $194.00 a Returns per $100 of feed fed, based on the entire dairy herd, are total returns from milk, increase in inventory, net sale of stock, and manure divided by each $100 of feed fed. Feed fed and total returns are shown in Table 1. b Returns per hour of labor are the profit or loss per cow, after meeting all costs other than labor cost, divided by the total man hours used per cow. c Break even point on $100 of feed fed, based on the entire herd, is the gross cost of main- taining the cow divided by each $100 of feed fed the cow. a house and other perquisites to bring the average monthly compen- sation of all hired men on these farms to a cash equivalent of $147 a month. Expenses Other Than Feed and Labor Expenses for feed and labor combined made up from 91 to 95 per- cent of the net cost of producing milk, as has just been pointed out. Of the remaining expenses, about half fluctuated with feed prices and farm wages and about half with the general price level. Nine items besides feed and labor enter into the cost of maintain- ing a dairy herd, but these items amounted to only 60 percent of the cost of feed alone (Table 1). These items consist of expenses for buildings, dairy equipment, power and machinery, water system, 1954} FIGURING MILK PRODUCTION COSTS 9 other cash expenses, interest on the investment in the herd, general overhead expenses, bedding, and management. The cost of hauling milk to a local concentration point was in- cluded as a part of power and machinery expense. A farmer who was paid for milk delivered to a concentration point incurred the cost of delivery whether he used his own truck or hired a trucker. This cost was therefore added to the cost of production. But hauling and spreading manure was not included as a dairy expense. A number of miscellaneous cash expenses that occur from time to time for such items as medicine, veterinary service, strainer pads, fly sprays, limestone for barn floors, breed association dues, registry and transfer fees, whitewashing the barn, washing pow r ders, insurance on the herd, and D.H.I.A. dues are included as other cash expenses. An item for general overhead expense was included because on every farm there are several expenses that are difficult, if not impos- sible, to charge directly to any one branch of the business. Such expenses are: real estate taxes on the land around the house and buildings, labor for cutting weeds along the road and fence rows, farm bureau dues, telephone, farm share of automobile expense, fence repairs, and farm papers. These overhead costs were grouped together and proportioned to crop and livestock enterprises on the basis of the amounts of man labor the enterprises required. Deductions From Costs When the entire herd is used as the basis for determining costs, the net cost of milk becomes the gross cost of all expenses on the herd minus: (1) increase in inventory of dairy animals; (2) differ- ence between income from sales of animals and purchase of animals; 1 and (3) value of dairy manure (Table 1). In 1949 and 1950 manure hauled from the barn and lots was valued at $2 a spreader load. The amount of manure that was esti- mated from feed input to have been dropped on pasture was credited to the dairy herd at the price of manure hauled from the barn and lots. 1 On farms in this study there was an annual increase in inventory value of dairy animals and an annual credit balance between sales and purchases of dairy animals. If there had been a decrease in inventory value or debit balance be- tween sales and purchases of animals, these items would have been included as part of the herd cost and not as deductions from cost. 10 BULLETIN No. 583 [December, Expenses for 100 Pounds of Milk The figures obtained in the study made it possible to measure the quantities of feed and labor used by dairy herds having different levels of milk production. They were also detailed enough to show the percentage of the net cost that feed, labor, and other items constituted. Since the quantities of feed and labor required to produce a unit of milk are not the same for high-producing and low-producing cows, the cost records were grouped separately for herds producing at three different levels: 10,000-12,000 pounds of milk per cow a year; 8,000- 10,000 pounds, the average of all the herds in the study; and 6,000- 8,000 pounds (Table 4) . Table 4. FEED AND LABOR REQUIRED TO PRODUCE 100 POUNDS OF MILK (Herds maintaining three levels of production) Requirements in herds having annual milk production per cow indicated 10,000-12,000 pounds 8,000-10,000 pounds 6,000-8,000 pounds Feed Farm grain, pounds 30 6 62 86 2.4 1.2 32 6 79 83 3.1 1.4 36 4 89 61 3.8 1.6 Protein meal and minerals, pounds . . Hay, pounds Silage, pounds Pasture, days Man l^hor, Viniirs, . , . The greatest differences in feed consumption per 100 pounds of milk at the different levels of production were in quantities of hay and silage (Table 4). There were smaller differences in the quantities of other feeds. Except for silage, herds in the highest of the three production groups produced 100 pounds of milk with the least feed of any of the groups. COMPUTING CURRENT MILK COSTS Cost-of-production figures are of most value if they can be pro- jected within reasonable limits of accuracy into each succeeding year. A scheme for estimating costs can be used without introducing a large element of error when current prices and wages can be applied to essential information secured by a reasonably recent study of milk- production costs. 1954} FIGURING MILK PRODUCTION COSTS 11 FARM PRICE OF CORN PER BUSHEL $2.00 -| 1.90 - 1.80 1.70 1.60 i 1.50 1.40 1.30 - 1.20 - 1. 10 - 1.00 .90 - .80 I COST OF 100 POUNDS OF MILK 5.50 5.25 5.00 4.75 ~ 4.50 4.25 4.00 3.75 3.50 3.25 jj- 3.00 ^- 2.75 2.50 WAGES OF FARM LABOR PER MONTH $300 - 285 270 - 255 240 225 - 210 - 195 180 - 165 - 150 - 135 120 Annual milk production per cow 10,000 to 12,000 pounds. With a string or ruler connect the price of corn (left scale) with farm wages (right scale). The figure at which the line crosses the center scale is the approximate cost of producing 100 pounds of milk in northern Illinois herds producing at this level. (Cost of management included. Based on a price-level of 200 [1935- 1939 = 100] for things farmers buy. See page 14 for way to adjust to other price levels.) 12 BULLETIN No. 583 [December, FARM PRICE OF CORN PER BUSHEL $2.00 . 1.90 1.80 1.70 1.60 1.50 I.4O 1.30 1.20 - 1.10 1.00 .90 - .80 -J COST OF 100 POUNDS OF MILK $6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 WAGES OF FARM LABOR PER MONTH $300 - 289 270 - 285 240 225 210 195 - 180 165 150 135 120 Annual milk production per cow 8,000 to 10,000 pounds. With a string or ruler connect the price of corn (left scale) with farm wages (right scale}. The figure at which the line crosses the center scale is the approximate cost of producing 100 pounds of milk in northern Illinois herds producing at this level. (Cost of management included. Based on a price-level of 200 [1935- 1939 = 100] for things farmers buy. See page 14 for way to adjust to other price levels.) 1954} FIGURING MILK PRODUCTION COSTS 13 FARM PRICE OF CORN PER BUSHEL $200 - 1.90 - 1.80 - I.7O - 1.60 - 1.50 - 1.40 H 1.30 - 1.20 1. 10 1.00 .90 - .80 COST OF 100 POUNDS OF MILK $ 7.00 ^- 6.75 ^- 6.50 5- 6.25 ^- 6.00 5.75 5.50 ^- 5.25 5- 5.00 jj- 4.75 ^- 4.50 ^- 4.25 4.00 3.75 3.50 3.25 WAGES OF FARM LABOR PER MONTH $300 285 270 255 - 240 225 - 210 - 195 - 180 165 ISO - 135 120 Annual milk production per cow 6,000 to 8,000 pounds. With a string or ruler connect the price of corn (left scale) with farm wages (right scale). The figure at which the line crosses the center scale is the approximate cost of producing 100 pounds of milk in northern Illinois herds producing at this level. (Cost of management included. Based on a price-level of 200 [1935- 1939 = 100] for things farmers buy. See page 14 for way to adjust to other price levels.) 14 BULLETIN No. 583 [December, A method of applying prices of feed and labor under changing price-levels seemed desirable for projecting the results of milk-cost studies. The method worked out here and translated into charts (pages 11-13) has been developed by (1) using the price movements of an important grain, such as corn, as the measure of fluctuations in the cost of feed and other items that tend to fluctuate with feed; and (2) using the movements of monthly cash farm wages in the community as the measure of fluctuations in the cost of man labor and other items that tend to fluctuate with man labor. Since feed and labor costs make up over 90 percent of the net cost of producing milk (Table 3) when milk costs are secured by using the entire dairy herd as the basis, all other items make up only a small portion of the net cost. As costs other than feed and labor tend to fluctuate either with feed and labor costs or with the general price level of commodities that farmers purchase, it is possible to fit the charts to one price level and then add or subtract an amount from the computed cost to com- pensate for a change in the price level. These charts are constructed on a price level of 200 (1935-1939 = 100) for the things farmers buy for use in their business. They can be used to compute the approximate cost of milk when the local price of corn is between 80 cents and $2 a bushel and the cash wage of farm labor is between $120 and $300 a month. All that is necessary is to take a string or a ruler and connect the price of corn (shown on the scale at the left) with the monthly cash wage of farm labor (shown on the scale at the right) , and the figure where such a line cuts across the center scale will show the approximate cost of producing 100 pounds of milk. If, for instance, the cows in a herd produce an average somewhere between 8,000 and 10,000 pounds of milk annually (page 12) , and if the local price of shelled corn is $1.40 a bushel and the monthly cash wages of a hired man are $150 a month, it would cost about $4.15 to produce a hundred pounds of milk when the price index is 200. To adjust to any other price level it is necessary to add 2 cents a hundred pounds to the cost, or subtract 2 cents from it, for every 10 points the index is above or below 200. If the price index were 190, the cost would be only $4.13 ($4.15 2 cents). Formulas for computing milk costs. Those who may prefer to work out costs arithmetically can do so by using the following formulas instead of the charts. The formulas are based on the same index of prices as the charts (200). The same amount (2 cents a hundred 1954] FIGURING MILK PRODUCTION COSTS 15 pounds) must be added to or subtracted from the computed cost for each 10 points the price index rises above or falls below 200. Cows producing 10,000 to 12,000 pounds of milk yearly: Cost of 100 pounds of milk = (Local price of shelled corn per bushel X 1.8) + (monthly cash hired man wages -=-165) +26 cents adjustment for change in price level Cows producing 8,000 to 10,000 pounds of milk yearly: Cost of 100 pounds of milk = (Local price of shelled corn per bushel X 2.0) + (monthly cash hired man wages -=- 150) + 35 cents adjustment for change in price level Cows producing 6,000 to 8,000 pounds of milk yearly: Cost of 100 pounds of milk = (Local price of shelled corn per bushel X 2.1) + (monthly cash hired man wages -^125) +49 cents adjustment for change in price level An example of how costs may be figured by the formula method is shown, in condensed form, in the following equation for cows giving 8,000 to 10,000 pounds of milk, when corn is $1.40 a bushel, labor is $150 a month, and the price index of commodities farmers buy for production is 200: ($1.40 X 2.0 = $2.80) + ($150-f-150 = $1) + $.35 = $4.15 SPECIAL NOTE ON COSTS The market price of feed that was fed to dairy animals and the prevailing wage for all labor that was used on the dairy were charged to the dairy enterprise. This method of accounting was used because it enables a farmer to analyze the profitableness of his dairy in rela- tion to other phases of his farm business. Though when analyzed in this way the dairy enterprise may show a loss, the enterprise may nevertheless have increased the farm income. For example, the dairy herd may have returned only 56 cents an hour for labor instead of the 64 cents charged in this study and $1 a bushel for corn rather than the $1.25 charged and still have added to the farm income. The losses these dairies showed may also have been more than offset by unaccounted for gains to the general farm business. A dairy provides an on-the-farm market for grains, hay, and pastures; gives employment to labor that otherwise might not be fully employed; supplies needed manure; and helps spread farm income evenly throughout the year. 16 BULLETIN No. 583 SUMMARY Milk production per cow averaged 9,366 pounds yearly in the northwestern Illinois herds included in this study a high milk yield compared with the production of all cows in the area. Proportional costs of milk production. Feed and labor expenses constituted 91 to 95 percent of the net cost of milk production. Feed costs made up 68 to 70 percent of these costs and labor 23 to 25 percent. Of the remaining expenses, about half fluctuated with feed prices and farm wages and about half with the general price level. The high-producing cows required less feed and labor per unit of milk produced than did the low-producing cows. The greatest varia- tion in the amounts of feeds consumed was in silage and hay; there were smaller differences in the quantities of other feeds used. Formulas for estimating costs. The above facts concerning feed and labor costs supplied the basis for developing formulas and graphs by which the cost of producing milk in northern Illinois in herds main- taining different levels of production can be computed closely enough for most practical purposes. The only variables in the formulas are in the local price of shelled corn, the monthly cash wages of hired men, and the price index. 8M 12-54 56010 UNIVERSITY OF ILLINOIS-URBANA Q.630.7IL6B C002 BULLETIN. URBANA 574-5901954-55 3011 2019529384