Published: 28 May 2020
The breakeven milk price is a useful number to calculate for planning and comparison with the milk price offered by different milk processors.
In a recent online Dairy HIGH discussion group, the topic of preparing for next season was discussed. Among other things, the discussion group discussed how to prepare for a potentially lower milk price next season. In an online poll conducted during the discussion group, 55% of the discussion group participants indicated they were using a milk price between $5.51 and $6.00/kg MS in their planning for the 2020/21 season.
Also discussed was the value of calculating your breakeven milk price – as the name suggests, this is the milk price at which your dairy farm business is able to ‘breakeven’. This can be a very useful number to know at all times but particularly when milk price signals are uncertain.
Calculating the breakeven milk involves determining your dairy business income and subtracting the cash costs including interest, lease costs, a provision for essential repairs and maintenance and an allowance for drawings. It doesn’t have to include depreciation or capital costs that can be delayed in the short term.
Calculating your breakeven milk price
The breakeven milk price is the net milk price minus the calculated cash surplus/deficit in $/kg MS.
The surplus/deficit is calculated by deducting the total expenditure from total income, in $/kg MS.
- Total income includes net milk income, income for livestock sales and other farm income.
- Total expenditure includes farm working expenses (all variable costs), overheads, interest, lease payments and drawings.
The interesting thing about the breakeven milk price is that it is only influenced by the cost of production and the total milk solids produced on the farm and not the change in milk price.
A change in milk price will only increase or decrease the margin (surplus/deficit). This is because it is still costing you the same to produce that milk, regardless of what you get paid for it.
This why the breakeven milk price is a good forward planning tool in your dairy business as you can look at how changing the cost structure in the business and or the total production units impacts on the cash surplus or size of the deficit.
If you know your breakeven milk price, you can plan ahead for different milk price scenarios, and predict your cash surplus/deficit position. It is important to remember when doing this the cost of producing that milk remains the same. If you add in additional costs, for example feeding more grain, your variable costs will change, and therefore your breakeven milk price will change.
Table 1: Breakeven milk price calculation
Cost of Production
The cost of production is a different calculation to the breakeven milk price but it can also be used for planning purposes.
There are three levels in the cost of production calculation:
- Farm working expenses (FWE) – these are all the cash costs within your business and the number is useful for preparing cashflow budgets and adjusting to changes in input prices or milk price.
- FWE = variable costs + cash overhead costs
- Variable costs include herd, shed and feed costs
- Cash overhead costs include administration, repairs and maintenance and paid labour
- Total operating costs (TOC) – includes the Farm Working Expenses (cash expenses) plus non-cash expenses
- TOC = variable costs + cash overhead costs + imputed labour + depreciation +/- feed and water inventory
- imputed labour is the value of the farm owners or family operators who are not paid a wage for their time
- depreciation is the calculated loss in value of plant and machinery used in the business.
- Cost of production (COP) including inventory change – the calculation includes everything in the above examples with additional livestock inventory change which is an adjustment made for livestock on hand and livestock purchased. This is the most accurate measure where the business is undergoing significant change and is used to calculate profit and return of investment and for comparing business performance in our benchmarking program.
Finance, leasing, principal, capital repayments, personal drawings, tax payments are not included in cost of production calculations.
The value of benchmarking
Knowing your business, including the cost of production, is a very useful step in preparing for a potentially lower milk price. Benchmarking not only helps you plan but also allows you to analyse your business performance from year to year and identify areas for improvement. If you would like to benchmark your dairy business you can do this yourself online using Dairy Australia’s DairyBase tool. If you would like help, one of TIA’s dairy extension team is able to assist you in benchmarking your business – with either option, your data is kept private.
Information for this article was sourced from Dairy NZ and Dairy Australia. You can find the DairyNZ breakeven milk price calculator here: https://www.dairynz.co.nz/business/business-analysis/analysis-tools/breakeven-milk-price/. More information on cost of production can be found in Dairy Australia’s Dairy Farm Costs fact sheet.
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