Milk marketing: Things to think about, Part I
Milk marketing can be a confusing and emotional proposition. There are so many things to think about. What do I need for a milk price? What is a good price for the market? What pricing tool do I use? Understanding your answers to these questions is key to developing and acting on a marketing plan. A solid plan is an effective weapon in managing the emotions involved in milk marketing.
Milk price has become more variable over the past decade. The highs are getting higher and the lows are getting lower. A milk marketing plan tries to reduce the amount of variability. The purpose of milk marketing is to get a good average price more consistently. Trying to outguess the market can lead to more variable milk prices, rather than less.
This article is the first of a three-part series on milk marketing which will appear in this publication in the weeks ahead. The present article will focus on figuring out What You Need For A Milk Price. The second article which will appear on October 8 will look at Trends in Milk Prices. The third article scheduled for the November 29 publication will assess different marketing tools and Putting Things Together Into A Marketing
A marketing plan is a proactive strategy to price your milk that considers your financial goals, cash flow needs, price objectives, anticipated production, and appetite for risk. The old saying 'knowledge is power' is true when it comes to developing and implementing a milk marketing plan. Knowing the milk price that will cover your needs gives you the power to act.
There are two pieces of information you must have to calculate your needed milk price: milk production and total cash needed. Milk production is the easy one to figure out. Total cash needed takes a little more time to determine but is worth the effort once you have the numbers. Having a good record system to track both direct and overhead expenses is important not only to help make business decisions throughout the year but also in order to put together a good milk marketing plan. Cash needed includes your costs of production as well as the cash needed for your family draw. The following table can be used to calculate milk price needed.
The example assumes 100-cow operation with annual milk sales of 19,500 lbs. per cow. To cover direct and overhead expenses, a total of $14.98/cwt is needed. The breakdown is $11.03 for direct costs and $3.95 for overhead. The family draw of $25,000 requires an additional $1.28/cwt.
|Total for the year||Per cwt||Total for your farm||Per cwt for your farm|
|Return to labor and management||$25,000||$1.28|
|Milk production (cwt)||19,500|
It is important to calculate your costs on a hundredweight (cwt) basis. The price you receive for your milk is on a cwt basis. Knowing your costs on a cwt basis lets you assess two things: 1) you know what milk price will lock in a profit. This piece of information allows for an informed milk pricing decision; 2) your cost per cwt lets you assess your relative competitiveness. Put another way, are you in the ball park with your costs?
The Center for Farm Financial Management at the University of Minnesota provides benchmark reports for dairy enterprises. The benchmark report breaks farms into groups by percentile. For each expense category, the average for each percentile is reported. For example, in 2004 farms in the bottom 10th percentile had direct costs of $10.39/cwt. Farms in the 50th percentile had direct costs of $9.01/cwt. Farms in the top 10th percentile had direct costs of $6.07/cwt.
There are two reasons dairy producers need to know what is needed for a milk price. First, implementing a milk pricing decision is easier to do when you know you are locking in a profit. Second, it is important to know whether your target price is in the ball park. Put another way, can you expect the market to give you the price you need?
Having figured out what is needed for a milk price, the second step in developing a milk marketing plan is getting a handle on what is a good price for the market. That is the subject for the next article in this milk marketing series.
Published in Dairy Star August 27, 2005