';"'""

,1“. 4:” .AA

main-nu"
.r V 'r

,..

”up“ .3.‘:,',
~A-.._'.A.A..‘...AAI
,..“ ._

...',':'.A
,A
A

N ’4 I
‘«.

;.l;'-u»vv'tn

. .
I A

I A‘-

.. , ',._~A,,..' ,...
m.
'

 

 

 

 

 

 

 

A, ',A.,.r'

 

’iAA,A.,'.A
......A,.. ;§'
1 A‘ .‘10". riv“[lr"k
’ ' . .A .:.A,A,:..A.,
. .QAAA.,‘,A'A ,
,A,,.,.A .15, , . V .. “H:
,A.A-.A_.
’ I
A- _
,.... J‘. ."..A “,;,

r.
v.

.A ...,J_2§,2
..,..

r
.f...
”a":

.A '7' .,
A..:.~:..,3A,'-,.> .A
A. n. . . . .

1 ,.A . ”if".

-:- ._
. u; p.'.... ,
,.., nu... . ".1,
A.“ ,q
, r- " .3

.
,,..,,,,, .A'.A.
E-A- -A—...'..AA..
’ 4
.A . A l
' .
r . W .
..,L: .A.:.'..
.uzp‘AAA .; .fl
,... .1.

.....‘.A', ....,..A'.;,

'I‘
....A._.._. , r
""‘ "..—. I

A 'y.’.- I. ..,.
.T

MICHIGAN STATE U

my liligniugflipim

319300

 

 

 

 

 

 

 

 

 

 

 

 

ll!

 

 

 

 

 

 

This is to certify that the

thesis entitled

 

A Financial Analysis of Michigan
Prototype Dairy Farms for 1995

presented by
Dale G. Darling

has been accepted towards fulf-illdment '
of the requirements for

Magnets—degree in Agricultural Economics

Km AW

Majorgofessor

Date July 5, 1991

0-7639 MS U is an Affirmative Action/Equal Opportunity Institution

 

 

 

 

”LIBRARY I
M'Chigan State

t

1

PLACE IN RETURN BOX to remove this checkout from your record.
TO AVOID FINES return on or before date due.

 

DATE DUE DATE DUE DATE DUE
MY 3%

 

 

 

fliiYQwag
" I139 .

UNI}???

 

 

 

 

 

 

 

 

.01

 

 

 

 

 

 

 

 

 

 

 

 

MSU Is An Affirmative Action/Equal Opportunity Institution
c:\clrc\daedue.un3~DAl

 

A FINANCIAL ANALYSIS OF MICHIGAN

PROTOTYPE DAIRY FARMS FOR 1995

BY

Dale G. Darling

A THESIS
Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of
MASTERS OF SCIENCE

Department of Agricultural Economics

1991

:f‘; :7 '" (flit? I'l/r

 

ABSTRACT

A FINANCIAL ANALYSIS OF MICHIGAN
PROTOTYPE DAIRY FARMS FOR 1995

By

Dale G . Darling

The financial position of Michigan dairy farmers has become an
increasingly important topic in recent years. The dairy industry is
undergoing a change and this is affecting the profitability of dairy
farmers. Rising costs and decreasing prices are making dairy farmers
reevaluate their financial situation. The purpose of the study was to
financially analyze potential prototype dairy farms. The financial
analysis is performed by computerized enterprise budgets. The prototype
dairy farms for 1995 are based on farmer(s) purchasing the entire
operation. All of the fixed costs are computed on an annual fixed cost
basis for the duration of the assets useful life.

This study deals with scenarios which will likely take place in the
year 1995. The prices and costs are trended to the year 1995 to be used in
the prototype dairy farms. The milk price is established at $10.00 per
hundredweight, milk production of 19,200 pounds of marketed milk per cow,
per year, and labor costs are $5.00 per hour. The prototype farms are
designed to house the cows in free stalls. The farms raise all of their
feed, feeding a ration of haylage and high moisture corn to the milking

I

herd. The dairy farms are based on herd sizes of 60, 120, 250 and 400 cow
operations.

Analyzing the four prototype dairy farms under the performance
variables, the larger dairy operations are more profitable on a per cow
basis than the small herds. The fixed costs, primarily buildings,
facilities, and equipment, in the larger herds are spread out over more
cows. The annual fixed costs per cow are the smallest in the large herds.
The annual fixed cost per cow are the largest in the small herd.

In the larger herds the annual labor requirements per cow are
significantly lower than the requirements in the smaller herd. The small
herds have a larger expense per cow than the larger farms. The overall
labor requirements are the largest in the 400 cow herd.

The smaller dairy herds in Michigan make the individual cow carry a
large cost. For these herds to be profitable in 1995 under the base
performance variables, they will have to produce over 21,250 pounds of
marketed milk. These herds are going to need to be well managed to reduce
cost and promote profits. The problem in cost reduction stems from the 60

cow farm having all the equipment, for so few acres and cows.

II

ACKNOWLEDGMENTS

I wish to express my appreciation to Dr. Larry J. Cbnnor, thesis
advisor and Chairman of the Guidance Co-ittee. His persistence and
constructive criticisms and reco-endations throughout the period of
research were extremely useful.

I would also like to thank the Department of Agricultural Economics
for providing me with an assistantship to finance my graduate program and
an enjoyable learning environment.

Thanks is expressed to Dr. Sherill Nott, Dr. William Bickert, Dr.
Larry Hamm and Dr. Roger Mellenburger for their advice and assistance.

Finally, deep appreciation is expressed to all my.family and.friends
for their continued encouragement in my educational pursuits. The constant

enthusiasm and support from them has been invaluable.

III

TABLE OF CONTENTS

LIST OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . VI
LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . .VIII

CHAPTER

H

1. INTRODUCTION .

Industry Environment . . .

Specific Problems of Michigan Dairy Farms

Specific Objectives of Research . . . . . . . . . . .
Organization of THESIS . . . . . . . . . . . . . . . . . . 1

O\0L\I~A

2. RESEARCH DESIGN

Michigan Prototype Dairy Farms for 1995 . . . . . . . . . 11
The Expert Team . . . . . . . . . . . . . . . . . . . 12
Breed of Dairy Cow . . . . . . . . . . . . . . . . . . . . 12
Herd Size . . . . . . . . . . . . . . . . . . . . . . . . 12
Housing . . . . . . . . . . . . . . . . . . . . . . . . 13
Milking System . . . . . . . . . . . . . . . . . . . . . . 16
Manure System . . . . . . . . . . . . . . . . . . . . . . 17
Cropping System . . . . . . . . . . . . . . . . . . . . . 23
Facilities . . . . . . . . . . . . . . . . . . . . . . . . 25
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 25
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Labor . . . . . . . . . . . . . . . . . 26
Michigan Prototype Dairy Farms . . . . . . . . . . . . . . 30
Enterprise Budgets . . . . . . . . . . . . . . . . . . . . 31
Receipts . . . . . . . . . . . . . . . . . . . . . . . . . 32
Variable Costs . . . . . . . . . . . . . . . . . . . . . . 32
Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . 34
Total Costs . . . . . . . . . . . . . . . . . . . . . . . 37
Return . . . . . . . . . . . . . . . 37
Cow and Replacement Heifer Budget . . . . . . . . . . . . 37
Performance Variables . . . . . . . . . . . . . . . . . . 38
Milk Revenues . . . . . . . . . . . . . . . . . . . . . . 38
Feed Costs . . . . . . . . . . . . . . . . . . . . . . . . 39
Crop Yields . . . . . . . . . . . . . . . . . . . . . . . 40
Cost of Capital . . . . . . . . . . . . . . . . . . . . . 40
Land Values . . . . . . . . . . . . . . . . . . . . . . . 40
Labor Cost . . . . . . . . . . . . . . . . . . . . . . 41
Sensitivity Variables . . . . . . . . . . . . . . . . . . 41

IV

3. RESULTS OF THE BASE PERFORMANCE VARIABLE FOR PROTOTYPE DAIRY FARMS
Financial Results . . . . . . . . . . . . . . . . . . . . 45
4. RESULTS OF THE SENSITIVITY ANALYSIS

Milk Price . . . . . . . . . . . . . . . . . . . . . . . . 58
Milk Production . . . . . . . . . . . . . . . . . . . . . 59
Soybean Meal Costs . . . . . . . . . . . . . . . . . . . . 61
Hay Yields . . . . . . . . . . . . . . . . . . . . . . . . 6l
Corn Yields . . . . . . . . . . . . . . . . . . . . . . . 62
Interest Rate on Land . . . . . . . . . . . . . . . . . . 62
Interest Rate on Buildings . . . . . . . . . . . . . . . . 63
Interest Rate on Equipment . . . . . . . . . . . . . . . . 63
Land Value . . . . . . . . . . . . . . . . . . . . . . . . 64
Labor Cost . . . . . . . . . . . . . . . . . . . . . . . . 64
Feed Acquirement . . . . . . . . . . . . . . . . . . . . . 65

5. SUMMARY AND CONCLUSIONS

Major Findings . . . . . . . . . . . . . . . . . . . . . . 68
Implication for the Michigan Dairy Farms . . . . . . . . . 69
Needs for Future Research . . . . . . . . . . . . . . . . 70
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . 72
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . 77
Bibliography . . . . . . . . . . . . . . . . . . . . . . . 82

2.10

2.11

2.12

2.13

2.14

3.1

3.2

3.3

3.5

LIST OF TABLES

Breakdown of Prototype Dairy Herds .
Milking System .

Manure Production Per Day

Earth Basins by Herd Size

Nutrient Composition of Pricing Feeds Used in Estimating
Feed Budgets .

Quantities of Feed Needed/Cow and 30% Replacement/Year
by Herd Size . . . . . . . . . . .

Estimated Annual Land Requirements in Acres

Estimated Annual Labor Requirements by Herd Size for Dairy .

Estimated Annual Labor Requirements for Crops per Farm .
Estimated Annual Total Labor Requirements per Farm .
Michigan Prototype Dairy Farms for 1995

Capital Recovery Factors for Various Opportunity Costs of
Capital and Planning Horizons

Performance Variables

Sensitivity Variable of the Base Prototype Dairy Farms .
Enterprise Budget for 60 Cow Dairy Raising All Feed
Enterprise Budget for 120 Cow Dairy Raising A11 Feed .
Enterprise Budget for 250 Cow Dairy Raising All Feed .
Enterprise Budget for 400 Cow Dairy Raising A11 Feed .
Replacement Heifer Budget

VI

14

. 17

. 20

. 21

. 22

. 23

. 26

. 27

. 28

. 29

. 30

. 36

. 42

. 43

. 46

. 48

. 50

. 52

. 54

Financial Returns of Prototype Dairy Farms Raising
All Feed .

Effects of Sensitivity Variables on Returns to Management
Sensitivity Analysis of Feed Acquirement .

Dairy Buildings and Facilities: Herd Size 60 .

Dairy Buildings and Facilities: Herd Size 120

Dairy Buildings and Facilities: Herd Size 250

Dairy Buildings and Facilities: Herd Size 400

Equipment Estimates: Herd Size 60

Equipment Estimates: Herd Size 120 .

Equipment Estimates: Herd Size 250 .

Equipment Estimates: Herd Size 400 .

VII

. 56

. 60

. 66

73

74

75

76

78

79

80

. 81

FIGURE

2.1 Earth Storage Basin .

LIST OF FIGURES

VIII

. 19

CHAPTER 1
INTRODUCTION

The United States dairy industry is in a time period of change. The
United States dairy industry is facing large surpluses of milk products,
reduced ‘price supports for' milk, and the imminent introduction of
production boosting technology. It is for these reasons farmers have had
to reevaluate their financial situations. Dairy farmers are considering
ways to reduce costs and increase profits to prevail in this changing
industry. This thesis analyzes the present situation prevailing in the
Michigan Dairy Industry and the potential financial conditions of Michigan
prototype dairy farms for 1995.

The first chapter focusses on the current environment in the dairy
industry and reasons for interest in the Michigan dairy farmer. This is
followed by specific objectives of this research and an overview of the

chapters comprising this thesis.

1.1 Industry Environment

The U.S. government is faced with difficult task of trying to
balance the supply and demand for milk. In recent years, supply has
exceeded demand and the government has had to purchase large quantities of
milk products. In 1983, the USDA purchased 16.8 billion pounds of surplus
milk, or about 11% of U.S. production‘. The federal government then
revised its dairy policy and two forms of voluntary supply management

programs were used. The first was titled the Milk Diversion Program (MDP)

 

 

1Browne, William P., and Larry C. Hamm, Political Choices Social Values
and the Economics of Biotechnology: A Lessen from the Daig Industry, staff paper
No 88 -33 , Department of Agriculture of Economics, Michigan State University, East
Lansing, April, 1988.

whereby producers voluntarily signed up to decrease their overall milk
production by a certain percentage. The second was the Dairy Termination
Program (DTP), whose goal was to purchase 12 billion pounds of productive
capacity out of the industry. In September 1987, milk production in the 48
DTP-states was estimated to be 1.6 percent below September 19852.

Total milk production in 1988 was 145.5 billion pounds, up 2 percent
from 19873. Total utilization was 137 billion pounds for a difference of
8.5 billion pounds‘. The federal government realizes supply still exceed
demand and has placed more emphasis on another area of dairy policy: the
milk support price.

The dairy support price reached a high of $13.50 per hundred weight
in 1981 and a low of $10.50 in 1988. The dairy price support has declined
20% since 1983 and has caused severe financial stress to many dairy
farmerss. If over production persists, the current federal legislation
calls for price deductions until supply and demand are in balance which
will cause further financial stress to the dairy farmer.

Dairy policy makers have evaluated many alternative price
determining mechanisms which would alter the current policy; One which is
being analyzed is a regional pricing system in which the milk price would

be determined within a region at a specific base point. This would be a

 

2Rourke, John P. , Change in Production of DTP Nongarticigant and New
Producers,.Breeding paper 87-10,.Dairy'Market News Volume 54, Report 46 November

1987 pg.8.

3030A, Daig Situation and Outlook Reggrt, DS-413, Economic Research
Service, Hashington, D.C. 20005, January 1988.

"IBID .

SBrowne, William.P., et a1 1988.

major change from the current pricing system which depends on the M-W
price. The other possibility, which many farmers have disapproved of,
would be a quota system in which the dairy farmer would only produce a
certain annual volume of milk.

Milk production per cow has steadily been increasing over the past four
decades. In 1950, the United State production per cow was 5,314 pounds of
milk annually. In 1988 the U.S. production per cow was 14,200 pounds of
milk annually, up 3 percent from 19876. In Michigan the 1950 average
production per cow was 6,280 pounds annually compared to the 1988 figure
of 14,900 pounds of milk annually produced7.

Over the past four decades cow numbers have been declining. In 1950
there were 21,944,000 milk cows and in 1987 there were half this number
(10,233,400). The number of cows in Michigan has also been declining. In
1983 there were 404,000 milk cows in Michigan and in 1988 the State
approached 350,000 milk cows8.

With the large decreased in cow numbers in recent years, it has
become more difficult for the input—supply industry. Michigan companies
are having to increase their market penetration and develop new marketing
plans to sell their products to dairy farmers. With fewer cows, companies
have become more competitive and have also had to look at ways of reducing
costs to promote profits.

Milk cooperations are also concerned with large decreased in cow

 

6Michigan Farmer, Daig Report, 1989.

7Michigan Agricultural Statistics Service, Michigan Agricultural Statistics ,
1989, Mass 89-01, 201 Federal Building, P.O. Box 20008, Lansing, MI 48901 1989.

 

8Michigan Agricultural Statistics Service, 1989.

3

numbers. The milk cooperatives are concerned that they may not receive
enough milk to fill their contracts with processors.

Dairy plays an important role in Michigan’s agricultural economy.
Dairying is the single largest agricultural enterprise. In Michigan, cash
farm income from dairying is approximately 28 percent9.

A final concern effecting the dairy industry which is receiving
tremendous amount of attention is the potential introduction of Bovine
Somatotropin (BST) . BST will be conercially available in the next year or
two. BST has the potential to increase milk production per cow by an
average of ten to twenty percent1°.BST is a growth hormone naturally
produced in the dairy cow. It is drawing attention from policy makers,
dairy farmers and consumer groups as to the effects it will have on the
supply of milk, the impact on the dairy cow, and the harm to consumers if

traces of BST filter in the food chain.

1.2 Specific Problems of Michigan Dairy Farms

A major concern of the Michigan dairy farmer deals with their
financial situation. The 1987 Michigan State University Dairy Farm Survey
reported 23.1 percent of Michigan dairy farms had a 70 to 100 percent +

debt-to-asset ratio". This is a critical debt-to-asset level which

 

9Hamm, Larry C. , Upper Midwast Perspectives on the Daig Price Supmrt
Program, staff paper number 87-77, Department of Agricultural Economics, Michigan

State University, East Lansing, MI 48823, 1987.
”Browne, William P., et a1 1988.

"Connor, Larry J., Larry C. Hamm, Sherrill Nott, Dale G. Darling, William
Bickert, Roger Mellenberger, H. Allen Tucker, Oran B. Hesterman, John A.
Partridge and John H. Kirk, Michigan Daig Farm Industg: SW of the 1987

Michigan State Universitz Daig Farm Survey, special research report 498,
Michigan State University Agricultural Experiment Stations, East Lansing, MI

4

financial experts state would be difficult to overcome. These dairy
farmers represent 23.3 percent of the milk volume sold in Michigan. An
additional 23.7 percent of Michigan dairy farms representing 27.8 percent
of the milk volume have a 40 to 69 percent debt to asset ratio”.

A second problem the MSU Dairy Farm Survey uncovered was the age of
equity capital. The age of total capital refers to the age of physical
capital such as when buildings and equipment were built and purchased
respectively. The average year housing facilities were built was 1963,
milking facilities was 1964, and feed storage facilities was 196913. All
three facilities average 23.7 years old. These facilities will need to be
replaced or updated in the near future. To carry this out will depend on
the dairymen’s equity position and net farm income.

A third problem in the MSU Dairy Farm Survey uncovered was the net
farm income for all families operating the dairy farm. Over 29 percent of
the Michigan dairy farms receive less that $10,000 in net farm income“.
Of this 29 percent, 30 percent divide the net farm income between two or
more families. An additional 20 percent of the dairy farms received
between $10,000 and $20,000 in net farm income. Of the 49 percent of dairy
farmers receiving under $20,000 in net farm income, 30 percent have a
debt-to-asset ratio of 70 to 100 plus.

Falling land values in the 1980’s have had negative impacts on dairy

farmers equity position. In 1981 the average land value per acre less

 

48823, July 1989.
“Connor, Larry J., et a1, 1989.
131310.

“1311) .

 

improvements was $985.60”. In 1986 the average land value per acre less
improvements was $695.00 per acre“. The difference between these two
values is 29 percent. This decrease in land value has a major impact on
the dairy farms equity position. It decreased their equity position making
it more difficult to borrow capital.

Milk price has a significant impact on a dairy farmers revenue. The
MSU Dairy Farm Survey found 78.4 percent of a dairy farmers revenue came
from the sale of milk. In 1981, the Michigan dairy farmer received an
average price of $13.80 per hundredweight. In 1987 this figure dropped to
$12.63 per hundredweight, This was an eight percent decrease in prices
received.

The cost of production to produce a hundredweight of milk has also
risen in this decade. A large percentage of this cost can be attributed to
the variable cost which includes the feed cost. The price of hay has been
increasing. In 1980 alfalfa hay cost $36.50 per ton compared to $57.00 per
ton in 198717. In 1988 these figures skyrocketed to $99.00 per ton due to
the severe drought. The price of soybean meal has varied. In 1980 it was
$280.00 per ton compared to $220.00 per ton in 1987. The 1988 figure was
extremely high, at $300.00 per ton due to the drought. The high cost of
soybean meal led producers to look at other forms of protein to feed their

cows such as whole cotton seed. The price of corn has fluctuated up and

 

“Harvey, Lynn R., Al E., House, Karen K. Cylbuski, David R. Walker,

Agricultural Land Values and Assessments in Selective Counties in Michigan,

Agricultural Economics Report No. 503, Michigan State University, East Lansing,
MI. , November 1987.

1611311).
17Michigan Agricultural Statistics Service, 1989.

6

down in the 1980’s between $1.50 to $3.25 per bushel. Feed costs represent
from ‘40 to 70 [percent of' dairy .farmers total costs. .Farmers .have
consequently evaluated many alternative feed products and are trying to
minimize the cost of their rations.

Labor shortages and the cost of labor have had a significant effect
on dairymen. With rising wages in other industries, dairy farmers are
having to compete with these industries to supply their labor needs. They
are performing this by offering higher wages per hour and/or adding
incentives to their labor. The hourly wage rate in 1980 was $3.64. In 1988
it was $4.25 per hour. This is a 14 percent increase in eight years. The
rising cost of labor and shortage of labor have caused dairy farmers to
critically analyze their operations and find ways to reduce their labor
requirements.

Michigan dairy farmers are having to face another problem in
environmental restraints placed on the handling and disposal of manure.
Emerging legislation and‘guidelines for Michigan are requiring some farms
to have long-term storage facilities for their .manure. If strict
guidelines are enacted into law, it will cause many dairy farmers to
change the existing manure handling practices. The 1987 MSU Dairy Farm
Survey reports 38.2 percent of the dairy farms representing 30.7 percent
of the milk volume haul their manure to a field on a daily basis.
Additionally, 26.1 percent of the farms representing 22.5 percent of the
milk volume haul their manure to a field on a bi-weekly basis. Of this
64.3 percent of the dairy farmers representing 53.2 percent of the milk
volume, 42 percent have a debt-to-asset ratio of 40 to 100 plus. These

farms would have severe problems if these laws were changed. In Michigan

only 5 percent of the dairy farmers have long term storage for all manure.
An additional 16.6 percent of the dairy farmers representing 24 percent of
the milk volume have long-term storage for only their milking cows’
manure. If the state requires the manure handling practices to be changed,
many farmers will be forced out or large investments in manure facilities
will be required.

The 1987 MSU Dairy Farm Survey revealed another interesting fact
pertaining to the age of the principle operator of the dairy farm. The
average age of the Michigan dairy farmer is 50 years old. Over 22.6
percent of the Michigan dairy farmers are over the age of 60. The dairy
farmers over 50 years old represent 54.4 percent of the milk volume
produced in Michigan. Another significant finding is 71.7 percent of the
dairy farms in Michigan are owned by a single individual. A major concern
of the industry is who will take over these operations when the principle
operator retires?

The Michigan dairy industry is facing some critical issues. It is
for these reasons the Michigan dairy farming systems need to be evaluated.
The prototype dairy farms are devised to help dairy farmers make
comparisons of costs incurred in dairying. The prototype dairy farms
evaluate specific parts of the dairy system which can be changed or
improved to promote profitability. The prototype Michigan dairy farms try
to describe the scenarios which dairy farmers will encounter in 1995. The
prototype dairy farms are intended for Michigan dairy farmers to compare
their own dairy farm to the prototype dairy farm. The study is not
designed for comparison between size levels but only within a specific

size. Each prototype farms has a different level of capital, labor, and

management requirements.

farm.system. They are based on the pertinent issues Michigan dairy.farmers
are going to be facing. The prototype farmers are designed around the
individual components grouped together to form the entire dairy system.
This way the entire dairy system can be analyzed. A system analysis looks
at the entire operation so it is.fully represented. The system.analysis is

based on performance variables which will likely occur in the future.

The prototype dairy farms are designed to look at the entire dairy

1.3 Specific Objectives of Research

1.

2.

Describe the present status of Michigan dairy farmer.

Identify potential Michigan prototype dairy farms for varying herd

sizes for 1995.

Evaluate the financial returns of the different prototype dairy

farms with respect to the following performance variables:

"thOU‘m

. Milk revenue

Feed costs
Crop yields
Cost of capital
Land prices

. Labor costs

Analyze the impacts of selected sensitivity variables:

Evaluate the potential applicability of the prototype dairy.farms to

h-nflm H10 9.0 u-m

. Milk price

. Milk production level
. Feed costs

. Crop yields

. Cost of capital

. Land values

Labor costs
Purchasing all feed requirements
Raising all forages and purchasing corn requirements

current dairy farming situations.

9

1.4 Organization of Thesis

The thesis is broken down into five chapters yielding insight into
the problems of Michigan dairy farmers, potential prototype farms, an
analysis of their performance variables, a sensitivity analysis of crucial
variables and potential applicability of these prototypes to the Michigan
dairy farmer.

Chapter 2 reviews the research design and methods of this study. It
starts with specification of the 1995 prototype dairy farms. The
computerized enterprise budget is then discussed. The performance
requirements for the base model are presented along with the sensitivity
variables to be analyzed.

Chapter 3 shows the results of the base model prototype farms. These
results are based on the given performance requirements.

Chapter 4 contains the results of the sensitivity analysis. The
sensitivity analysis examines milk prices, milk production, feed costs
crop yields, cost of capital, labor costs, land values, and the sources of
the dairy farmers feed.

Chapter 5 contains the summary and conclusion of the study. The
major findings are presented followed by the implications of the findings
to Michigan dairy farmers. This chapter concludes with the needs for

future research in this area of study.

10

CHAPTER 2
RESEARCH DESIGN

This chapter specifies the Michigan prototype dairy farms for 1995
and how they are evaluated with selected variables. The chapter begins
with a description of the components making up each prototype farm. The
method of evaluating each farm is then defined. The performance,
sensitivity variables and the financial variables summarizing the analyses

are presented .

2.1 Michigan Prototype Dairy Farms for 1995

A prototype dairy farms is similar to a representative dairy farm.
This is a concept referred to by researchers in evaluating the potential
effects of new technology and institutional policies. "By representative,
the farm is defined to be typical of internal characteristics and external
conditions of some specified group or population of farms. Internal
characteristics include size and type of farm, quality of resources, level
of management and technology used. The external conditions of a
representative’s farm refer to the market conditions, climate, credit
system, and other conditions faced by a specified population of farms"18.
The 1995 prototype dairy farms are based on likely technology and
institutional policies prevailing in the 1990’s. Current price levels are

utilized since relative price levels are most important in comparing

farms .

 

18Harsh, Stephen B. , Larry J. Connor, and Gerald D. Schwad, Managing the
Farm Business, Prentice Hall, Inc. , Englewood Cliffs, New Jersey 07632, 1981.

ll

2.1.1 The Expert Team

The selection of the Michigan prototype dairy farms for 1995 was
performed by an expert team. The team consisted of members from six
different disciplines all with related interest to dairy. The members
included from the Department of Agricultural Economics: Drs. Larry Connor,
Larry Ham, and Sherrill Nott; Agricultural Engineering: Dr. William
Bickert; Animal Science: Drs. Roger Mellenberger and H. Allen Tucker; Crop
and Soil Science: Dr. Oran B. Hesterman; Food Science and Human Nutrition:
Dr. John A. Partridge; and Large Animal, Clinical Sciences: Dr. John H.

Kirk. This group in future text will be referred to as the "Expert Team".

2.1.2 Breed of Dairy Cow

The first consideration was the breed of dairy animal to use.
Holsteins are used since over 90 percent of the dairy cattle in Michigan
are Holsteins. The Holstein breed possess a distinct type. The dairy cow
is a large well-framed cow, with ample strength and depth of body to
enable her to consume large quantities of feed and sustain high level of

milk production”. The mature Holstein cow should weigh 1500 pounds.

2.1.3 Herd Size
Determining the herd size was a difficult process. In Michigan the

average herd size of milking and dry cows is 74.4 cow per farmzo. The

 

”Trimberger, George W. , Daig Cattle Judging Techniques Second Edition,
Prentice-Hall Inc. ,m Englewood Cliffs, New Jersey, 1977.

20Connor, Larry J. , et a1, July 1989.

12

1987 Michigan State University Dairy Farm Survey also reported about
future herd size plans for dairy farms for the next five years. Farmers
with herds under 50 cows, which accounts for 26.6 percent, want to
decrease their size, while farmers with herds over 50 cows want to
increase their herd size. The projected herd size in 1995 would be 96.6
cows per farm. This date was taken into account along with considerations
for buildings , facili ties , labor requirements , and increased
specialization resulting in larger herd sizes. The herd sizes used in the
prototype dairy farms for Michigan are 60, 120, 250 and 400 milking and

dry cows combined. Table 2.1 gives a complete breakdown on each herd.

2.1.4 Housing
With herd sizes established at 60, 120, 250, and 400 cows, the
housing requirements were determined. In Michigan, 49.5 percent of the
dairy farmers house their cows in free stalls while 34.6 percent of the
dairy farmers house their cows in stanchion/comfort stallsm. The expert
team concluded the majority of new housing facilities being built were
free stalls compared to stanchions because of the considerable decrease in
investment. Secondly, stanchion/comfort stalls were not economically
feasible over sixty cows.
Calves from the age of 0-2 months old are raised in calf hutches.
22

Calf hutches are being used successfully on dairy farms in most states .

The typical hutch is 4x8x4 feet in size and provides housing for one calf.

 

2I'Connor, Larry G. , et a1, July 1989.

2zBickert, William G. , Building and Remodeling Replacement Facilities to
Enhance Management, Raising Dairy Heifers for More Profits , Cooperative Extension

Services, Michigan State University, East Lansing, MI 44823, Pg. 10.1, 1987.

13

Table 2.1

Breakdown of Prototype Dairy.Herds 1

 

HERD SIZE

 

Animal Category 60 120 25023 400

 

(number of head)

 

 

 

Calves and Heifers 60 120 250 400
0 - 2 months 5 10 20 32

3 - 5 months 8 15 31 48

6 - 8 months 8 15 31 48

9 -12 months 10 21 43 72

13 -15 months 7 15 30 48
16 -24 months 22 44 95 152
Dry Cows 10 20 42 66
Two-Year-Olds 15 30 63 100
Three Years and Older: 35 70 145 234
High Producers 15 30 63 100
Medium Producers 10 20 41 67
Low Producers 10 20 41 67

 

1 Numbers assume uniform calving year round, 12 month calving
interval, all males sold at birth and a 30% culling rate.

 

Z3Bickert, William G., Building and Remodeling Dairy Cow Facilities to
Enhance Management, Managing the Milking Herd for More Profit, Cooperative
Extension Service, Michigan State University, East Lansing, MI 48823, P. 2, 1988.

14

0n the 60 cow herd, the heifers from ages 3-15 months are raised in
a counter-sloped barn sometime referred to as the Virginia style heifer
barn. This facility is based on a counter-sloped, self cleaning floors and
is intended for use with little or no bedding. A main advantage of this
design is the low investment-less than 50 percent of the investment
required for a free stall facility“. A second advantage of this design
is it is very effective in smaller herds. Heifers from the ages of 15
months until freshening are raised in free stalls. Regardless of the
housing type, the heifers are grouped by age and weight depending on the
management plan to promote maximum growth.

On the 120, 250 and 400 cow operations are raised in the 3-5 month
old heifers in super hutches. Super hutches are designed similar to calf
hutches but in a larger version. These pens allow between 4-8 calves to be
grouped together. Super hutches are thought of as transition pens. They
allow calves, raised individually, to be placed with other calves to be
raised in a group style. Heifers from the ages 6 months to freshening are
raised in free stalls. The animals are grouped by age and weight according
to management style to provide maximum growth and health.

The non-latching cows (dry cows) are housed in free stalls. When the
animal approaches parturition (delivery time) the animal is placed in a
maternity pen. The maternity pens are 12x12 feet and provide water and
available feed. A complete list of the housing by herd size is in Appendix

1.

 

2“11311), p. 10.14.

15

2.1.5 Milking System

The milking system designed for all four herd sizes is a herringbone
milking parlor. The parlors are double-herringbone having units on each
side connected to a low-line pipeline. The parlors are equipped with
automatic take-offs for each unit. In the parlor no grain-concentrate is
fed. The holding pen outside the parlor has a crowd gate to minimize
milking time and labor. The herd size and corresponding parlor are in

Table 2.2.

16

Table 2.2

Milking System 1

 

 

Herd Size Herringbone Milking Parlor
60 Double -- 4
120 Double -- 6
250 Double -- 8
400 Double -- 10

 

1 sizes are based on Expert Teams Recommendations.

2.1.6 Manure System

The manure system designed for the Michigan prototype dairy farms
had to meet various specifications. First, it needed to account for
environmental constraints. Secondly, the manure system needed to have a
longer time period'of storage capacity than what is presently in Michigan.
Third, it needed to be of minimum cost. The earth basin met all three
qualifications.

The earth basin is designed to have storage capacity for eight
months for all the animals on the farm and to prevent ground and surface
water contamination. Earth storage basin for dairy manure generally
produces relatively little odor during the storage period because a
floating crust consisting of bedding and organic matter in the manure
develops over the surface.

The manure is transferred to the earth basin by a transfer pump. The
transfer'pump, also known as a piston-style pump, pumps the manure through

17

a buried pipeline into the bottom of the basin. This method allows for
more even distribution of the manure through the basin and prevents pile—
ups on the top in the winter which would occur if manure were added from
the top.

The earth basin is a earth-walled structured formed by excavation
and earth berms so they are partly above and partly beIOW'grade. The earth
basin is designed by excavating down six feet and creating a four foot
berm. This allows ten vertical feet storage capacity; When calculating the
storage capacity the earth basin is designed to store eight vertical feet,
this system allows for a two foot free-board. The berm is eight foot wide.

The design of the earth basin resembles Figure 2.1.

18

 

Figure 2 . 125

Earth Storage Basin

 

, . -
L‘8 mm Drlvg

l

Qua—mama“!

 

  
 

 

 

 

    
    

EIIIEII
"E'“='l I?
i

Diversion Terrace

Fence , around storage

Earth Dike Construction,
inside bank slope depends
on soil type

A gitate and pump with modified 3-point mounted liquid manure pump.

 

2".Midwest Plan Service, Livestock Waste Facilities Handbook, Second Edition,
Iowa State University, Ames, Iowa 50011, p. 6.4, 1985

19

 

To calculate the capacity required per herd for an earth basin the
process was broken down per animal based on its weight. The mature cows
weighs 1500 pounds but not all of the milking herd is mature so an average
weight of 1400 pounds per cow was used. Table 2.3 gives a break down in
cubic feet per day of manure produced.

Table 2.3
Manure Production Per Day

 

 

Animal by Weight Cubic Feet of Manure/Day?"5
1400 lbs. 2.10 ft3/Day'a
1000 lbs. 1.32 ft3/Day
500 lbs. .66 ft3/Day
250 lbs. .32 ft3/Day
150 lbs. .19 ft3/Day

 

aIncludes .3 ft3/day allowance for water from milking and parlor
cleanup.
The manure storage is for eight months so the cow numbers were
multiplied by 240 days multiplied by the manure production per day. The

size of the earth basins is shown in Table 2.4.

 

”Midwest Plan Service, P. 2.1, 1985

20

Table 2.4
Earth Basins by Herds Size

 

 

Herd Size Cubic Feet Dimensions in Feet
60 40 , 000 ft3 8 ’x103 ’x100 ’
120 80 , 000 ft3 8 'x122 'x150 ’
250 162 , 991 ft3 8 ’xl50 ’x225 ’
400 265 , 008 ft’ 8 ’x274 ’x200 ’

 

The Michigan prototype dairy farms for 1995 use feeds produced in
Michigan. The feeds produced on the dairy farms are haylage, hay, and high
moisture corn. The rations are balanced by the Sparton Ration Evaluator
for Dairy Cattle”. In addition to the primary feeds, minerals, vitamins,
buffers, soybean and meal are added to the ration to balance it. The
rations are fed as a total mixed ration.

The nutrient composition of the primary feeds are listed in Table
2.5.

The milking herd is fed by groups based on milk production and age.
The heifers are fed by groups based on their age and weight.

The milking herd is divided up into a high group, low group, and two

year old group. These cows are fed haylage, high moisture corn, soybean

 

27Bucholtz, H.f. , J.W. Walter, R.A. Patton, S.T. Hayes, Sparton Daig Ration

Evaluator, CP-0112, Version 10, Cooperative Extension Service Software Library,
Michigan State University, East Lansing, MI 48823, June 1987.

21

Table 2.5
Nutrient composition of.Pricing.Feeds USed

in Estimating.Feed Budgets

 

 

 

Feed % % MCal % %
DM CP NE/lb. ADF NDF
Early Alfalfa Haya 88 20 .61 33 40
Early Alfalfa Haya 50 20 .61 30 40
High Moisture Corn 89 10 .93 10 13
Soybean Meal 90 48 .85 10 14

 

éAlfalfa is cut early to maximize crude protein in the plant. Alfalfa
high in CP% greatly reduces the need to

as a main ingredient,
purchase protein.

meal, and minerals and vitamins. The dry cows are in their own group and

they are fed a ration of dry hay and haylage and those animals close to

parturition (delivery time) have high moisture corn supplemented to their

diet to adjust their rumens.

The heifers are fed haylage and hay with some supplementation of

corn. The younger heifers definitely receive corn. The calves are fed

whole milk, hay, and calf starter. The heifers are all fed according to

age and weight.

The total quantity of feed needed annually is in Table 2.6.

22

Table 2.6

Quantities of Feed Needed/Cow and
30% Replacement/Year by.Herd Size

 

ELM

 

 

 

 

 

 

Feed Cow 30% Replacement Heifer Total Need
Haya .29 ton .73 ton 1.02 ton
Haylage 5.98 ton 1.49 ton 7.47 ton
H.M. CornC 79.50 bu 6.92 bu 86.30 bu
Soybean Meal 184.33 lb. 19.60 lb 203.93 lb.
EThese figures include a storage and feeding loss of 18 percent.
hThese figures include a storage and feeding loss of 18 percent.
hese figures include a storage and feeding loss of 10 percent.
hese figures include a storage and feeding loss of 2 percent.
120I 150, and 400 Cow Herd
Feed Cow 30% Replacement Heifer Total Need
Hay"a .32 ton .73 ton 1.05 ton
Haylage 6.31 ton 1.57 ton 7.80 ton
11.21. Corn C 79.50 bu 6.92 bu 86.30 bu
Soybean Meal 184.33 lb. 19.60 lb 203.93 1b.
aThese figures include a storage and feeding loss of 18 percent.
‘bThese figures include a storage and feeding loss of 24 percent.
CThese figures include a storage and feeding loss of 10 percent.
dThese figures include a storage and feeding loss of 2 percent.

2.1.8 cropping System

The cropping system has

two components in the base prototype farm.

The primary crop grown is alfalfa.

23

The alfalfa is made into haylage

primarily and secondarily in baled hay. The second crop grown is corn. The
corn is used for high moisture corn.

The alfalfa is harvested early to maximize the percent crude protein
in the plant. The'main theme is harvesting quality not quantity. The
reason this is stressed is alfalfa as a main ration ingredient with a high
amount of crude protein reduces the purchased protein needed. Protein
costs are extremely high and by raising a high protein alfalfa this
dramatically decreased the annual fed costs.

Both haylage and baled hay are harvested early to maximize the
percent crude protein. The 60, 120, 250, 400 cow operations use large
bales. The large bales are used to reduce the labor required when using
small bales. Small bales may be used on an option on the smaller herd
sizes but it is not economical on large herds.

High moisture corn is harvested.at a 28-30 percent moisture content.
The high moisture corn is custom harvested on the 60 and 120 cow
operations. It would not be economically efficient to own a combine for
those few acres to make the machine cost effective. On the 250 and 400
herd sizes this could be a viable option. Under these prototype farms all
corn is custom harvested.

The reason for not using corn silage was two-fold.'Haylage, if
harvested correctly, is higher in nutritional value than corn silage.
Secondly; without corn silage, one storage facility is eliminated. It also
decreases equipment costs which are not acquired to harvest corn silage.
It was for these reasons that the expert team recommended a ration

consisting without corn silage.

24

2.1.9 Facilities

The facilities required to store the feeds include upright silos for
the high moisture corn, upright or bunker silos for haylage, and a no-
sided roofed building for the dry hay. these silos are designed to be
filled one time a year and provide a one year supply. The haylage
facilities are designed for 80 percent annual need, because they are
filled in the beginning of the summer and refilled late in the summer. The
60 cow operation stores its haylage in an upright silo while the 120, 250,
and 400 cow operation stores their haylage in bunker silos. The baled hay
building is designed for storage for a complete year. The purchased
soybean meal is stored in a metal grain-style bin. A building is provided

to store equipment. A complete list of the facilities is in Appendix A.

2.1.10 Equipment

The equipment required for the Michigan prototype dairy farms for
1995 includes everything needed to raise all of the dairy’s feed
requirements, to feed the animals, and to remove the manure from the
animals. The complete lists of equipment for each prototype farm in
Appendix.
2.1.11 Land

The land required for the Michigan prototype dairy farms includes

 

a Storage and feeding losses are compensated. The upright silos for
high moisture corn have 10 percent factor. The haylage horizontal
silo has a 24 percent factor. The dry hay has an 18 percent factor

compensated .

25

the land for the crops and building and facilities. Table 2.7 gives a

breakdown in acres for the building and facilities, crops and a combined

 

 

total.
Table 2.7
Estimated Annual Land.Requirements in Acres
Herd Size Building & Hay Haylage H.M. Corn Total
Facilities
(acres) (acres) (acres) (acres) (acres)
60 2.0 12.2 87.6 57.8 155.7
120 3.0 25.2 187.2 103.7 318.9
250 6.5 52.5 390.0 216.0 664.7
400 8.0 84.0 624.0 345.7 1061.7

 

The amount of land required depends on the yields from the crops.

The land is based on the performance variables listed in Section 2.3

2.1.12 Labor

The labor required per farm is broken down into the labor required
for the dairy in Table 2.8 and the labor required for the crops in Table
2.9. The total labor required per dairy farm is in Table 2.10. The total
amount required increases with increasing herd sizes. However, with
increasing herd sizes more specialization occurs and the actual labor on

a per cow declines with increasing herd sizes.

26

Table 2.8
Estimated Annual Labor.Requirements
by.Herd Size for Dairy

 

 

(Hours/Year)*
HERD SIZE
Item 60 120 250 400
Total Hours/Cow/Year 55 43 35 30
Total Hours/Annual Farm/Yearade 3,300 5,160 8,750 12,000
Total Hours/Cow and Heifer/Year 63 50 40 35
Total Hours/Annual Farm/Year 3,780 6,000 10,000 13,600

 

*

These figures are based on milking, manure handling, feeding,
bedding; heat' detection, breeding; young' stock, dry’ COW' care,
records, and miscellaneous.

aMilking time for herd sizes is based on Wetzel, 1979, Table 3.1.
Hours per milking is based on JLUbik, 1984, Table 4.16.
b

Manure handling labor is based on Bath et a1., 1978, Appendix V-I,
P/ 531.

QBedding and other labor costs with exception of records and dry cow
care are based on bath et. a1, 1978, Appendix Atable V-I.

27

Table 2.9
Estimated.Annual Labor.Requirements for Crops per Farm

 

 

(HOurs/Year)
Herd Size Item Labor/Acrez8 Acres Total Hours

60 Haylage 8.4 89.6 753.0
Hay 10.1 12.2 124.0

H.M. Corn 3.1 51.8 lggpz_
1037.7
120 Haylage 7.0 187.2 1310.0
Hay 10.1 25.2 255.0
H.M. Corn 2.5 103.0 259.0
1824.0
250 Haylage 5.0 390.0 1950.0
Hay 8.1 52.5 425.0
H.M. Corn 2.0 216.0 432.0
2807.0
120 Haylage 4.4 624.0 2746.0
Hay 7.0 84.0 588.0
H.M. Corn 2.0 345.7 691.0
4025.0

 

28Hlubik, Joseph G. , The Profitability of Purchasing Vs. Growing Feeds on
Dairy Farms in Southern Michigan, Michigan State university, East Lansing, MI

48823, Table D18, 1984.

28

Table 2.10
Estimated Annual Total Labor.Requirements per.Farm

 

 

(Hours/Year)
Herd Size Dairya Cropsb Total/Year
(Hours) (hours) (Hours)
60 3,780 1,037 4,953.05
120 6,000 1,761 8,007.50
250 10,000 2,807 13,185.50
400 13,600 4,025 18,176.00

 

Ebairy labor requirements are based on 1989 Table 2.3.
rop labor requirements are based on 1989, Table 2.4

2.1.13 Michigan Prototype Dairy Farms
A compiled list of the prototype dairy farms for the 60, 120, 250,

and 400 cow operations are in Table 2.11.

29

Table 2.11

Michigan Prototype Dairy Farms fer l995‘a

 

Herd Size

 

Item

60 120 250 400
Cows Free Stall Free Stall Free Stall Free Stall
Dry Cows Free Stall Free Stall Free Stall Free Stall
Heifers 14-24 m Free Stall -- -- ~-
Heifers 3-15 m Counter-Slope -- -- --
Heifers 6-24 m -- Free Stall Free Stall Free Stall

Heifers 3-5 m
Heifers 0-2 m
Milking Parlor
Manure Storage
Haylage

H.M. Corn

Hay

Feeding System
Equipment

Super Hutch

C. Hutch C. Hutch
D-4 D-6
8 month 8 month

Upright Silo Bunker Silo

Upright Silo Upright Silo

Maternity-Hospital-

Treatment Plus

Land Base (Acres)

Labor (Hours/year) 4,953.05

Building Building
Fixed-Mechanical MObile
Building Building
5 10
155.73 318.86
8,007.50

Super'Hutch

C. Hutch
D-8
8 month

Bunker Silo

Upright Silo

Building
Mobile
Building

16
664.75
13,185.50

Super Hutch
C. Hutch
D-10
8 month
Bunker Silo
Upright Silo
Building
Mobile
Building

22
1061.68
18,176.00

 

a
Based on expert team’s recommendation.

30

2.2 Enterprise Budgets

The Michigan prototype dairy farms for 1995 are based on whole farm
enterprise budgets. An enterprise is defined as a single, separate project
undertaken for the purpose of making a profit. "Enterprise budgets are
prepared by stating the income, expenses, and resource needs of a
productive activity of the farming business on a per unit basis. The
income, expenses, and resource needs are treated as a package in examining
various adjustments related to the business."29

Enterprise budgets provide guides for the expected quantity of
production, kinds and quantities of feed required, operating expenses, and
building, equipment, manure and labor requirements. The returns to both
labor and management and profitability of the enterprise can be
calculated. The bottom line of any enterprise budget reflects the
profitability of that enterprise. The returns to an enterprise can be
classified in one of four ways. The first figure, gross receipts, is based
solely on the production and price received of the particular enterprise.
"Returns over variable costs, or gross margins, reflect the short-run
profitability of an enterprise (in other words tells if it is covering
variable cost) ". 3° The returns to unpaid labor and management show the
return to those resources. Deducting the cost of labor gives us the

returns to management. Enterprise budgets can serve as short-run planning

guides using this year’s expected prices and costs or as long-run forward

 

29Harsh, Stephen 8., Et al, P. 190, 1981.

3°Luening, R.A., R.M. Kle-e and W.T. Howard, Wisconsin Farm Entepprise
Budgets, Daigz Cows Replacements, A 27 31, University of Wisconsin Agricultural
Bulletin Room 245, 30 N Murray St. , Madison, Wisconsin 53715, P. 4, 1987.

31

planning guides based on longer run projections.

The Michigan (prototype dairy .farms for .1995 are computerized
enterprise budgets. Computerizing the enterprise budgets make it very easy
and quick to make adjustments to the budget. For example, if the price of
milk received per hundred‘weight is changed, the new price is typed in and
the computer automatically computes a new financial result.

Enterprise budgets are based on a per unit basis. These enterprise
budgets are all based on a per cow basis. All revenues, costs, and returns
are on a per cow basis. The enterprise budgets are based on prototype
dairy farms raising only enough of their own feed to feed their cows. The
budgets are designed on a per cow basis with a raised replacement heifer.
There are five main components of an enterprise budget. The first section
deals with the variable costs involved in the enterprise. The third
section deals with the fixed costs. The fourth area is combined total of
the variable and fixed costs. The fifth deals with the returns to the

enterprise.

2.2.1 Receipts
The receipts section represents the sales of milk, cull cows, cull
heifers, and bull calves sold. The total of these four are combined into

gross receipts per cow per year.

2.2.2 Variable costs
Variable costs change with the level of production. The variable
costs are broken down into two types: feed costs and livestock costs.

The feed costs include forage (haylage and.hay), corn, soybean meal,

32

minerals, vitamins, and milk (for calves 0—2 months). The soybean meal,
minerals, vitamins, and milk are charged at the current market price per
unit based on the performance variables in Section 2.3. The forages and
corn price is more complicated.

The prototype dairy farm income comes only from the sales of dairy
products. The farms are raising all of their own feed so their is
equipment specifically used for crops. However, there are no revenues from
crop sales, because the only crops grown are what the dairy animals
require, A set price per bushel or ton is not used in this budget because
it would bring in the factor of relative efficiency of the crop production
enterprise, which would obscure the true profit from the dairy herd. The
equipment required to raise the feed is placed in the fixed cost section
under equipment. The labor required to raise the feeds comes under labor
cost. The costs attributed to variable costs are seed, chemical,
fertilizer, and fuel costs to produce the feed the cow and replacement
heifer need.

The livestock costs are the remainder of the variable costs. They
include the cost for bedding the animals. Milk:hauling costs very directly
with the level of production. The next item is the veterinarian and
medicine costs. The breeding costs are based on a 1.5 services per
conception rate. The final three livestock costs include the power and
fuel, supplies (soaps, inflations, etc.), and overhead (DHIA, legal,
accounting, etc.).

A final item which appears under the variable costs is the operating
capital interest cost. The interest on operating capital is calculated on

50 percent of the forage, corn and bedding costs.

33

2.2.3 Fixed Costs

Fixed costs are costs which do not vary with the level of
production. The fixed costs are often referred to as the DIRTI five:
depreciation, interest, repairs, taxes, and insurance. Calculating fixed
costs is a two step process that consists of placing a value on the
equipment, buildings, manure facility, and breeding livestock and
calculating an annual cost for each of these fixed assets whose productive
value extends over several years. Calculating the actual fixed cost
requires a current value, salvage value, expected life, and an opportunity
cost of capital.

Fixed assets are divided into two groups: those that generally
depreciate in value (most buildings, breeding livestock, and equipment)
and a groups that generally appreciate in value Hand)“. The
depreciating fixed asset costs consist of an allowance for the loss in
value, an opportunity charge for capital invested, and annual charges for
repairs, taxes, and insurance. A Capital Recovery Charge (CRC) can be
computed that accounts for the first two components (depreciation and
interest) of the fixed costs. The annual fixed costs of depreciating
assets are found by adding the capital recovery charge the fixed cash
costs of repairs, taxes, and insurance.

The capital recovery charge is found by first computing an annual
loss in value, To do this multiply the loss in value of the fixed asset
(original value minus salvage value) by the capital factor found in Table
2.1.2. The interest charge is computed by multiplying the salvage value

byu the opportunity cost of capital. The capital recovery change is then

 

31Luening, R.A., et al, p. 3, 1987.

34

the sum of the annual loss in value and the interest charge.
The formula used for figuring the Annual Fixed Cost is:

(purchase-salvage) x CRC factor + interest (on salvage) + taxed,
insurance and repairs - annual fixed cost.

Salvage value is equal to 10% of purchased price
Salvage value of cattle is slaughter value
Useful life:

Farm, buildings and facilities 20 years
Farm equipment 7 years
Cattle (5 years, milking 3 years 3 years

Taxes, insurance, and repairs:

taxes 0.5 %
insurance 0.5 %
repairs 1.0 %

The six fixed costs in the total fixed cost figure are buildings,
equipment, livestock, death loss, manure facility, and land. The
buildings, facilities, and manure storage are based on a twenty year life
span. The equipment has a seven year life span, and the producing cows is
expected to be in the milking herd for three years. Death loss figures are
included as a fixed costs since it is a cost that does not vary with the
level of production per cow, Land does not depreciate so a CRC factor is
not used. An interest rate charge per acre and a real estate tax per acre
(46 mill or 2 percent of purchase price) are combined for an annual fixed
cost on land. The manure facility does not have a salvage value included.
For the buildings, equipment, and facilities the salvage value is 10
percent of the purchase price. The livestock salvage value is what the
animal would receive at slaughter,

The fixed costs are all added together to give a total fixed cost

figure.

35

Table 2

.12

Capital.Recovery Factors fOr Various Opportunity

Costs of Capital and Planning Horizons52

 

 

Number of
Years in
Planning
Horizon Opportunity Cost of Capital (8)
8 9 10 11 12 15
1 1.0800 1.0900 1.1000 1.1100 1.1200 1J1500
2 0.5608 0.5685 0.5762 0.5839 0.5917’ 0.6151
3 0.3880 0.3951 0.4021 0.4092 0.4163 0.4380
4 0.3019 0.3087 0.3155' 0.3223 0.3292 0.3503
5 0.2505 0.2571 0.2638 0.2706 0.2774 0.2983
6 0.2163 0.2229 0.2296 0.2364 0.2432 0.2642
7 0.1921 0.1987 0.2054 0.2122 0.2191 0.2404
8 0.1740 0.1807 0.1874 0.1943 0.2013 0.2229
9 0.1601 0.1668 0.1736 0.1806 0.1877 0.2096
10 0.1490 0.1558 0.1627 0.1698 0.1770 0.1993
15 0.1168 0.1241 0.1315 0.1391 0.1468 0.1710
20 0.1019 0.1095 0.1175 0.1256 0.1339 0.1598
25 0.0937 0.1018 0.1102 0.1187 0.1275 0.1547
30 0.0888 0.0973 0.1061 0.1150 0.1241 0.1523

 

The formula used to calculate the CRF is

i (1+i2An
(1+i)An-l

CRF =

Where i - opportunity cost of capital
n - length of planning horizon

 

32Luening, R.A., et al, p. 22, 1987.

36

2.2.4 Total Cbsts
The total cost section is the variable costs plus the fixed costs.

This figure does not include any costs for labor and management.

2.2.5.Return

The return section shows the profitability or losses to the
prototype dairy farm. There are seven parts to the return section. It
starts with the gross receipts. Then variables costs are subtracted off.
This figure is the returns above variable costs. Then fixed costs are
subtracted off. This figure gives the returns to labor and management.
Then labor costs are subtracted off. The final figure is the returns to
management. This figure represents the bottom line. In some cases it is

positive and some cases negative.

2.2.6 cow and Replacement Heifer Budget

There are two parts to each enterprise budget. The first part deals
exclusively with the cow. The second part deals with the replacement
heifer. To put an enterprise budget together for a cow plus replacement
heifer the two had to first be broken apart. The primary reason being 30
percent of the cow is replaced annually by'a new two-year old (a recently
fresh heifer). A complete heifer budget was designed for each prototype
dairy farm. The budget was complete from.birth until the animal freshened.
It takes two years to raise a heifer. Only 30 percent of the totals
required for each area in the heifer budget were added to the cow budget
because 30 percent of the cows are placed annually.

Dividing the fixed costs which were attributed to cows and to the

37

replacement heifer was the next phase. Any fixed costs related to feed
equipment, crop equipment, and storage facilities was broken down to 59
percent is required by the cow and 41 percent by the heifer. Any fixed
costs attributed to manure handling and storage were broken down into 70
percent to the cow and 30 percent to the heifer. These figures are based

on the manure annually produced per cow and heifer on the prototype farm.

2.3 Performance Variables

Performance variables are the base variables which are used in all
four prototype farms. These base variables are used to evaluate the
prototype farms, The areas evaluated are in the financial performance
section of the enterprise budget. The evaluations are based on variable
costs, fixed costs, labor costs, and returns to management to four
different herd sizes. The base performance variables refer to the
essential variables in a dairy farm which have a definite impact on the

financial returns to the far.

2.3.1 Milk Revenues

The first two variables which are very obvious to farmers deal with
revenues. The variables are milk production and milk price. These
variables are based on trends and the impact of future legislation. Milk
production was based on the past 25 years of data provided by the Michigan
Dairy Herd Improvement Association. In 1961 the state DHIA average was
11,101 pounds of milk per cow per year. In 1986 the average was 17,041
pounds. this is a 237.8 pound per year increase. Projecting this trend out

to 1995 the state DHIA average would be 19,200 pounds of milk per cow. The

38

milk price in 1995 stems from.recent developments in legislation affecting
the milk price. In the base model a conservative price, $10.00
hundredweight is used. This price is based on recent projections by the

expert team.

2.3.2 Feed Costs

A second area of the base performance variables is feed costs. The
feed cost for a dairy farmer can make up from 40 to 70 percent of the
total costs. For this reason it is an important concern to dairy farmers,
The three main feed costs are haylage and dry hay combined, high moisture
corn, and soybean meal. The costs of these fees have varied over the past
decade. One of the main things which has affected the price of these feeds
is the supply. The supply has been significantly affected by the weather.
When the Midwest has been in a drought such as in 1988 the price of these
three feeds increase significantly; In years of adequate to above average
rains the prices have been lower. A third weather factor affecting the
supply of feed in Michigan was the flood of 1986 which severely reduced
the supply of alfalfa for the following year. The base prices for these
feeds are based on the past decade’s prices projected to 1995. The prices
are for corn $2.50 per bushel, soybean meal $300 per ton ($l5/cwt.), and
a $60 per ton average for dry hay and haylage. The hay and haylage
combined is at $60 per ton because haylage which is cheaper is the primary
feed and the higher prices dry hay makes up a small part of the ration.
The corn and hay price is not used in the base prototype farm, but they

are in the final sensitivity analysis.

39

 

 

2.3.3 Crop Yields

A third area of base performance variables deals with the yields of
the feeds grown. The yield per acre has a significant impact on the acres
required to raise the feed. The base yield variables are based on what the
yields in Michigan have been for the past decade projected out to 1995.
The alfalfa yield per acres is based on 5 tons of dry matter per acre. The

base yield for corn is 100 bushels per acre for 1995.

2.3.4 Cost of Capital

A fourth area deals with the cost of capital. Specifically, what the
interest rates are. Interest rates play a significant role in determining
the annual fixed costs. The interest rates are broken down into rates for
land, building, and equipment. These three make up the primary costs
comprising the fixed costs and this is why they are assigned there own
specific rates. In the early 1980’s the rates were extremely high while in
other years they were much lower. The base rates for the prototype farms
are as follows: land 10 percent, buildings 11 percent, and equipment 11

percent .

2.3.5. Land Values

The fifth area deals with the price of land per acre. Land prices in
Michigan have varied significantly. In the early 1980’s the prices per
acre reached record levels. However, since then the price of land has been
declining each year. The 1987 agricultural land value per acre minus

improvements for Michigan was $697.00 per acres”. It is difficult to

 

3:I’Harvey, Lynn, et a1, 1988.

40

project land values in the future so the base price per acres minus

improvements used in the prototype farm is $697.00 per acre.

2.3.6 Labor Cost

The final area deals with the price of labor per hour. Labor
shortages on farms in recent years have made wages more competitive. Labor
prices have increased 14 percent in the past eight years to a 1988 figure
of $4.25 per hour. The labor price used on the Michigan prototype dairy
farm for 1995 is $5.00 per hour. This figure is based on the past decade
of wage rates and projected out to 1995.

2.4 Sensitivity Variables

Chapter 5 looks at the results of the base prototype dairy farms
under a different set of assumptions. "The process of using different
assumptions and observing the impact on the alternatives being analyzed is
called sensitivity analysis"“. The process allows a dairy farmer to
determine the impact of changing assumptions on the sensitivity of the
profitability of the dairy. Sensitivity analysis is very important in
long-range financial planning. Sensitivity analyses allow a manager to
know that an apparently profitable alternative can become potentially
disastrous with only a slight change in the assumptions.

In section 2.3 the base variables in the prototype dairy farms were
given. The first sensitivity analysis takes the base variables and adjusts
them to an upper level and down to a lower level. the second sensitivity
analysis looks at the entire prototype dairy farm. In this analysis the

base variable is the farm raising all of its feed. The other variables are

 

“Harsh, Stephen 3., et al, p. 215, 1981.

41

Table 2.13
Performance Variables

 

 

Item Value

Milk Price $10.00 per hundredweight

Milk Production 19,200 pounds/cow/year
'Haylage and hay $60.00 per ton

H.M. Corn $2.50 per bushel

Soybean Meal $300.00 per ton ($15 per cwt.)

Hay Yield 5 ton DM per acre

Corn Yield 100 bushels

Land Interest Rate 10 percent

Building Interest Rate 11 percent

Equipment Interest Rate 11 percent

Land Price $697.00 per acre

Labor Price $5.00 per hour

 

the dairy farm raising only it forages and purchasing its corn, and the
dairy farm purchasing all of its feed (both forage and corn). This
analysis uses all of the base performance variables listed in table 2.13.
The compiled lower, base and upper variables are in table 2.14.
The second sensitivity analysis dealing with the origin of the feed
is more complicated. In this analysis equipment requirements are altered.
The dairy raising only forages will neither have the equipment dealing
with corn production nor the labor costs associated with corn production.
These farms are charged $2.50 per bushel for corn. The farms purchasing
all of their .feed ‘will have a significant reduction in equipment
requirements. These are charged $2.50 per bushel of corn and $60 per ton

for hay and haylage combined.

42

Table 2.14
Sensitivity Variable of the Base Prototype Dairy.Earms

 

 

Item Lower Base Upper
Variable Variable Variable

Milk Price $9/cwt. $10/cwt. $ll/cwt.
Milk Production 12,100 lbs. 19,200 lbs. 21,200 lbs.
Soybean Meal Price $13/hdwt. $15/hdwt. $l7/hdwt.
Corn Yield/Acre 80 bu. 100 bu. 120 bu.
Hay Yield /Acre in

Dry Matter 4 ton 5 ton 6 ton
Interest Rate on Land 10% 12%
Interest Rate on Buildings 11% 13%
Interest Rate on Equipment 11% 13%
Land Value/Acre $697.00 $997.00
Labor Cost/Hour $5.00 $10.00

 

43

 

 

 

CHAPTER 3
RESULTS OF THE BASE PERFORMANCE VARIABLES FOR PROTOTYPE DAIRY FARMS

The performance variables specified in Table 2.13 are used to
analyze the Michigan prototype dairy farms for 1995. The analyses are
based on the enterprise budget explained in Chapter 2. Each prototype farm
is established with the performance variables and analyzed in the
enterprise budget format. There is a complete enterprise budget based on
the cow and a 30 percent replacement rate for the 60, 120, 250, and 400
cow operations. Additionally, one 250 cow operation heifer enterprise
budget is included. Only one heifer enterprise budget is included for all
four prototype farms, . to show its format and findings.

The primary analysis is contained in Section IV of the enterprise
budget entitled Returns. The Returns evaluate the bottom line
profitability of the prototype farms. It also breaks down essential
components comparing the budgets to identify which items are of major
importance. Tables 3.1 through 3.4 are the complete enterprise budgets for
the Michigan prototype dairy farms for 1995. Table 3.5 is the replacement
heifer budget from birth until freshening for the 250 cow operation.
Thirty percent of the replacement heifer budget is included to comprise
the cow replacement heifer enterprise budget. These enterprise budgets are
based on the prototype dairy farms raising all of their feed.

For a financial sumary of the 60, 120, 250, and 400 cow prototype
dairy farms, Table 3.6 was compiled. This table lists all of the
components of the financial returns for each farm.

The results of the prototype farms are based on the specific

prototype farms. These results are not intended to make comparisons

44

between herd sizes, but only an analysis the specific prototype farm. Each
prototype farm .has a different level of capital, labor, land and
management requirements.

3.1.Financial.Results

There is a significant difference between the profitability levels
of the prototype farms. Essentially all four farms have identical gross
receipts because they are all based on the same production level and milk
price. The variable costs are all similar because the feed requirements
per animal are the same. The returns above variable costs are also very
similar. The returns above variable costs vary by $7.23 per cow. The first
three items on the financial return section are similar. However, the
remainder of the returns vary significantly.

The fixed costs between the 60 cow operation and the 400 cow
operation vary by $511.41 per cow. The primary reason for this large
difference is on the 400 cow operation the fixed costs are spread over
more animals, reducing the cost per animal, than on the 60 cow operation.
The two fixed costs which vary significantly between the 60 and 400 cow
herd sizes are building costs and equipment costs.

The building costs vary by $106.04 per cow. The reason for this
difference stems from storage facilities. Bunker silos are more economical
per animal in a 400 cow herd than a vertical silo per animal in a 60 cow
herd for storing haylage.

The equipment cost varied by $404.03 per cow between the 400 cow
operation and the 60 cow operation. There are two components to the fixed
equipment costs. The first is the dairy equipment and the second part is

the crop equipment to raise the feed. The reason for the difference is

45

Table 3.1
Enterprise Budget for 60 cow Dairy
Raising All Feed
[Raised.Replacement Heifer.Budget Included]

 

 

 

 

ITEM AMOUNT
I. RECEIPTS
1. Milk-192.00 cwt. x $10.00/cwt $1,920.00
2. Calf-90% calf crop: .47 bull calf sold .45 heifer 52.37
calf raised .90 calf minus .45 raised
- .475 sold x $110.25
3. Cull Cow-30% x 1400 lbs. x $48/cwt. 201.60
4. Cull Heifer-12% x 950 lbs. x $53/cwt. x 30% 18.13
5. Gross Receipts $2,192.09
Price Per Amount Dollar
Unit Value
II. VARIABLE COSTS
A. Feed Requirement
1. Forage (tons)a 8.49 60.48
2. Corn Equivalent bushels 86.30 84.48
3. Soybean Meal cwt. 15.00 1.97 29.55
4. Vitamins cwt. 58.76 6.26 10.49
5. Minerals cwt. 10.15 40.84 71.07
6. Whole Milk 10.00 217.69 21.77
7. Total Feed Costs 277.84
B. Livestock Costs
1. Bedding ton 50.00 1.52 75.88
2. Milk Hauling cwt. .50 192.00 96.00
3. Veterinarian & Medicine 48.49
4. Breeding 33.33
5. Power and Fuel 70.56
6. Supplies, Soap, etc. 35.61
7. Overhead (DHIA, legal, etc.) 59.78
8. Livestock Costs 419.65
9. Capital Interest Totalb 16.86
10. Total Variable Costs 714.35

 

 

 

III.

IV.

FIXED COSTS

1. Building 324.25
2. Equipment 580.95
3. Livestock 115.38
4. Death LossC 30.00
5. Manure Facility 16.50
6. Land 179.58
7. Total Fixed Costs 1,246.65

TOTAL COSTS

(Except labor and Management) . 2,103.70

RETURNS

1. Gross Receipts 2,192.09
2. Less Variable Costs 714.35
3. Returns Above Variable Costs 1,477.74
4. Less Fixed Costs 1,246.65
5. Returns to Labor and Management 231.09
6. Less Labor Costs $5.00/hr. 400.48
7. Returns to Management (169.39)

 

aForage ration of 84% haylage and 16% hay (C.P. 20%, ADF 33%,
NDF 40%) Includes allowances of 18% for feeding and storage
losses.

bInterest on operating capital is calculated on 50% of the
forages, corn, and bedding costs.

cThe death loss figure is included as a fixed cost since it is
a cost that does not vary with the level of production.
Based on material from Luening, Klenme, Howard, 1987, p. 22

47

Table 3.2
Enterprise Budget for 120 cow Dairy
Raising.All.Feed
[Raised.Replacement Heifer Budget Included]

 

 

 

 

ITEM AMOUNT
I. RECEIPTS
l. Milk-192.00 cwt. x $10.00/cwt $1,920.00
2. Calf-90% calf crop: .47 bull calf sold .45 heifer 52.37
calf raised .90 calf minus .45 raised
- .475 sold x $110.25
3. Cull Cow-30% x 1400 lbs. x $48/cwt. 201.60
4. Cull Heifer—12% x 950 lbs. x $53/cwt. x 30% 18.13
5. Gross Receipts $2,192.09
Price Per Amount Dollar
unit Value
II. VARIABLE COSTS
A. Feed Requirement
1. FOrage (tons)a 8.49 60.48
2. Corn Equivalent bushels 86.30 84.54
3. Soybean Meal cwt. 15.00 1.97 29.55
4. Vitamins cwt. 58.76 6.26 10.49
5. Minerals cwt. 20.15 40.84 71.07
6. Whole Milk 10.00 217.69 21.77
7. Total Feed Costs 277.90
B. Livestock Costs
1. Bedding ton 50.00 1.52 75.88
2. Milk Hauling cwt. .50 192.00 96.00
3. Veterinarian & Medicine 48.49
4. Breeding 33.33
5. Power and Fuel 70.56
6. Supplies, Soap, etc. 35.61
7. Overhead (DHIA, legal, etc.) 59.78
8. Livestock Costs 419.65
9. Capital Interest Totalb 16.87
10. Total Variable Costs 714.42

48

 

 

 

 

III. FIXED COSTS

1. Building 281.86
2. Equipment 347.58
3. Livestock 115.38
4. Death LossC 30.00
5. Manure Facility 14.14
6. Land 178.93
7. Total Fixed Costs 967.90
IV. TOTAL COSTS
(Except labor and Management) 1,825.00
V. RETURNS
1. Gross Receipts 2,192.09
2. Less Variable Costs 714.42
3. Returns Above Variable Costs 1,477.67
4. Less Fixed Costs 967.90
5. Returns to Labor and Management 509.77
6. Less Labor Costs $5.00/hr.
cow 43h. x $5.00 heifer 4.84 h. x $5.00 322.82
7. Returns to Management 186.90

 

aForage ration of 84% haylage and 16% hay (C.P. 20%, ADF 33%,
NDF 40%) Includes allowances of 18% for feeding and storage
losses.

bInterest on operating capital is calculated on 50% of the
forages, corn, and bedding costs.

CThe death loss figure is included as a fixed cost since it is
a cost that does not vary with the level of production.
Based on material from Luening, Klemme, Howard, 1987, p. 22

49

Table 3.3
Enterprise Budget for 250 cow Dairy
Raising All Feed
[Raised.Replacement Heifer.Budget Included]

 

 

 

 

ITEM AMOUNT
I. RECEIPTS
1. Milk-192.00 cwt. x $10.00/cwt $1,920.00
2. Calf-90% calf crop: .47 bull calf sold .45 heifer 52.37
calf raised .90 calf minus .45 raised
- .475 sold x $110.25
3. Cull Cow-30% x 1400 lbs. x $48/cwt. 201.60
4. Cull Heifer-12% x 950 lbs. x $53/cwt. x 30% 18.13
5. Gross Receipts $2,192.09
Price Per Dollar
Unit Amount Value
II. VARIABLE COSTS
A. Feed Requirement
1. Forage (tons) a 8.49 59.59
2. Corn Equivalent bushels 86.30 84.73
3. Soybean Meal cwt. 15.00 1.97 29.55
4. Vitamins cwt. 58.76 .18 10.49
5. Minerals cwt. 20.15 3.53 71.07
6. Whole Milk 10.00 217.69 21.77
7. Total Feed Costs 277.20
B. Livestock Costs
1. Bedding ton 50.00 1.52 75.88
2. Milk Hauling cwt. .50 192.00 96.00
3. Veterinarian & Medicine 48.49
4. Breeding 33.33
5. Power and Fuel 70.56
6. Supplies, Soap, etc. 35.61
7. Overhead (DHIA, legal, etc.) 59.78
8. Livestock Costs 419.65
9. Capital Interest Total b 16.83
10. Total Variable Costs 713.68

 

 

 

III. FIXED COSTS

1. Building 262.51
2. Equipment 248.13
3. Livestock 115.38
4. Death LossC: 30.00
5. Manure Facility 11.84
6. Land 182.91
7. Total Fixed Costs 850.76
IV. TOTAL COSTS
(Except labor and Management) 1,707.13
V. RETURNS
1. Gross Receipts 2,192.09
2. Less Variable Costs 713.68
3. Returns Above Variable Costs 1,478.41
4. Less Fixed Costs 850.76
5. Returns to Labor and Management 627.65
6. Less Labor Costs $5.00/hr.
cow 35h. x $5.00 heifer 3.46 h. x $5.00 265.00
7. Returns to Management 362.65

 

aForage ration of 84% haylage and 16% hay (C.P. 20%, ADF 33%,
NDF 40%) Includes allowances of 18% for feeding and storage
losses.

bInterest on operating capital is calculated on 50% of the
forages, corn, and bedding costs.

Czl‘he death loss figure is included as a fixed cost since it is
a cost that does not vary with the level of production.
Based on material from Luening, Klemme, Howard, 1987, p. 22

51

Table 3.4
Ehterprise Budget for 400 cow Dairy
Raising.All.Feed
[Raised.Replacement Heifer.Budget Included]

 

 

 

 

ITEM AMOUNT
I. RECEIPTS
1. Milk-192.00 cwt. x $10.00/cwt $1,920.00
2. Calf-90% calf crop: .47 bull calf sold .45 heifer 52.37
calf raised .90 calf minus .45 raised
- .475 sold x $110.25
3. Cull Cow—30% x 1400 lbs. x $48/cwt. 201.60
4. Cull Heifer-12% x 950 lbs. x $53/cwt. x 30% 18.13
5. Gross Receipts $2,192.09
Price Per Dollar
Unit Amount Value
11. VARIABLE COSTS
A. Feed Requirement
1. Forage (tons)a 8.49 59.59
2. Corn Equivalent bushels 86.30 84.92
3. Soybean Meal cwt. 15.00 1.97 22.90
4. Vitamins cwt. 58.76 6.26 10.49
5. Minerals cwt. 10.15 40.84 71.07
6. Whole Milk 10.00 217.69 21.77
7. Total Feed Costs 270.70
B. Livestock Costs
1. Bedding ton 50.00 1.52 75.88
2. Milk Hauling cwt. .50 192.00 96.00
3. Veterinarian & Medicine 48.49
4. Breeding 33.33
5. Power and Fuel 70.56
6. Supplies, Soap, etc. 35.61
7. Overhead (DHIA, legal, etc.) 59.78
8. Livestock Costs 419.65
9. Capital Interest Totalb 16.84
10. Total Variable Costs 707.19

 

 

 

III.

IV.

FIXED COSTS

7.

OxtnvthH

Building

. Equipment

. Livestock

. Death LossC

. Manure Facility
. Land

Total Fixed Costs

TOTAL COSTS
(Except labor and Management)

RETURNS

1. Gross Receipts

2. Less Variable Costs

3. Returns Above Variable Costs

4. Less Fixed Costs

5. Returns to Labor and Management

6. Less Labor Costs $5.00/hr.

cow 30h. x $5.00 heifer 3.46 h. x $5.00

7. Returns to Management

218.
176.
115.
30.
11.

21
92
38
00
51

183.23

735.

1,549

2,192.
707.

1,484.
_Z§_L__

749.

525.

24

.55

09
19

90
24

66

224.

52

14

 

aForage ration of 84% haylage and 16% hay (C.P. 20%, ADF 33%,
NDF 40%) Includes allowances of 18% for feeding and storage

losses.

Interest on operating capital is calculated on 50% of the

forages, corn, and bedding costs.

CThe death loss figure is included as a fixed cost since it is
a cost that does not vary with the level of production.
Based on material from Luening, Klemme, HOward, 1987, p. 22

53

 

 

 

00.000 00.000 0.0.00 00.0 0:. ut.a.0.=.= 000000.000
0.0000 0009. .00 0.008 00.8.0 .00
004000 00.0 00.0 0040:. 00.0 00.0 00. .ua\00.0 0.0.0 .0
00.000 00.000 0000.0 00.0000
0.00 0..o0 .0
00.000 00.0 00.000 00.00 00.0 00.00 00.00 0.000 0.000 .0
00.00 00.0 00400 0040: 00.0 00.0: _ 00.0 .0
00.0 00.0 00.0 00.0 00.0 00.0. 00.0.00 .000.0 .0
00.0 00.0 00.0 00.0 00.0 00.0 00.00.000 .0
00.00 00.0 00.00 00.0 00.0 00.0 00.000000 .0
00.00 _ 00.0 00.00 00.0 . 00.0 00.0 000000000 .0
. 00000 00000 .000
00.000 00.00 00.00 .0000u.0 0.0.0 .0
00400 00.0 00.00 001. 00.0 00. 0 0....000 .0
00.00 00.0 .0000 0.0.0.000 0.0.0 .0
0040: 00.0 00.0 .040 00.0 00.0 0.000000 0..0u.>0 .0
00.00 00.0 00.00 00. 00.0 00. 0 0.000000 .0
00.0 00.0 00.0 00.0 00.0 00.00 0.00 0:. 0.0.0 .0
00.00 00.0 00.00 0.0 00.0 00.0 0000..u0 .0
00.0 00.0 00.0 00.0 00.0 00.00 .00000.= c.0u.c0u.u.0 .0
00.00 .00\00.0000 00.0 .00\00.0000 00.0 0.000 00.0 .00\0.00 =0.\00.00 00000.0 .0
hunch accuhoxywd .n
00.000 00.00 .u.0u 0..0 0.0.0 .0
nqiqn. 0.0 00.0 00.0 0010: 0.0 00.0 0.0 .usux00.00 000: .0000 .0
00.0 .00\00.0 00.0 .00\00.0 00.0 0.0 00.0 .00\0.0 .usox00.00 .a0aau00 .0
00.00 .00\00.00 00.0 .00\00.00 00.0 .0.0 00.0 .o0\0.0 .osux00.00 00.0.00: .0
00.0 0.0 0000 0.0 00.0 0.0 00.0 0.0 .usox00.00 0..= 00.0000 .0
00.00 .anx00.000 00.0 .00\00.000 00.0 0.0 00.0 0.0 .an\00.0 00.0.00000 00.0 .0
00.000 .00\00.0000 00.0 .00\00.0000 00.00 .00\0000 00.0 .00\00.0000 .0.u\00.00 .00000 .0
unnoaouqauom nook .<
0380332§ 00
00000050 .0
030-: ucawe< houoqm ucnos< o:-> unsoe< honouk unsoe< «my aqua noua
0~0~on 0.000 uu-on 0:000 000 .0000

 

00.0.0 00 .u 00

o

mc0cocnouk unu0k on ou<

gonna: nowqoz ucoaooq~mum

n.n Omens

51;

 

 

 

00.000 00.0 00.0000 00.000 00.000
00400: 00.0 00400:: 0040:: 00.0 00.0 00.0 00400: 00.0 . 00.0 00.0 .0
00.000 00.0 00.0000 00.000 00.000 .0
00.000 00.0 00.000 00.00 00.0 00.00 00.000 00.0 00.000 .0
00400: 00.0 004000 00400 00.0 00.00 00400: 00.0 00d00 .0
00.0 00.0 00.0 . 00.0 00.0 00.0 00.0 00.0 00.0 .0
00.0 00.0 00.00 00.0 00.0 00.0 00.0 00.0 . 00.0 .0
00.00 00.0 00.000 00.00 00.0 00.00 00.00 00.0 00.00 .0
00.00 00.0 00.000 00.00 00.0 00 00 00.00 00.0 00.00 .0
00.000 00.0 00.000 00.000 00.000 .0
0040:: 00.0 00400: 0040:: 00.0 00.0 0040:: 00.0 00.0 .0
00.00 00.0 00.000 00.00 . 00.00 .0
0040: 00.0 00400: 0040: 00.0 00.0 0040: 00.0 00.0 .0
00.0 00.0 00.00 00.0 00.0 00.0 00.0 00.0 00.0 .0
00.0 00.0 00.00 00.0 00.0 00.0 00.0 00.0 00.0 .0
00.0 00.0 00.00 00.0 00.0 00.0 00.0 00.0 00.0 .0
00.0 00.0 00.00 00.0 . 00.0 00.0 00.0 00.0 00.0 00.0 .0
00.00 .0000.000 00.0 00.00 .00\0.0000 00.0 .00\00.000 00.0 .o0\00.000 00.00 .00000.000 00.0 .00000.000 .0
00.000 .00\0.000 00.0 00.000 00\0.0000 00.00 00.000 .0
00400: 400004000 00.0 00400: .00\0.000 00400 .00\00.000 00.0 .00\00.000 0040:: 00.0 00.0 00.0 .0
00.0 .00\0.0 00.0 00.00 .00\0.00 00.0 .00\00.0 00.0 .00000.0 00.0 .00\00.0 00.0 .00\00.0 .0
00.0 .00\0.00 00.0 00.00 .00\0.000 00.0 .00\00.00 00.0 .00\00.00 00.0 .00000.00 00.0 .00000.00 .0
00.0 .o0\0.00 00.0 00.0 .00\0.00 00.0 .00\00.00 00.0 .00\00.00 00.0 .00\00.00 00.0 .00000.00 .0
00.00 .00\0.000 00.0 00.00 .00\0.0000 00.0 .00000.000 00.0 .00\00.000 00.00 .00\00.000 00.0 .00\00.000 .0
00.000 .0000.0000 00.0 00.000 .00\0.00000 00.0 .00\00.000 00.0 .00\00.000 00.00 .00\00.0000 00.0 .00000.0000 .0
.3; 05.63. 00300.0 .3: 23050 2.0-S .2395. .030: 000.505. 03.00 003800. noun: 3006.5.
0.0020 .0033 .0033 030.0 0100000 030.0
0.0030 00.0030
20.33.7030 usage-2030 2.3088 n 3 o 23:08 N0 3 n
.00 0.0.0

 

00.00000000 0.0 .0000

Table 3.6
.Financial Returns of Prototype Dairy Farms
Raising'All.Feeds

 

 

 

 

HERD SIZE
60 120 250 400

Item Dollars/Cow
Gross Receipts $2,192.09 $2,192.09 $2,192.09 $2,192.09
Less Variable Costs 714.35 714.42 713.68 707.19
Returns above

Variable Costs 1,477.74 1,477.67 1,478.41 1,484.90
Less Fixed Costs 1,246.65 967.90 850.76 735.24
Returns to Labor

and Management 231.09 509.77 627.65 749.66
Less Labor Costs 400.48 322.87 256.00 224.52
Returns to Management (169.39) 186.90 362.65 525.14

 

again the advantage of the 400 cow operation, spreading the costs over
more animals. 0n the 60 cow operation basic equipment is required to
perform certain activities. In raising the crops on the 60 cow operation,
equipment is required to till on few acres. 0n the larger farms the
operations can go to larger equipment but with the additional cows the
costs are less on a per cow basis. The equipment, required specifically
for the dairy varies from $328.25 per cow for the 60 cow operation to
$82.02 per cow for the 400 cow Operation. The same pattern holds true on
the crop equipment: $173.00 per cow for the 60 cow herd and $68.90 per cow
for the 400 cow herd.

With the large difference in fixed costs, the returns to labor and

56

 

management deviate between the four prototype farms. The 60 cow operation
has the smallest returns to labor and management at $231.09 per cow and
the 400 cow operation has the largest returns to labor and management at
$749.66 per cow.

The cost of labor per cow varies because of hour requirements per
cow are different on the four herd sizes. Referring to Table 2.8, the 60
cow operation requires 63 hours per year for the cow and replacement
heifer while the 400 cow operation only requires 35 hours of labor. 0n the
larger herds less labor is required per cow than on the small herd.

Taking all of the costs into account, the final returns to
management vary by $694.53 between herds. The 60 cow prototype farms has
a loss of $169.39 per cow. The 120 cow operation is showing a return of
$186.90 per cow. The 400 cow operation shows the largest profit per COW'at
$525.14. From these results the larger.Michigan prototype dairy farms for
1995 based on the performance variables listed in Table 2.13 have a profit
per cow. These farms accomplish this by spreading the total costs over the
larger number of cows on the larger farms. An area which is costly to the
smaller prototype dairy.farm is the fixed equipment costs. In the smaller

herd, each cow is required to carry a large fixed cost.

57

CHAPTER 4
RESULTS OF THE SENSITIVITY ANALYSIS

Sensitivity analyses were performed with numerous variables to
identify their effect on the profitability of prototype dairy farms. One
variable at a time is altered from the base prototype and its effects are
evaluated. The analysis is performed so there is an upper, lower and base
variable. All three variables of each item are included in Table 4.1. The
items which were analyzed included milk price, milk production per cow,
soybean meal cost, hay yield, corn yield, interest rates on land,
equipment and buildings, land values and labor costs. Each variable is
analyzed and its implications are discussed in its respective section.

A second sensitivity analysis was performed on each prototype dairy
farm to determine the effects of purchasing all feed or raising only
forages and purchasing corn. Results of this analysis are Table 4.2.

Each sensitivity analysis is performed on each prototype farm.
Sensitivity analysis does not compare different prototype farms to each
other. Each prototype farm has a different level of capital, labor, and

management requirements .

4.1 Milk Price

The price of milk per hundredweight is one of two primary factors
influencing a dairy farmers’ revenue. Base milk price was set at $10.00
per cwt. Ten dollars cwt was compared to $9.00 and $11.00 cwt. At $9.00
per hundred weight milk both the 60 and 120 cow operation are producing at
a loss. The 250 cow operation shows a small profit per cow and the 400 cow

operation also shows a profit. At $11.00 per hundredweight, the three

58

larger prototype farms show a profit. Only at a price above $11.65 per
hundredweight will the 60 cow operation have a positive return, when
19,200 pounds of milk are marketed per cow. If milk prices continue to
decrease in the future, dairy farms will have to increase their production
levels and/or decrease their overall costs to be profitable in dairy
farming. This analysis indicates the 60 cow operation to be in the most
critical situation. However, this is based on the prototype farms stated
in the previous chapter. In the prototype farms each farm is started from
the ground up. These farms are based on an individual having to acquire
all of the fixed capital and variable capital new to begin farming, thus,
the high level of costs. Small herds in Michigan are profitable because of

different capital and management levels.

4.2.Hi1k.Production

The annual volume of milk production per cow is the second primary
factor influencing a dairy farmers revenue. In the prototype dairy farms,
the milk production is 19,200 pounds marketed annually per cow. At this
level only the 60 cow operation is producing at a loss. At 17,200 pounds
of marketed milk produced per cow, both 60 and 120 operation are at a
loss, this is based on the basic parameters of 1995. When moving up to
21,200 pounds of milk, the three larger operations are able to produce at
a substantial profit. Only at a level above 21,250 pounds of milk will
the 60 cow system have a positive return. If the basic assumptions of the
prototype farm are correct in 1995, larger herd sizes will be profitable
over 21,200 pounds of milk but the small herds will have to have an even

higher production level to cover their costs.

59

Table 4.1
Effects of Sensitivity Variables on Returns to Management

 

 

 

(Dollars/wa/Year)
HERD SIZE
60 120 250 400
(3) ($) ($) (3)

Milk Price
1. $ 9.00/hundredweight (382.17) ( 30.85) 151.15 306.60
2. $10.00/hundredweight (169.39) 186.90 362.65 525.14
3. $11.00/hundredweight ( 9.69) 341.63 523.63 679.13
Milk Production
1. 17,200 pounds (379.93) ( 28.61) 153.39 315.49
2. 19,200 pounds (169.39) 186.90 362.65 525.14
3. 21,100 pounds ( 11.93) 339.39 521.39 683.49
Soybean Meal Cost
1. $260.00/ton (165.71) 192.59 366.33 527.49
2. $300.00/ton (169.39) 186.90 362.65 525.14
3. $340.00/ton (173.08) 185.21 358.96 522.34
Hay Yield
1. 4 ton/acre (236.11) 125.02 302.45 466.42
2. 5 ton/acre (169.39) 186.90 362.65 525.14
3. 6 ton/acre (124.91) 231.48 402.78 564.28
Corn Yield
1. 80 bu/acre (209.55) 149.42 323.70 486.13
2. 100 bu/acre (169.39) 186.90 362.65 525.14
3. 120 bu/acre (142.62) 215.22 388.62 551.14
Interest Ray on Land
1. 8 percent (139.95) 218.23 392.63 555.17
2. 10 percent (169.39) 186.90 362.65 525.14
3. 12 percent (210.50) 159.58 332.66 496.10
Interest Rate on Buildings
1. 9 percent (135.28) 222.08 393.40 550.88
2. 11 percent (169.39) 186.90 362.65 525.14
3. 13 percent (198.83) 149.47 330.10 494.54
Interest Rate on Equipment
1. 9 percent (142.35) 204.70 374.18 533.22
2. 11 percent (169.39) 186.90 362.65 525.14
3. 13 percent (195.03) 173.92 351.40 517.48

60

Land Value

1. $ 697.00/acre (169.39) 186.90 362.65 525.14
2. $ 997.00/acre (265.49) 111.88 283.92 446.27
3. $1,297.00/acre (323.98) 34.87 205.20 367.41
Labor Cost

1. $ 5.00/hour (169.39) 186.90 362.65 525.14
2. $ 7.50/hour (376.66) 9.89 221.82 399.34
3. $10.00/hour (542.19) (109.75) 106.24 317.93

 

Figures are all based on the base performance variables in the
prototype dairy farm.

4.3 Soybean Meal Costs

Currently soybean meal costs account for an expensive portion of the
purchased feed costs to dairy.farmers. Dairy farmers who are feeding lower
quality feed (15-17 percent crude protein) are having to supplement their
rations with a large quantity of purchased protein. In the Michigan
prototype farms, the goal in forage production is to produce a high
quality forage (20 percent crude protein) so less purchased protein is
required. The prototype dairy.farms only.requires 203.93 pounds of soybean
meal annually per cow and replacement heifer. The quantity of protein
required in the ration is low because of the high quality forage. By using
a small amount of soybean meal in the ration, the variation in its price
does not significantly effect the profitability of the prototype dairy

farms.

4.4 Hay Yield

The prototype dairy farms have hay and haylage as the primary feed
so many acres are devoted to growing this forage. The yield of hay has a
significant effect on the quantity of land required and also on the total

61

costs of production to grow the forage. If it is high yielding hay there
are fewer acres which entail a lower total cost of production to produce
the entire quantity of hay needed.

The base yield is 5 tons per acres. The upper and lower variables
are 6 and 4 tons per acres respectively. On the 60 cow Operation there is
$111.20 difference between the upper variable and lower variable on the
financial returns. On the 400 cow operation the difference is $97.86 per
cow, The yield of hay does have a significant effect on a dairy’s

financial return if the ration is primarily based on hay.

4.5 corn Yield

The corn yield is very similar to the hay yield as to its effects
and significance to the prototype dairy farms. The base variable, upper
variable, and lower variable are 100, 120 and 80 bushels per acre
respectively. On the 60 cow operation the difference between the high and
low .yield (produces a $66.93 difference in financial returns. This
difference is very similar.for all farm‘prototypes. This implies the lower

its yield the less profitable it is on the overall financial return.

4.6 Interest Rate on Land

The prototype dairy.farms raise all the feed required by the cow and
replacement heifer. The feed is raised on land which the dairy farmer is
paying an annual fixed cost. If the interest rates rise, the annual fixed
cost of capital increases and if the interest rate decreases the annual

fixed cost of capital declines. In the prototype farm 10 percent is the

62

base with the lower variable being 8 percent and the upper variable being
12 percent. Across all four farm prototype farms the difference between
the upper and lower variable is roughly $60.00 per cow. It is similar
across all farms because the same amount of land is required to feed an

individual a cow on the 60 cow operation as on the 250 cow operation.

4.7 Interest Rate on Buildings

The interest rate’on buildings refers to the cost of capital for the
buildings, manure facility, and feed facility. All of these are based on
a lifetime of twenty years. The based interest rate is 11 percent, the
upper variable is 13 percent and the lower variable is 9 percent. Across
all four prototype dairy farms the difference between the upper and lower

variable was between $60.00 and $70.00.

4.8 Interest.Rates on.Equipment

The interest rates on equipment refers to the cost of capital to own
the equipment. On the prototype farms, the farms have all the equipment
required to grow and feed the crops, remove the manure, and milk the cows.
This all adds up to a large investment in equipment. The equipment has a
useful life of seven years so it depreciates at a faster rate the
buildings. The base interest rate is 11 percent, the upper is 13 percent
and the low rate is 9 percent. The difference between the upper and lower
variable is the most significant on the 60 cow operation at $52.68 per
cow. On the 400 cow operation the difference is only $15.74. The main
reason for this variation is because on the 400 cow operation the

equipment is spread over more cows to reduce the costs per cow.

63

4.9 Land Value

The base land value is $697.00 per acres. It is for this reason two
upper variables were used instead of a lower variable. The two upper
variable are $997.00 per acre and $1,297.00 per acre. Under the base
variable the 60 operation has negative returns. At the two upper variables
both the 60 and 120 cow operations have negative profits per cow.

The significance of using the upper variables for land value stems
from the fact that many farmers purchased land in the late 1970’s and
early 1980’s when land prices were high. These dairy farmers are still
paying off the debts incurred from those purchases even though the value
of the land has declined. The decline has pushed some dairy farmers from
a low to moderate debt-to-asset ratio to a moderate to high debt-to-asset
ratio. They moved into different equity positions because assets have

decreased in value yet their debt level had remained the same.

4.10 Labor Cost

The prototype farm has a base wage of $5.00 per hour. At this level
the 60 cow operation and the 120 cow operation have a negative return. The
cost of labor has been increasing on the farm level this decade. There
have been shortage of labor making wages more competitive. The upper level
labor cost is $10.00 per hour. At this level, both the 60 and 120 cow
operation are in the red. The 250 cow operation is at a positive $106.24.
Throughout all of the sensitivity analysis, raising the wage rate to
$10.00 hour gave the 400 cow operation one of its lowest return at

$317.93. This implies labor costs are a significant cost to the operation.

64

4.11 Feed.Acquirement

The results of the sensitivity analysis on feed acquirement are in
Table 4.2. This analysis looks at different ways of obtaining your feed.
The base farm raises all of its feed. The second raised only its forages
and purchased its corn. The third purchased all of its feed.

Under all three methods, the 60 cow operation has negative returns.
For all four herd sizes, the purchasing option is the least profitable
fOllowed by raising only your forages. Raising all feed has the highest
returns of the three methods. The advantage of raising all feed has over
the other two options which purchased some feed, as it produces its feed

at a cheaper rate than what the market price was charged.

65

Table 4.2
Sensitivity Analysis of Feed Acquirement
( Dollars/Cow/Y ear) a

 

 

Purchase All Raise Forages Raise 1
Herd Size Feed Purchase CornC Feed
60 (223.01) (181.77) (169.39)
120 139.75 155.12 186.90
250 273.76 354.10 362.65
400 392.42 493.16 525.14

 

aAll three methods of acquiring feed is based on the base performance
variables in the prototype farm.

bDoes not include any equipment or labor required for crop
production. Based on $60/ton for forages and $2.50/bu. for corn.

CIncludes equipment and labor required for forage production. Based
on $2.50/bu. for corn.

dInclude equipment and labor required for both forage and corn

production.

66

 

CHAPTER 5
SUMMARY AND CONCLUSIONS

A financial analysis of Michigan prototype dairy farms for 1995 was
conducted because of'the,growing'concern among dairy.farmers and the dairy
industry pertaining to the financial conditions of Michigan dairy farmers.
The dairy industry is undergoing a severe change and this is affecting the
profitability of dairy farmers. Rising costs and decreasing prices are
making dairy farmers reevaluate their financial situation. The purpose of
this study was to financially analyze potential prototype dairy farms. The
financial analysis is performed by computerized enterprise budgets. The
prototype dairy farms for 1995 are based on an individual(s) purchasing
the entire operation. All of the fixed costs are computed on an annual
fixed cost basis for the duration of the assets useful life.

The findings deal with scenarios which will likely take place in the
year 1995. The prices and costs are trended to the year 1995 for use in
the prototype dairy farms. The milk price is established at $10.00 per
hundredweight, milk production of 19,200 pounds of marketed milk per cow
per year and labor costs are $5.00 per hour. The prototype farms are
designed to house the cows in free stalls. The farms raise all of their
feed, feeding a ration of haylage and high moisture corn to the milking
herd. The prototype farms are based on herd sizes of 60, 120, 250, and 400
cow operations.

This analysis is not intended to address which size level is most
appropriate. The analysis addresses the specific size level of the
operation. Each size requires different capital, labor, and management

requirements. The analysis addresses the prototype dairy farms for 1995.

67

 

 

 

5.1 Major Findings

Analyzing the four prototype dairy farms under the performance
variables, the larger dairy operations are more profitable on a per cow
basis than the small herds. The fixed costs, primarily buildings,
facilities, and equipment, in the larger herds are spread out over more
cows. The annual fixed costs per cow are the smallest in the large herds.
The annual fixed cost per cow are the largest in the small herd.

In the larger herds the annual labor requirements per cow are
significantly lower than the requirements in the smaller herd. The small
herds have a larger expense per cow than the larger farms. The overall
labor requirements are the largest in the 400 cow herd.

The smaller dairy herds in Michigan make the individual cow carry a
large cost. For these herds to be profitable in 1995 under the base
performance variables, they will have to produce over 21,250 pounds of
marketed milk. These herds are going to need to be well managed to reduce
cost and promote profits. The problem in cost reduction stems from the 60
cow farm having all the equipment, for so few acres and cows.

The prototype farm analysis did not attempt to address which
operations could be the best under capital and labor limitations. All four
operations require a different level of capital and labor. The 400 cow
operation required the most capital and labor while the 60 cow operation
required the least.

Dairy farms raising all of their feed, as opposed to purchasing
their feed is the most profitable approach to dairy farming based on the
performance variables. Purchasing feeds ranked third under all farm herd

sizes which agreed with Hlubik’s findings in 1984. However, this does not

68

mean purchasing feeds is an inferior alternative. It will depend on an

individuals capital, labor, and management limitations.

5.2 Inplications for the Michigan Dairy Farms

If the forecasted performance variables occur, will Michigan dairy
farmers survive? Presently if the prescribed conditions occurred many
dairy farms would be in a severe financial strain; many would eventually
fold.

Michigan dairy farmers need to analyze their financial position.
Dairy farmers need to identify all of the costs their cows are carrying.
The areas which are costly, such as buildings, facilities, and equipment
need to be reduced or reorganized.

This analysis found the 60 cow herd to be producing with negative
returns, but this does not imply this is happening in the industry. In the
analysis the fixed costs are based on new facilities, buildings, and
equipments. In the industry many dairy farmers are using old buildings and
facilities which are fully depreciated. The annual fixed costs on these
items are significantly lower than those represented in the prototype
farms. A large portion of the annual fixed costs is based on the asset’s
depreciation.

The prototype analysis differs from Michigan dairy farmers based on
the manure system required. The prototype dairy farms are required to have
a storage facility capable of holding eight months of manure. In Michigan
only five percent of the farms have long term storage. This storage
facility is an additional cost on the prototype farms. If the Department

of Natural Resources required long term manure storage, many dairy farmers

69

 

will be forced out or large investments in manure facilities will be
required. I

The production of high quality feed is essential to reducing
purchased protein costs. Protein costs are extremely high and if a high
quality forage (high in percent crude protein) can be produced, this will
sharply reduce the dairy farmers feed costs.

The Michigan dairy farmers can look at one of the four prototype
farms, which ever is the most similar to their farm and compare their farm
to it. This will help them figure out which areas to restructure and

improve .

5.3 Needs for Future Research

This thesis identifies pertinent problems the Michigan dairy farmer
is facing currently and possibly in the near future. The research
establishes profitable dairy enterprises for 1995. The next question is
how do we get from the present to the future maintaining our industry?
What programs and services can be offered in a cost-effective manner to
promote profitability in dairy farming.

Dairy farms need to know if they can pay for a new investment.
Financial education of the dairy farmer needs to occur to assure sounder
financial decision making.

Future research needs to look at minimum cost systems. Is rotational
grazing a viable option? Is feeding by-product feeds a cheaper yet
productive technique for dairy farmers? Since the average herd size in
Michigan is 74.4 cows per herd, more research should be conducted on the

small dairy farms to identify which alternatives would be most profitable.

70

Research should be conducted on a given herd size to identify what is the
best system of production for the herd size. There are many questions to

be answered in dairy farming but what solutions are the most profitable in

the long run ?

71

APPHDIX A

Dairy Buildings and Facilities Estimates

72

Table A.l

Dairy Buildings and Facilities: Herd Size 60

 

 

Item Dimensions Investment Cost

(Feet) (Dollars)
cow Freestalls $24,750
Dry cow Freestalls 4,150
Heifer Freestalls 9,600
Virginia Heifer Barn 8,250
Calf Hutches 1,575
Maternity Treatment Pens 20,000
Milk House 20,000
Holding Pen and Crowd Gate 11,400
Equipment Building 18,000
Haylage Silo 60’x26’ 24,000
H.M. Corn Silo 20’x40’ 11,000
Hay Barn 1,500
Protein Bin 850
Manure Storage, 8 months 8,034
TOTAL $163,109

 

73

Table Am2
Dairy Buildings and Facilities: Herd Size 120

 

 

Item Dimensions Investment Cost

(Feet) (Dollars)
Cow Freestalls $54,000
Heifer Freestalls 33,950
Super Hutches 3,750
Calf Hutches 2,250
Maternity Treatment Pens 40,000
Milk House 24,000
Holding Pen and Crowd Gate 14,000
Equipment Building 30,000
Haylage Silo l4’x55’x100’ 41,325
H.M. Corn Silo 24’x55’ 20,000
Hay Barn 3,000
Protein Bin 850
Manure Storage, 8 months 13,980
TOTAL $281,105

 

74

Table Am3

Dairy Buildings and Facilities: Herd Size 250

 

 

Item Dimensions Investment cost

(Feet) (Dollars)
Cow Freestalls $162,500
Heifer Freestalls 69,650
Super Hutches 7,750
Calf Hutches 4,500
Maternity Treatment Pens 64,000
Milk House 36,000
Holding Pen and Crowd Gate 22,500
Equipment Building 48,000
Haylage Silo l4’x80’x150’ 67,200
H.M. Corn Silo 24’x55’ 20,000

24’x60’ 22,000
Hay Barn 6,000
Protein Bin 1,700
Manure Storage, 8 months 24,300
TOTAL $556,100

 

75

Table A.4

Dairy Buildings and Facilities: Herd Size 400

 

 

Item Dimensions Investment Cost

(Feet) (Dol lars )
Cow Freestalls $220,000
Heifer Freestalls 112,000
Super Hutches 12,000
Calf Hutches 7,200
Maternity Treatment Pens 88,000
Milk House 40,000
Holding Pen and Crowd Gate 30,000
Equipment Building 60,000
Haylage Silo 14’x100’xl95’ 81,300
H.M. Corn Silo 28’x60’ 27,000

28’x60’ 27,000
Hay Barn 10,000
Protein Bin 1,700
Manure Storage, 8 months 37,812
TOTAL $754,012

 

76

APPENDIX B
Equipment Estimates

77

Table B.l
Equipment Estimates: Herd Size 60

 

Item Investment Cost
(Dollars)

 

1. Dairy Equipment

Double-4 Herringbone Parlor $20,000
Milk Tank 9,600
Auto Takeoffs 6,000
Silo Unloaders 13,000
Batch Mixer 11,000
Conveyor 800
Manure Pump Agitator 6,440
Manure Spreader 8,000
Manure Scrapper 500
Manure Transfer Pump 14,000
Unloader 4,000
Tractor, 45 HP 12,000
Tractor, 80 HP 19,200
Miscellaneous 1,000
Total Dairy Equipment $125,540
2. Crop Equipment

Blower 3,000
Conditioner 8,500
Rake, Tandem 2,500
Chopper 8,000
Hay Head 1,570
Baler 8,000
Forage Wagon (2) 10,000
Drill '5,000
Plow, 4 bottom 3,200
Disc, 10 feet 4,000
Corn Planter, 4 row 6,000
Cultivator, 4 row 2,500
Sprayer 1,750
Pickup 8,500
Gravity Box 1,600
Total Crop Equipment $ 24,120
Total Dairy and Crop Equipment $199,660

 

78

Table 8.2

Equipment Estimates: Herd Size 120

 

 

Item Investment Cost

(Dollars)

1 . Dairy Equipment
Double-6 Herringbone Parlor $26,000
Milk Tank 15,000
Auto Takeoffs 8,000
Silo Unloaders 6,500
Batch Mixer 16,800
COnveyor 1,600
Manure Pump Agitator 6,440
Manure Spreader 8,000
Manure Scrapper 500
Manure Transfer Pump 14,000
Unloader 4,000
Tractor, 45 HP 12,000
Tractor, 80 HP 19,200
Miscellaneous 1,500
Total Dairy Equipment $139,540

2. Crop Equipment
Blower 3,000
Conditioner 10,000
Rake, Tandem 4,000
Chopper 9,000
Hay Head 2,070
Baler 11,000
Forage Wagon (3) 15,000
Drill 5,000
Plow, 5 bottom 5,000
Disc, 12 feet 4,500
Corn Planter, 4 row 6,000
Cultivator, 4 row 2,500
Tractor, 90 HP 24,000
Sprayer 1,750
Pickup 8,500
Gravity Box (2) 3 00
Total Crop Equipment $114,520
Total Dairy and Crop Equipment $254,060

 

79

Table 3.3
Equipment.EStimates: Herd Size 250

 

Item Investment Cost
(Dollars)

 

l . Dairy Equipment

Double-8 Herringbone Parlor $32,500
Milk Tank 25,000
Auto Takeoffs 11,000
Silo Uhloaders 13,000
Batch Mixer 27,000
Conveyor 800
Manure Pump Agitator 7,000
Manure Spreader 10,000
Manure Scrapper 500
Manure Transfer Pump 14,000
Skid Steer 14,000
Tractor, 55 HP 14,400
Tractor, 90 HP 21,600
Miscellaneous 2,000
Total Dairy Equipment $192,800
2. Crop Equipment

Blower 3,000
Conditioner 13,000
Rake, Tandem 5,000
Chopper 12,000
Hay Head 2,570
Baler 12,000
Forage Wagon (4) 20,000
Drill 7,000
Plow, 7 bottom 7,000
Disc, 16 feet 7,000
Corn Planter, 8 row 10,000
Cultivator, 8 row 4,000
Tractor, 130 HP 33,000
Sprayer 1,750
Pickup 8,500
Gravity Box (2) 3,200
Total Crop Equipment $146,020
Total Dairy and Crop Equipment $338,820

 

80

Table 3.4
Equipment.Estimates: Herd Size 400

 

Item Investment Cost
(Dollars)

 

1. Dairy Equipment

Double-10 Herringbone Parlor $37,500
Milk Tank 29,000
Auto Takeoffs 13,800
Silo Unloaders 13,000
Batch Mixer 30,000
Conveyor 1,600
Manure Pump Agitator 7,000
Manure Spreader 10,000
Manure Scrapper 500
Manure Transfer Pump 14,000
Skid Steer 14,000
Tractor, 55 HP 14,400
Tractor, 120 HP 25,320
Miscellaneous 2,000
Total Dairy Equipment $212,120
2. Crop Equipment

Blower 3,000
Conditioner 15,000
Rake, Tandem 5,000
Chopper 16,000
Hay Head 4,000
Baler 15,000
Forage Wagon (4) 20,000
Drill 8,000
Plow, 7 bottom (2) 14,000
Disc, 18 feet 10,000
Corn Planter, 8 row 10,000
Cultivator, 8 row 4,000
Tractor, 130 HP (2) 70,000
Sprayer 1,750
Pickup 10,000
Gravity Box (3) 4,800
Total Crop Equipment $210,550
Total Dairy and Crop Equipment $422,670

 

81

BIBLIOGRAPHY

Bickert, William G. , Building and Remodeling Dairy Cow Facilities to Enhance

Management, Managing the Milking Herd for More Profit, Cooperative Extension
Service, Michigan State University, East Lansing, MI 48823, P. 2, 1988.

Browne, William P. , and Larry C. Hamm, Political ChoicesI Social Values, and the
Economics of Bio Technology: A Lessen from the Dairy Industg, staff paper

No 88-33 , Department of Agriculture of Economics, Michigan State University,
East Lansing, April, 1988.

Bucholtz, H.f., J.W. Walter, R.A. Patton, S.T. Hayes, Sparton Dairy Ration
Evaluator, CP-0112, Version 10, Cooperative Extension Service Software
Library, Michigan State University, East Lansing, MI 48823, June 1987.

Connor, Larry J. , Larry G. Hamm, Sherrill Nott, Dale G. Darling, William Bickert,
Roger Mellenberger, H. Allen Tucker, Oran B. Hesterman, John A. Partridge

and John H. Kirk, Michigan Dain Farm Industg: Summary of the 1987 Michigan
State University Daig Farm Survey, special research report 498, Michigan
State University Agricultural Experiment Stations, East Lansing, MI 48823,

July 1989.

Hamm, Larry G. , Upper Midwest Perspectives on the Dairy Price Support Program,
staff paper number 87-77, Department of Agricultural Economics, Michigan

State University, East Lansing, MI 48823, 1987.

 

 

.Harsh, Stephen B. , Larry J. Connor, and Gerald D. Schwad, Managing the Farm
Business, Prentice Hall, Inc. , Englewood Cliffs, New Jersey 07632, 1981.

Harvey, Lynn R. , Al E. , House, Karen K. Cylbuski, David R. Walker, Agricultural
Land Values and Assessments in Selective Counties in Michigan, Agricultural
Economics Report No. 503, Michigan State University, East Lansing, MI. ,
November 1987.

Hlubik, Joseph G. , The Profitability of Purchasing Vs. Growing Feeds on Dairy
Farms in Southern Michigan, Michigan State University, East Lansing, MI

48823, Table D18, 1984.

 

Luening, R.A. , R.M. Klemme and W.T. Howard, Wisconsin Farm Enterprise Budgets,
Dairy; Cows Replacements, A 27 31, University of Wisconsin Agricultural
Bulletin Room 245, 30 N Murray St. , Madison, Wisconsin 53715, P. 4, 1987.

Michigan Agricultural Statistics Service, Michigan Agricultural Statistics. 1989,
Mass 89-01, 201 Federal Building, P.O. Box 20008, Lansing, MI 48901 1989.

Michigan Farmer, Dairy Report, 1989.

Midwest Plan Service, Livestock Waste Facilities Handbook. Second Edition, Iowa
State University, Ames, Iowa 50011, p. 6.4, 1985

82

Rourke, John P. , Change in Production of DTP Nonparticipants and New Producers,
Breeding paper 87-10, Dairy Market News Volume 54, Report 46 November 1987

pg.8.

Trimberger, George W. , Dairy Cattle Judging Techniques Second Edition, Prentice-
Hall Inc. ,m Englewood Cliffs, New Jersey, 1977.

USDA, Daig Situation and Outlook Report, DS-413, Economic Research Service,
Washington, D.C. 20005, January 1988.

83

 

 

 

 

   

NICHIGQN STQTE UNIV. LIBRQRIES
1|H|WH|HH||W|HHHIHIIIHHHHHIWIIHHIHWIWI
31293009026380