Management Brief: Swings in P&L

September 7, 2011 08:50 PM
 

Profit years better; loss years horrendous

Every dairy producer knows that volatility in milk prices and operating costs seems to be on the upswing. Now there’s proof: The highs are getting higher, and the lows are getting ridiculous.

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More on cumulative profits

Lane Ely, an Extension dairy specialist with the Univer-sity of Georgia, has logged net farm income per cwt. of milk sold since 1995. Over those 16 years, dairy producers have banked a profit in 12 years, or 75% of the time. "That’s a pretty good record, and why many have found the dairy industry to be a good option," Ely says.

But the range in loss to profit was much less during the first 11 years of that period. Ely notes that the greatest loss from 1995 through 2005 was just 62¢ per cwt. and the largest profit was $2.80 per cwt., for a range of $3.42.

Since 2006, however, that range has nearly tripled—to $9.81. The killer year was obviously 2009, with an average loss of $6.23 per cwt. But the best profit year in the last 16 occurred in 2007, at $3.58 per cwt.

Ely analyzed the data further, looking at accumulating profits over time. For example, dairies recorded a loss of 62¢ per cwt. in 1995, but then showed a $1.73 per cwt. profit in 1996. The cumulative profit for the two years was $1.11. If you follow that cumulative addition through 2010, a dairy would have had a cumulative profit of $10.78 per cwt. over the 16 years.

However, if the dairy started operation in 2000, the cumulative profit through 2010 would have been just $4.69. And if the dairy had started milking cows in 2005, the cumulative profit for those six years would have been just 60¢ per cwt. because of the devastating impact of 2009 losses.

"The lesson from this should be that ‘saving for a rainy day’ or using some profits to be prepared for the downturns will be successful in the long run," Ely says. "It takes very good financial records and planning to keep ahead of the game."

 

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