5 dairy farm metrics to monitor

By Dan Duthie, Bremer Ag Bank

Dairy farmers are busy. You’re overseeing the herd, handling the milking process and managing production. However, paying attention to just a few metrics will help ensure your operation runs efficiently and, most important, profitably. 

It’s especially important to pay attention to these metrics if you want to obtain additional credit. Your bank will use them to determine if your operation is well-run, profitable and has healthy debt levels.

1. Debt service coverage ratio

We look at debt service coverage ratio (DSCR) to make sure an operation can pay their current debts. It helps us measure how much of your income is available to service your debt. We like to see a DSCR of 1.25 or above. This signals that the operation is profitable and not overloaded by debt. Your DSCR is especially important if you’re looking to apply for additional lines of credit or loans.

2. Current working capital position

 Your working capital position is another important financial metric to pay attention to. This ensures the operation can pay for upcoming obligations, and that assets can be turned into cash as needed. Specifically, we’re looking for a working capital position of 1.5 or greater.

Working capital position is the ratio of your operation’s current assets, divided by your current liabilities.
A strong working capital position will help you survive challenges such as market volatility or disease outbreak. Having cash reserves will also allow you to quickly respond to opportunities such as purchasing good deals on feed, fertilizer, other operating expenses or even update equipment without the need for financing.

Another number that we like to look at is the working capital per cow. Ideally, we like to see this metric at $750 per cow. This is calculated by dividing the current assets by total cow number. This is important because the average purchased feed cost is $1,500 annually, and this means you have six months of current assets to pay feed bills. 

3. Interest expense ratio

Your interest expense ratio is another indicator of your operation’s financial health and efficiency. It looks at how much of your income is going toward paying interest on loans. It is calculated by dividing the interest you pay on all loans for one fiscal year by your earnings before interest, income taxes, depreciation, or amortization. For your operation to be considered strong, we like to see no more than 6% of your income being used to pay interest. More than 10% would mean you are spending too much money on interest.

4. Net-profit per cow

When working with our producers we like to see a net-profit per cow of around $375. It’s easy to calculate – take the net profit from your operation on an accrual basis and divide it by the number of cows in the herd.

Your profit per cow should be high enough that you and your family can be financially secure, you can set aside money to invest in your operation, and you can weather market volatility.

5. Whole farm cost of production

With any financial metric, it’s important to put it into context. That’s why we look at whole farm cost of production. Your whole farm cost of production takes into consideration:
• Feed
• Labor
• Equipment depreciation
• Herd replacement cost 
• Overhead costs
It then takes the sum of those expenses and divides it by the hundredweights (CWT) sold to yield. Farmers looking to improve profitability will often look to lower their cost of producing a CWT of milk. When working with producers, we aim to have a cost per CWT of $16.50 or lower for energy-corrected milk.

Knowledge is power

While you don’t want to get bogged down in the numbers, maintaining accurate records, and working with your banker to make these calculations, will help you make well-informed decisions about purchasing new equipment or livestock, buying more land, or where to reduce expenses. Knowledge is power. Having the right information at your fingertips will help you improve your operation.