Wednesday, October 30, 2013

The Equation

aka How to Calculate a Cow Owner's Share of Milk Income 

Last year at Midwest Dairy Expo, Glen and I shared our experiences as beginning farmers as part of a producer panel. One of the questions we were asked was how we calculated our milk check while we were working on another farm as herdsmen and housing our milk cows there. I'll explain everything below, but here's The Equation that Glen came up with:

number of cows
x  average daily milk production in pounds
x  days in month
x  milk price (per pound)
x  farm's net farm income ratio
x  cow owner's percentage of income
= cow owner's share of milk income

Before I explain how we ended up using this equation and give an example, let me share a few assumptions and requirements for this equation to work.

This equation can be used in a situation where the Cow Owner(s) own the cows, but someone else (the Farm) provides housing, feed, veterinary care, breeding expenses, labor, etc. Cow Owner(s) might be farm employees who own cows, like we did, but Cow Owners do not necessarily need to work on the Farm. Milk from the Cow Owner's cows is commingled with milk from the Farm's cows in one bulk tank. This equation is set up for a once-monthly payment from the Farm to the Cow Owner.

To use this equation, you need to know the cows' average milk production for the month. We used the production information from our monthly DHIA (Dairy Herd Improvement Association) test. We kept our cows in a separate string, which allowed us to easily determine average production.

For milk price, we used the Farm's mailbox price, which, of course, isn't available until the milk check for that month comes. (For example, we were paid in mid-January for the milk our cows produced during the month of December.)

You also need to know the Farm's net farm income ratio. The net farm income ratio, which is a measure of the Farm's financial efficiency, is the percent of the gross farm income that remains after all expenses are paid. The farm where we housed our cows was enrolled in the Minnesota Farm Business Management program, so we pulled their net farm income ratio off the executive summary of their financial analysis. We included this ratio in The Equation to make sure the Farm was compensated for feeding, housing, and otherwise providing for our cows.

The Cow Owner's percentage of income is a percentage that's mutually agreed upon between the Farm and the Cow Owner. We used 66%, which meant that we received two-thirds of the income from milk our cows produced and the farm kept the other third. This figure wouldn't necessarily need to be included in The Equation, but we added it so that our situation would be a win-win for both us and the farm we were working on. Adding our cows to the farm meant longer milking times and rearranging some fencing. In other situations, employee-owned cows might be occupying stalls that could otherwise house farm-owned cows. If the cows being housed on the Farm are owned by multiple owners, this percentage could be divided accordingly.

Here's how we ended up needing The Equation:

Back in 2006, we were milking cows on my dad's farm. We had just purchased the cows from him, but were still renting the facilities. Jane Salzl needed a herdsman for one year for the dairy farm she owned with her husband Sam. Sam had been badly injured in an accident earlier that year and was still recovering. Jane called us on July 29 and asked if we would be interested in the herdsman position. (Glen and I had done relief milking for Sam and Jane before we started farming.)

After considering Jane's question, we said yes, but with one condition – only if we could bring our cows along. As most dairy farmers and cow owners understand, we were attached to our cows. And we knew that after our year of working for Jane and Sam, we planned to find a farm in Stearns County and return to dairy farming on our own.

Jane and Sam decided that they could make room for our cows in their dry cow pasture, so we brought three-quarters of our small herd along with us. (Glen's dad and brother milked and housed the rest of our milk cows, along with our older calves.) We brought our bottle calves along to Jane and Sam's. We left our yearling heifers at my dad's.

During the four weeks between Jane's first call and the day we moved, one of the things we needed to figure out was how we would get paid for the milk our cows produced while they were at Sam and Jane's. One night during milking, Glen came up with The Equation as a solution. When we presented the idea to Jane and Sam, they agreed that The Equation would work.

Finally, here's an example of how we used The Equation:

In December of 2006, we had 32 cows milking at Sam and Jane's. On test day, they averaged 77 pounds of milk. Sam and Jane's milk price for December was $14.81/cwt. Sam and Jane's net farm income ratio was 37% (based on their financial analysis from 2005). As mentioned above, we used 66% for our share of income from our cows' milk.

So, plugging those numbers into The Equation...

32 cows  x  77 lbs.  x  31 days  x  $0.1481  x  .37  x  .66 = $2,762.51

We used this money to make our equipment and cattle loan payments while we worked for Sam and Jane.

If you have any questions, please feel free to contact us.

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