Risk management experts explain the importance of knowing your cost of production

Our team offers Risk Margin Insights free of cost – and they do the math for you

Photo of financial summary graphs and insights from cost of production analysis

There’s no time like the present to start planning for your future. To do that, you’ll need to understand where you stand today from a cost perspective. We talked with our Land O’Lakes Risk Management Experts on why a Cost of Production (COP) analysis is a smart move as you begin the New Year and explain how we can help you get it done.

First, the basics of a Cost of Production Analysis.

What is a cost of production analysis and what do I have to do to get one?

Mark Halbakken, Senior Dairy Advisor: A COP analysis involves determining all costs associated with producing milk, including variable costs such as animal health, utilities, feed, replacements, breeding, labor (family and hired), etc. It also includes fixed costs such as economic depreciation, interest, repairs, taxes and insurance.
We will total all those costs up and then divide by the cwts of milk produced to get a total cost to produce 100 pounds of milk for your farm. And all you have to do is ask one of the DBAs or ask your Dairy Field Rep to contact us for you.

How much does it cost for Land O’Lakes do this for me?

Mark: This is a free service we offer to all our Dairy Members.

Is there a special COP formula? Why should I work through the Land O’Lakes team?

Jake Thompson, West Region Senior Dairy Business Advisor: Our Land O’Lakes team has been trained to review your numbers and bring a high-level of insight to your business operation.  We are focused on solely on the dairy industry and have the knowledge to deliver insights and results that directly impact your business operation. 
Any producer if they have the time, has the ability to calculate their own cost of production. However, most producers I know don’t have a ton of time on their hands, and it is always beneficial to sit down and have an outside perspective. With this service, we do the math for you – and that to me, is a reason itself to work with us.

Time is precious and we know you don’t have a lot of it. Let’s go over the time commitment of this service.

What kinds of information will I need to provide?

Mark: You will need your income/expense information for the year such as an accrual income statement, a cash profit/loss statement, your Schedule F and supporting statements from your taxes, or your entries in your account book.We would also look at your beginning of year and end of year inventories, A/P, A/R and prepaid amounts plus fair market values of equipment and facilities.

How long will it take to get a COP analysis done? How often should I do one?

Andy McCarty, East Region Dairy Business Advisor: To go through a COP analysis it usually takes 2-3 hours of your time depending on available information. I would suggest completing one with your local DBA annually. This builds historic information that allows great insight on all areas of your business to help you make those important decisions.

Now we’re going to go deeper; on why this is an important exercise for your business.

This service is timely, especially in volatile markets – explain why

Andy: A COP is always a good number to have in the back of your mind at any time. Knowing that number and working through the process of determining what your COP makes you a good manager in the good times, but a great manager through the hard times. When the market turns more volatile, you are better prepared to make informed decisions to manage through those difficult periods while continuing to position your operation for future success when the markets turn back around.

How will it help my business in the future?

Greg Squires, Dairy Enterprise Services: An annual NCOP (Net Cost of Production) analysis provides foundational insights to many business management decisions and strategies including risk management.The analysis will shed light on areas of your cost structure which may represent areas of opportunity for better cost control. Knowing your NCOP and engaging in basic risk management practices can greatly help your operation better manage cash flow and potentially help improve profitability.

Finally, let’s go over what kinds of things you’ll receive by taking advantage of this service through Land O’Lakes; the ‘what’s in it for me?’

What kinds of insights will I get?

Jake: COP breaks down the business into cost categories; cash vs. accrual, and Class III and Class IV break-evens. Over a longer period, we can assist you in recognizing opportunities within cost categories and management strategy.  After we complete a full year-end COP, we will sit down and provide a forward-looking forecast on your upcoming year and your forecasted Class III and Class IV break-evens. 

How does this relate to my risk management plan?

Jake: Most importantly, the Class III and Class IV break-evens allows the dairy producer to look at the risk management tools that are available and make business decisions that can provide milk revenue protection that covers the business’ costs.
We at Land O'Lakes have the knowledge to provide insight on the markets and opportunities that may be present in the marketplace with Dairy Margin Coverage program, Dairy Revenue Protection or forward contracting programs based on the producers Class III and Class IV break-even.

Download our cost of production service overview here.

Ready to get started? Contact our Dairy Business Advisors today.