CASH FLOW FROM MILK INCOME INCREASES

Cash flow is another measure of financial health for a dairy operation or any business. Each business has a minimum cash requirement to meet its ongoing commitments, such as operating costs, overhead, debt service payments and family living. The remainder can be used for capital investment, such as to replace older equipment, build liquidity, or invest in a retirement fund. Cash margin from milk income increased significantly from 2021, averaging $6.43/cwt. compared to $0.66 in 2021, $0.35 in 2020, $1.43 in 2019, and -$0.49 in 2018 (Figure 5).9 Prior to 2019, the average DFS farm had four straight years of negative cash flows. This means that although the average farm in our sample has had positive cash flow for the last four years, they may still carry increased debt loads from prior years of negative cash flows.

Figure 5 shows the range of cash margins from milk income for the average Northeast dairy farm since 2018. Due to cost inflation and increasing debt levels, the breakeven milk price has increased significantly from approximately $14 per cwt., which was common prior to 2007, to a peak of over $20 in 2014, and again in 2022. Milk prices have fluctuated in recent years, setting new records in 2011, 2014 and 2022, but declining between 2014 and 2022. Note that this calculation looks at milk income only and does not account for government payments, which were more significant in 2020 than before or after that year.

Given the variation in average cash margins, making a financial decision based on a single year’s performance would be difficult. Figure 5 further illustrates this point: While the cash margin was positive for the last four years, it was negative for the four years prior to 2019.

This level of variability makes financial management more challenging, underscoring the importance of a long-range view of cash flow. Timing of major capital expenditures, managing debt load, building liquidity for the tight years, and adjusting family withdrawals are all means of managing volatility. Some producers have adopted risk management strategies involving both input costs and milk prices using a combination of crop insurance programs, such as Livestock Gross Margin (LGMDairy) and the Dairy Revenue Protection (DRP) coverage, other government programs such as the Dairy Margin Coverage (DMC), as well as hedging strategies.