INTROOOCT rON

Tll i ~ repor t presents est ttl.te~ or tile net CO\t of prOdllClng mt It for d

for. selected group of Nor th C"olll" Gr.de A da iry fa rlls for 1962 and 1983.

The d.ta upon Wft lch t he c.lclll.1ed costs are based were obta ined 'rom

5 grOllp of ~r .de A d.lry f.r~~ p.rtlclpating on • Yoluntary basts In the

North C.rol lna ~llle Uni ver Si ty Electronic F.rn BlIsiness Records Progr.m .

Although not a r.nd~ s. rnole of al l Gr.de A d. lry f.r~s in the s t.le ,

the cost -of. proluctlon St.llsllcs for the group oro1tde insights into

changes occurring QtI da iry fartls. Flfty·e lght dl lrynte" proylded datI

fer tne I98J s tudy. e.ch of wh~ OPerates a sPfcl.,l led dairy business

1II11lting 1{0i Slet" cow$, FarliS OIer e selected on the basis of I tllllely

c~pleted business record for 1982 and 1983.

The Nor th C,roll na Sta te UniYerstty {I eclronlc F.rm Records

Program Is a c~puter; led farm busIness records progr .m that keeps

det.iled cost .nd return accounts for c~rclal farmers. Study d,t •

..ere clleclted rOt co-oletene's and . ccur , cy on a regu l.r bas Is by persnnne l

of the Oev,r~t of Economics . nd Bus iness ~n4 the North Car ol in.

A~r;cullur.1 E~lenslon S,r vlce. St.nd~rd f,r~ atcountlng pro~edure s

NET COST OF PflOOUCIII& 100 POUN DS Of MILK

r~e ~osts and returns .ssocl ated wlt~ producing 100 pounds of mil ~ for

1982 and 1983 are s~arlled in Tab le I. The calcul~t l on s ~sed to derive

these cost and return figures are presented in Table 2, page 4 of t~ l~ report.

T.ble 1. Estlm.ted Average Net Cost of Production. Blend Price and Return to Management per 100 Pounds of M l1 ~, sa Selected "orth C.rollna Grade A Da iry far .. " 1982 and 1983.

,,,. 1982 1983 m lSI

Net cOS t of producing 100 lbs . oflrlilk 16.69 11.38

Blend price re<elved for 100 Ibs. Of .l lk 14 .69 14.76

Return to mana9ement - 2.00 - 2.62

The net cost of producln9 100 pounds of mil k for 198) ... as Sl7.lB.

corr:tared to a blend prlce of st'.76 for t~e CJT oup of hrr.;. The COllP.r.b le

figures for 1982 were 1I6.69 and SI4.69 , respectively. Product ion costs per

hr lft for 1983 ranged frOlll SIl,63 per 100 pounds to Sl3. 00 . Tooo_thirds of

prol!lIcer$ are es tlmtted to have costs between Sl4. 10 and S20.66. 1 Blenl!

pri ce recelvel! In 198) r.nged fr~ a low of SI) . 72 to SI6 .• ' per 100 poundS ,

,.. Ith t~o_thlrds of the prodllcers rece lvin9 ,n es t i ~.ted S14.08 to SIS.44,

Blend price Is I"(l u~ced by se.sonal i ty of prod~t l on, butterf.t tes t, the

l Est lm.tes of var l ,bll i ty are b,sed on the assu~t ion that the dIstributIon of Indlvldu.l f,rlll data fol io .. a · "or~al " or bell-shaped curve distrIbution pattern. Thus , two_thirdS of the f,rm d,t, .. ill l Ie wIth in plus or minus one s t.ndard deviation from the average (~an ) Vl lue. Averagu and standard d.evla t lans are sUlmlarlzecl In lab le 14 , page 23.

-,-"OU~l of b,S! owned , the ~ount of mll~ ~roduction re l .t l ~e to b.s! and t~ e

procusing plant's Cl u s 1 ~ .l rs . D.lr)llllel'l orten state th. t tllere Is liltle

t hey can do about the price rece ived for ~ Ilt. Although thts Is true Nlll!

respect to pr ice .t • oartlcular t'~ . tnt variat ion shown .~o¥e Indlc.tes

that ayer.g! . n.u, l or Ices recelyed 01 dalryme~ do • • ry. ".n'9~t ,nd f.r"

~.rket ln9 or.et le!s over whi ch da l r~n n.ve some centrol .ccount for some of

lhese dif ferences.

The difference oet.een blend pri ce ~nd net cost per 100 pounds represents

the return to tbe It. lr}'ll. n for his lIIan.~emen l abil i ty. Over,ll, nltt cos ts per

100 poundS Increa sed by 4. 1% .nd blend price Increased by 0.5% from 1982 to

198]. As. consequence , lhe return to "'dn~gement clt!tre.sed frO'll -SZ .OO (ler

100 pounds In 1982 to -S2.62 In 1983. This change Is discussed in ~re

deta il lal t r In this repor t. Return to m.nageMef1 t ranged " Idely. wllh

two_th irds or producers Sho" lng relurns es t l ~4led to lie in the -S5. 9O lO

+SO.66 r'''ge.

Method of C. lcul .t lng Nt t :ost

The net co~t of pr oducing 100 pounds of ~II ~ waS c,l cu 'ated by using

the -whole farm" ~thod CT.blt 2). Tol, l far~ cos ts are f irst obt. lntd by

comb Ining tol.1 oPt r "tlng or c.Sh t Apenses .Itll dtpr~c;. tion on bull olngs

. nd eQu l ~ent. Interest ch.rges on n~t wvr th us~d In the dairy business and

w.ge allowances r(lt' operator AlIa III'I p.ld ,.,.. lI y h~or. NOll _Milk InCOlne , such

a5 livestoc~ an' crop sales , Is credlleo . gll nst lot. 1 farm costs to obta in

tht net cost of producing lht mi lt sol d.

Tot, l ntt cost pt r f.r~ Incrtised , fr om Sl60 ,1 20 In 1982 t o S280, S98

III 198J , a 1.91 Increase . Some C,ltgo,. le, of eKpense IncreaSed from 1982

to 1983 , and s~e dtCrtaltd.

-.-Tabl e 2. (st i., ted Average Net Cost of Producing 100 PoundS of Hilk ,

58 Se lected North Carolina Grade A Dair1 F.r~ . 1982 and 1983

""" Tol,l oper,tlng eJpenses'

Deflreciatlon 011 bulldl"gs and lIIachineryb

Interest on net _or th '

V. lue of cper.tor and unpaid f .. ll, 1.borO

Tot.1 cost

Less nen.mllk receipts'

Net cost'

"11k so lo (1bs.)

Net cost per 100 11K . of !IIllk

... -rep. lrs, rent,

.Iscel'.~eous eJoenses .

198Z m

ZOI ,Il7

22 , 310

41,970

19,784

291 , 202

31. 082

260 ,120

1, 558 , 235

16 . 69

198) (I)

219, 263

25 ,084

31 ,917

20 , 841

JOJ,106

22,508

280 , 598

1.614 , 295

17 . J8

oatl.ys for hir ed labor , feed , seed , crop esoenses , breed ing fees , veter ln.r l.n

~i l k h.ul ing. purchased livestOCk, da iry and Mr. , f uel and oth . building

p.ld on debt, croperty t.seS and

• ch"g' for the use of f.r~ ~ch i "ery , .bility of • busine$s t o r~c.oture p.st

to continue in operat ion In the loni run.

" 1983 , .,,' w~s c.lcu lated at .~ annual rate of II percent

da i ry en terprise for 198Z and at 9 percen t for 11 Interest rates. Equity h total owned inyest.

1 ,i:!::::~:;:'.es at th~ closing valuatioll date. The charge al ear n Ings on an equal ~unt of non(.r. I nyest~nt.

labor C.rol in. ,~i,~ I. S5,65 per

ue of the operator 's ':,;:1;'; Ie wor~ers In Horth _ pef hour. lllcrusing to

labor is v. 1UH at the (eder,l minlm~ char ges are .ssumed to represent

and family l abor If this l,bor cpntinue ; It aho represents ~igh t have earned (Of

~age r.te of S3.35 for 19BZ and 1983. the cos t s to the business of replacing were unavailab le Md the farm opefat.lons III est ImHe of the IncOl1le the oper ator :_,-".­the ir labor In off- far m work.

r

Inc Tude incOIIIe (r()l'fl I hes lod and crop u 1 es , patron.ge ~'~~"'" etc., and changes In feed , livestock and supolles . -

Tot ,1 (c'Sh) oper.tlng elpenses were 9.0S hl9h~r I~ 1981: I n t~r~St

chlrged 01\ the oper.tor'S capit.1 Inyestme'lt was 21.0S lower ; deoreclation

ch.r;es were 12 .4~ higher; tne f. lue of oPBr,tor . nd ftm 1ly labor was S.lS

higher . III do lhr te,..s tlte Increues III g.ger.tln9 e_l)ellses ,nd the Ikcruses

In interest on lIet _th had the hrgeH effect on tota l lIet cost. These

Incre.ses in lot.1 cos ts oer (.r~ occ~rred for lhr~ re.sens : , J.5S increase

In milt 50111 per hf"' , i drop fn non_mill! recei pts frOlll 1982 to 1983. and

ch. nges 'n \ndlftllui' oper.t ing cost Items. Ch,ngo' In oper, tl llg costs .re

discu5sed on p.ge 7.

'.ble J ShowS tho co-ponents of the not COS l, operating e_pense5 and

o~erhead costs for 198Z .nd 1983. Tota l lIet operating costs were 51 Z.57 per

100 pound~ for 1981. up fr om SII .53 In 1982. Major Increases occurred In

l ivestock expenses, bec.use of lhe feder,l mll~ .ssessments , 'Md In ~rch,sed

feed costs. 8lend price e_ceeded c.sh ~Apenses by SZ. 19 for 1981 comp.red to

Sl . 15 for 1981. Overhe,d costs per 100 poyn Gs were " .81 for 1983 compared to

SS.IS for 198Z bet.use tho s~'ler Int @rest ch.rge on net ~rth off set

Increases In t~e otner items. Tot,l tost$ per 100 PO~nds were SIl .J8 for

1983 .nd '15.69 for 1912.

SELECTED HEASW1ES CJ' 8USINESS PERfQIIMldlCE

The fin.nc \, 1 perfor~dnce of the d.l ry Industry In , given ye.r ,ffects

~resell l and future ml'~ prcductlclI . from th is p,rsp~'t l ve lhe net cost per

100 pounds of ~Il k dOes not pr.sellt • ca-p let, pi cture of the event5 of 1983

with resDecl to the tu, rell l . nd 11~e'1 (uture hulth of North C.rolin.'s

d.l,y farm, Tllese ef~nts are described and dhcuHed III the con te.ct of

fIItur~ .. iii!. prOduct ion In the following u:ctions. The d ... t . are for the Whole

farllt bUS '"~H. III CCJrltrHl to the rr.e thoGol c91 used In the ore~ious sKt lolls.

••• hble l. COIAIJDflefl t s of htt .. ttc! lIel Cos t o( ProdllClng 100 POUftdS of Milk , " ... eug!

of sa Selec ted N:/fth CIII'ol'n, Gr.de A D.l ty fUllS, 1982 ifill 1m

It$!

PIlf'CIlUlci feed

Crop up,nU

Power, m.chl~try

S{loa 11K.

4. 07

1.25

,nd bulldln" 1.90

Hired ltllOf'" 1.l6

Lt.-stock ,.peltS' 0,95

IP'ltereit, tpn .,.d Inil/7'oInC. 1.00

Gmer,' f,n. , Apenl'S ...L.Ql

Tohl ODerH 'n9 t~Pt"U" 11.53

Oellrtcl.tlon 1.28

Int,reU 011 !let worth 2. 75

,.hll of oper,tor .. d IInp.td (pll)' hw 1.1]

Tot,l overhe.eI cosu' 5.16

Tot,l .11 cosu' 16.6\1

198'

S of TOl,I

24 ••

, . , 11.4

'.1 .., •••

.-!.J.

6U .., 16.5

..!:.! 10 ••

100.0

Net Operat ing t'lh Inca-e

11100 Itli.

4.59

1. 23

1.86

l.H

1.)6

1.00

1.06

12 .51

1.44

2.17

1.20

..81

11. J8

191)

, of Tohl

Z6 ••

, . 1

10.1 .. , '.' ..,

-h!.

72 . J

'.1 12.5

••• 21.1

100.0

Tot.l (.Ih Incoce .111 e.ptns,s for th. bws'n", gl" jft '"dlc.llon of the

.b lll ll of d,lr, r.r~r' to cover c~rr eftt ooer.t'", e.o~'e' ,nd t~r.(ort , to

'e-,In In .1Ik ","oductlon tn tilt ,I!Of'" t nln. I.bl!. lhcvs toul cn" rece ilits

fro- f.,. IOVre!1 were S266,761 In 1983 , VII ).91 o_er 1982. T~'I Incre'lt

ocur'td prll!.dl" beUIiU the volUIIIII of .l1 t lold hlc,useCl , Iince tile '''''ge

blInd II/'Ic. IlIcre"eo very little. "I1t .... d Ilvestoct ules KCO<.lntld fOt' 961

of lot,l c,sl! recetots .

-7-

Table 4. Estimated Aver.ge CaSh F.rm Receipts, sa Selected Nor th (4rol; n ~ Grade A D,lry Farms , 1982 . nd 1983.

1981 1983 i Dr 10t,l , of Total

" ~ Sir artll Rece ipts S/F arm Receip ts

Hi I t u.le~ 128 ,859 89.1 238 , 299 89 . J

L !vesteet sales 16, 890 ••• 16 . 725 '.J

Crop sales 6.041 7.. 4 6,Ol) 2. J

Rents , di vi dends 2,498 1.0 2:,31 9 0.'

H isce llaneou!. 2. 583 --.hQ 3. 412 I.J

Tot.l ' ash farm receipts' 256 . 817 100.0 266 , 161 100.0

' [ndi y id u<l1 Hems may not eq ua l lelah bec.use of '-01,10\01119.

Table 5 shows lota l cash expenses of \ 21 9. 263 in 1983, up 9.01 over 1982.

PUrchased feed expense increased 12. 81 fro- 1932 t o 1983 , Milnl, because of

higher prices. Crop excenses and power 400 ~"ch lnery "penses were unchanged;

the lalter result might refl ect 10"!r ",.,-ves t lng cons IssochteG with

droYgh l-redyceo yie lds. l ivestoct e~penses lncredsed ~~.O~, S7.255, wit h

the hcleral .,il~ asseSSllen ts accGunling f or .s Imon all of t ile increase .

Hirecl la~or elpense increased oec.use of Incre~ses in ~o th the ~verage wages

pa id to labor "Ild the <l.lIOlin t of labor used. The tncrene tn (4sh receipts

I nc~e aecre"sed by 14.81 t o ~47,504 in 1983 . An esti ma ted two-th irds of t ~e

survey far~s h"d " net operat i ng cash Income in the SI 2,584 to SB2.424 r~nge.

8y in specti on, the number of farms wit h ser ious CaS h f low problems Increased

fr~ 1982 to 1983 , with almost ~e fa rm tn ftv e Showing serious cash fl~

probl~s and high de~t lo~d per cow.

•••

Table S. fs t l~.ted Aver.ge Clsh Far. Elpenses , 58 Sele<ted Nor th C.rolln. Grlde A Ollry F.r~s . 1982 and 1983

1982 1983 • 01 hh l l of fohl ,,,. S/F.'III Cish h penses S/F .r. Cuh hpensu

Purchased feed 10,977 JS.J 80,0. 5 36.5

Cr op exPfftSl! 21 , 712 10. 8 21,427 , .. Poooer and rlllehi"ery 33 , 162 16.5 32 , 466 14 .8

Hired I,bor 23 . 686 11 .8 25 ,662 11 .7

Livestock tlpense 16, 505 .. , 23 , 760 10.8

IntereH , tUtS , Insuranu 11 , 411 '.7 11,388 7.'

Gener,l r.r~ expenses 17 , 6t9 ••• 18. SlS ••• -- --10t,I c.Sh operating

expenses ' lDI,Il7 100.0 219.263 100 .0

TOlal caSh operatIng receipts ( fr Qlrl Table 4)' 256 ,877 2fifi , 767

Tol. l Ret operating tasl! tncOllle' 55 , 740 47 ,504

'Individual i leas III,y not eo~.l to t als because of rounding.

Net Farm Income

Nel far. Income figures are ShDWn In Table 6. C,sh rece ipts ,nd tlpenses must

b! adj us ted for non-c'Sh In,~e .nd costs , n.~ly changes In lives tock , feed and

supplies inventories , and bu il dings a~d m,chlnery deoreclltlon ch,rges , In order

to ~re fully describe the a~nual earni ngs of dairy far~. Table 6 sho~s that net

firm IncOlnt for 198] was Sl6 , 460. only '5, U of t"'e 1982 level. This result occur-

red becluse of a decre.se In the feed Inventory and larger deprecl.tion c ... . rges.

Net f.r. Inc~e ranged fr~ less th,n -Sloo,ooo to acre th.n +S9O ,ooo , bul two_

th irds of producers are fsti.ated to have earnfd a net far. Income In t"', -S19.616

-,-

Table 6. Estimated A¥erage Net Farm Incom~. 58 Sele~ted Nor th C.rolln~ Grade A Dai ry Farms, 1982 and 1982

Ite~ 1982 1983 lS) IS)

Net operating cash fl ow (rr~ Tab le 51 55 ,140 47 ,504

Change In Inventories 3,054 • 5, 960

Tot., " ,M' ",~' Les~ depreciation charges 22 ,310 25 , 084

Net farm Income' 36 ,493 16,460

Net farm ;nc~ Is a ~re accurate description of dai ry rar~ earn ings

t~an net operating cash income , but the non-caSh nature of in~entory changeS

and depreciation Charges Ii such that these Items .re likely to ta~e longer

to Influence m ll~ produc ti on th,n cash It~5. For example . ~ach lner1

replacements can be de layed or ~Ou9ht forward. However, in 1983 on average,

these N. C. da irymen suffered a mark ed de teriora tion from an operati ng 'aSh

flow st~ndDolnt . and when t~e non-C4S~ Items are consi dered, the picture

is one of mar~edly lower real dairy farm e~rn tngs. T~l s de ter iora ti on

Is likely to n.ve an effec t on ~ilk produc t ion in l~e coming months.

Returns to Unpaid Input~

80th ne t operating fa~ Income and net far~ income gtve an Indicati on

of the present and Immediate fut ure (In~ncf41 ~e.lth or the dairy industry.

However , • continued supply of milk also depends upon the returns t~.t •

da i ryman receiveS on tne labor , land and other assets , and management sk il ls

th~t are supplied by the operator . nd his fam ily. The fundamenta l concept

·10-

orod~\lo. they .~t e. pec t to re<el ve ret~~$ fro- d.l ryl", th.t "e . t

le.,l .s , re.t .s those to be e .rn~ on the 5.-e input s In . Itern,l lve ~es .

In 1 ~1, section of t~e rep~ t, t~e i l l oc, t l~ of net f.rm I nc~ to t~e'e

llOor ."d 11,'1'9_"1 I~coee

1.ble 7 Ibows • vi l ~e of 11 6,460 IS ne t f.r. IncOle for 1' 8]. However ,

for 1M] t~e Interest ch.rge 011 the ¥tl ue of Ute far,. aueU owned by the

o,er.tor, his ~el wor th, . '1 estt.,te4 to be $l7 ,917. this repre'e~ t ' • ll .O1

decr,.s, 'r~ 1982 . and II .ttr tbut ,ble pr l • .,l ly to • lower I~t,rest r.te f~

1"]. Sine. the In ter.st ch.rge e. ctlded net f,,. Inc~ , there w., •

ne"tlve return to I.bor .nd . ,n. g_nt. t nls ~a$ure ref lec t s lhe relurn

to • d,lry..n for ~I' role IS worker~.n .o. r .

',ble 7. htl.atld A~er 'ge Returns to l .bor ,nd """9"lIt , lIorth C.,olln, ~.de A o.lry hr • • 19l12 ... .,d 1M],

,,- 19" IS)

'" hr. InC(IIIII! CfrCJll h bl . 6) 36 ,493

less In teres t on net -orth' 17 ,910

itetllt'll to IIbor II'Id lI4II.gflll'ltb _ll,.n

less ~. l~ of oper' t~ ~d wnp,ld ,,.11, 1.bor 19 , 784

iteturn to M.nge.e.,tb -31, 261

sa S.lKt ed

'98' (II

16,'60

37 .'1 7

-ll ,.58

20 ,841

.4l , l99

'Interest ~'I ch,r,e •• t 11 perc,nt o( net wor t~ for 1912 and , t 9 PtrCfflt f~ 199J .

bit .... , not 6dd btu"". of rOllftd l ~,.

cOper.t~ I,bar w,s v. lued ,t SS,3S/hour (or 1982 . nd SS.6S/hour for 1983 , b,sed on t he . ver.ge hour ly r,t , p,ld to textil e wor~er , In Har tb C.rolln,. F .. il, I,bor WI' ,. Iued It t he ~t nl.us w.g~ r.te, 'l.l5/~our In both }98l I.,d 1983.

-11 -

Table 1 41 \ 0 ~ho.~ a value of 520 ,841 imputeG to ooerator and unp.IG

r6~ll1 "bor . Tbls represents, 5. 31 increlse o~er 198Z, It tr i but a~Je to

'~what higher wlges In the ~o~ - farm etCnGm1 of North Carol In. , althoush

there waS no Increase in the mlnlsum wa~e. Tne Interest charge ana I,bor

value tltceea net farnl ' ncOlll!, leav lnS a negative l\lIOunt , -S4 l ,299, IS an

averlge re t l/r" to IIIInagemenl. Tills Imoll es tn,t , on .~er.ge, these d.1r1"len

did not earn the esti mated .ar~ et vll ~ of t~e fanll ly" resources. Two.thirdS

of the da irymen In the stuay were est lmatea to have a return to ~.n.gement In

the -S80, 8BB to -\),660 rdnge , and few ddlr~n earned a oosl t lve ret urn.

However , these figures do not consi der any change In the va lue of tand ~ned.

laber , Management ,nd Ownership InCa-!

Table 8 present' a~ est Ima te of labor , manag~ent and ownership Income

the co-blned return to the d.ir~.n for hIs role as wor~er-~nager , financi er

and owner , Ind includes the change in rea l est.te v.l uu. It .. eflecU the

combined return on owner dnd '''''y labor ¥ld equ i ty cap i tal (net "'OrthJ , ~nd

(~r .. n.gene"t and rIsk t.%I"g.

T,bl. B. (stl.a ted Aver'ge LabDr , Man'9~nt and O.nershl p Inc~ . sa Se lected Gr.de A O. Iry FIniS , 1982 and IS83.

,,,. 1982 19B1 m (tl

' 0< f.,.. ' n CMe (frOlll Tab le 6) 36,49) 16 ,460

Chlnse In re. l e\t.te va luea I, S41 10 ,130

L.lIor , m,nagemen t rd ownership Income 38 ,441 26,590

'Rea ' est. te values Incre.sed II In 19B2 and Increased st In 19B3, based on USDA dat, Ilubllshed in "F,r. Rell ESlate Market De¥e lo~ts," Illpl led to the Jlnuaf1 1st va lues of '.nd owned.

bltems mlJ' net add because of round ing.

-11-

Return on Net Worth

Return on equi ty c~pltal (ne t wort~ ) Is a common ~.sure used to ~va­

luate the per fo r~ance of a business (Tabl~ g). Re turn on net worth was

obtained by deduct ing the val ue of operator and unpaid labor and a charge

tnr management from the labor, management and ownership Income. The In.n_

ag~nt ch~rge was based up on th~ cost of hiring far~ "anag~nt services

such .S from the trust depar tment of a bank.

When rea l est,te appreciation wa s Included , the return on net ~orth was

56.164 for 1982 and a negative return of -S6.599 per farm for 1983. Th is

"losS " in 19B3 Is equIvalent to a -1.51 annu~ l rate of return on net wor th.

When real estate apprecl,t lon was e~cluded in calcul atIng returns on net

... orth. the annual rate of return on net worth aver'ged -3.on for I9B3. The

1983 re turn s were negative because the value of operator and far..l1y labor and

the lllan,ge'llent ch arge ~Jceeded total hbor , .. anagemeflt and ownershIp Iflc~.

ror comparison, the annual average yield on three_month Treasury Bills was

10.71: Ifl 1982 and 8.61 !n 1983.

Imp! icat Ions for Futur~ "ilk ~roduct ion

Tht$ section of the repor t has described the returns to the Inputs

lOu pplled by the farlll operator and hili hnlily for 1982 Md 1983. The data

$~OW a Signif ic ant deterioration In the returns from d~lryln9 from 1982

to 19B3. rurther~ore, the 1983 reSults suggest ra tes of return thAt are

high ly unfavorable by most standards. For 1983 the average return to

managemtflt and the return on net worth suggest earn ings below that from

a l t!rflati~ e uses of operator afld family resources. The smal l Increase

in land dPprt(lation does not alter the picture appreciably .

Table 9. Eslima ted Average Return on Net Wor th, 56 Selec ted North Carol ina tirade A D.t ry Farms , 1982 and 1983.

It",

Incl uding Change In Real !state 'Ialue

Labor, management and ownersh Ip In ~ome

Less : Value of oper ator and

unpai d hmi ly labor

Value of ~na9~nt at 5~ of cash rece ipts

Return on ne t worthb

AmOUnl of net 100r tli

Rate of return on net wor th

E ~cludln9 Change in Real Estate Value

Return on net worth ( fr om above)

Leu:

Change in real esta te

Return on net wor lhb

Amount of ne t worth

Rate of return on net wor th

1982 m

38.754

19,708

12,882

6,164

449. 91 5

1.41

6, 164

2,009

4, 155

449,915

0."

1983 ( S )

27 .497

20,107

13 , Jl!9

- 6, 599

436,351

_1. 5~

-6, 599

10. 443

-11,042

436,351

-J.9~

aDd ta are for S6 f, rms only, because 2 far~ Showed a negative ne t worth in 1983 and therefor e , a rate of return on ne t worth cannot be cal culated for them . ,

ItemS may not add because of round in9.

O~er the long h,ul, the supp ly of milk Is affected by the rela t i ~ e

attrac t l ~eness of dairying compared to the a lternatl ~e uses of fa.'lIlly

resources. The poor returns for 1983 are li kely to dtscourtlge further

Increases In mi lk produc t ion. These long _term effects are reinforced by

the poor net cash f low, and the s~a l l net farm Inc~.

Net Worth and Debt Cormltments

Assets Used in Oal ry Far.l ng

I nvest~ts requ ir ed for dairy farming are large. The average In~est _

ment per far~ amounted to S~48,41 2 In 1983 (Tabl e 10), Dr 55,230 per cow .

Land and buildings accounted for 441 Of lotal Investment for 1983 anc!

lhes tocl: accounted for 281. Business Ihbl1lt1es dIIlounted to \ 121,265 for

1981. leav ing a net worth of \4 21,148 per far~ , on average. Net worth

decreased 3.41 from December 31 , 1982 to December 31,lg83 because repor ted

asset values decru.sed D.9l and liab il i ties Increased 8.51. The Increase

In liab il ities probably reflects the general deterior ation In operat ing cash

flows because static herd sl~e and lower year_end investments in build ings

and lIIachinery suggest a 1ac~ of .."Jor new In~estnlents. The Increase In

land va lues reported by the cooperat ing farme rs was caus ed main ly by

increased value per acre , with fe. reports or add i tiona l land purchases

during 1981.

Liyestoc~ lovestment decre~sed 5.6' bet.een 1982 and 1981 because

of lower I'rices fcr dai ry cattl e. The qeneral declloe In cow value~

anll -.eat demand for a~r l cultural laod is cause for some concern because

of the ",{feet on the ava i hbl1lty of credit for dairymen alrudy huvlly

In debt. Lacl: of credit coul d be the deciding f",ctor In the ability of

a fdr~ to continue to operate , although this study gives little Infor~dtl o n

as to the e.tent of this probl~ .

_lS_

T.b le la , Eu lm.led A~tfl9t riel Wor lll Statement , sa Seltc:led lIor th Carol ina Grade. Dai ry Farms , Deceeber 31 , 1982 .nd 1983.

Assl!ts Accoun t s rece habl e lJ , 86Z 3] ,039

Build ings, clepr ec la t ell v.1 ue 28,891 27 ,061

Machinery , depreclt ted u l ul! 60,851 S8 , SOD

Fe!!d . crops and suop l l!!s 43,%0 36,880

l ivestock 160. 'U1 151 , 901

l,nd 196 ,673 21Z, 728

Mi l k bas!! 28.116 28 . 2'12

Tot.l ISS!!U' 55) , 350 S48, 41Z

Liabtlltl!!s F.rm lI.blllt ies 117 ,257 127 ,265

Net .. orth· 436, 093 4Z1,I48

Indebte4ness ,"d Debt P.yments

T.ble II presen ts some common fl n.ncl, 1 me.sur es used in s tudying tile

financial per fo rmance of da iry hrms. Ih t! r . tlo of net oIOr th to the to tal

value of li sted assets , J, e" t he per cen t. eouily or owner Ship of the bus iness

u sets , .. as 78' for 1983 , dolln fr om 80' for 1982. Thh per centage ranged fr OC!

zer o t o I hl9h of IDa , II l th t we. th lrds of t~ businesses es t lm.ted to De In

the 6~ t o 901 r ange . Farm I I.b ll lt les Incre.sed by 8, 51 fr~ 1982 t o 198) ,

and reported asset ~.I ues decr e'Sl!d by 0,9' . s no tl!D abovl!.

Dur ing 198] thl! f.r~ busi nl!S51S gl!neratl!d SS9,2)Z, on aVl!r.ge. for

principal and lnter l!st p')'!!Ients , fa mi ly livln9 e ~oense 5 , sav ings Of

re lnvl!s t ml!nt , e t c. The comparabl l! f igure for 1982 ~a s S68,196, AnnYdl aeb t

-16-

pa~ls -ere 3.61 I~er In 1983 at S27 , 27 4, pr esumably reflecting the

poorer cash flooi poS1tlM of the~e farms , on the average , because there was

litt le evidence of Inajor new investments. The reSidual ¥lIount, S31,958,

wa s aY41lable for hmtly living expensl'S, re lnvl'Stnlent , etc. In 1983. In

1982 , the comparable f igure was S39,893, Indi ca t ing a significant droo fr~

year to year.

Table 11. Heasures of Indebtedness and Debt Payments , 58 Selected North Carolina Grade A Oal ry FarlllS, 1982 and 1983 .

I t("1l

Availabl e for debt service and family Ii v lng

Annual debt pafllll!nt -­principal and In teres t

Avail able for fa~l l y livln9, etc.

Debt payment as a percen t of Inll~ Income

Farm debt

Debt payment

1982 ($)

80'

68,196

28 , 30]

39,893

'" 5. 346

1.133

m

aData are for 56 r.r~ sho"ing a positIve ne t oiort h.

Size of Business and Rates of PrOduction

Selected Measures of Size of Business

1983 (S )

'" 59 , 232

27 , 274

31 , 958

Il<

5.Z3O

1.214

2"

The dairy farms upon Io'hlch the previous flnanch! Inform.,tl on was b.,sed

reported an average of S266 , 767 fo r cash farm receipts In 198], ., ] . 9~ Incr e.se

over 1982 . However , l otal fa rm reeelpt~ .....,re SZ60 .901 in 19BJ. virtUdlly

markedly ( T ~ble 12). ~erd si ze In 198J ~as up ~light ly fr om 1982 at

105 cows per fd'Ii\, but milk OOllnd~ge sold iMcrused by 3.&S t o

1.&14. 295 PDUn(lS. TM dcr UQe of eroolalld f~rflled was simI lar il! both

years at approx i~dtl! ly ZI 5 ~c.es. In 1953 It re ~lI ired J.7 mM·yeus of

l~bo r t o take C4re of tne d~ i ry ner d, La produce c.oo. for the dairy her d

dnd to produce some croos and ot her l ive~ l ock fOr \dle. Man·ye.rs o( l abor

is the ~M Udl tolal of lII,ft - eQul Ydl enlS of oper ator . (dIIIll y and h ireo hbor.

4 min_equivalent eoudls twel ve months of labor used . labor suppl ied IIy

04,t ·t i_ workers and chil dren was conver ted l O Its equi valent of m~lI -years

of l abor.

Table 12. Selec ted Measur e\ of Si l e of Busines s , Averdges f or 58 Se lect ed Ilortn Caro lina Grade A Ddlry far ms , 1982 end 1983 .

I tem 19B2 19B3

C~sh hrm incOITIJ! S256 , 811 1266 , 767

Total fdrm recelcts JZ59 , 94J \ :/:&0 , 801

Pounds , f mi Ik sold 1,558,235 1, &14 , 295

Number of cow~ 10' lOS

~cre~ of cr oo l and fa rlll\'d 2ll '" H4n·years of hrm la bor l . 6 l . 7

Ne t 'lor tn U J& , OgJ 1421,14B

these me d~ Y reS suggest tha t tne f~r~ resour ces used by l hese aairy

fa rms Chdnged lill Ie dur ing 1983. on average . The fi nanc i al medsures

sugge51 lhat lhese r esOurces generated higher CdSI'I Inc~, althou9h this

tncrea~e bare ly tel)l oace with the generd l rale of inflatIon.

Selec ted He.~ures of Rat es of Pr oduct ion

Produc ti on per cow was 2.2S ~ \ g~ e r In 1983 c~p~red to 1982, at 15,395

oounds (T,ble 13 ). Thi s Is pr obab ly the r esult of genetic progress and

'.proved rnana~~nl, st . bl e herd si ze af t er severa l years of growth , and

culli ng poorer cows th. t were not profitable under current feed cos t s and

.l lIt orl ces. Production per CO'<l v.rled con5 l der~b ly from herd to her d, with

two·thlrds of t ~ herdS es tlm. ted to lie withi n the 13,492 to 1' , 298 pound

r .nge. At ' 2, 273 !Jer cow , II'Ili k IncOOi'e W.llS 2.81 hi gher In 1983 th. n In 1982.

The Door growing se.son In 1983 Is reflect ed In the corn s l1age harves ted

oer . cr e .nd per c.ow. C(llWS i>!r •• n . nd IrIllk ules poer .. n-ye.r of da iry

I.bor showed l lt l le ch.nge In .verage I. bor effic iency In 1983 over 1982.

M ll~ sal es aver aged 4~ ) , 881 poundS poer .. n In 1983, • 1.21 increase . with

two_thirds of the f.r~ In a fa irl y wide r ange of 300 . 891 to 586 , 811 poundS per

man. Total fa rm rece ipts oer ~.n W!re S69 , 6OO In 1983 , • l.ll decre.se fr om 19SJ .

Table 13. Se lec ted Measures of Rates of Product ion , Aver ages for 58 Sel ected Nor t h C.ro lln. Grade A O,l r~n . 1982 and 1983.

,,~ 1982 1983

PoundS of 1'11 1 k so ld per cow 15,055 15, 395

I1 llk sales per '" , 2, 211 , 2.273

Corn si lage harves ted per acre (t ons ) 16 II

Corn silage equh',len t harves ted per cow (lons) " 17

H~ber of cows per ~an -year of d.iry labor " "

PoundS of II'I l lk sold per ~" -1ear of d.\ry labor 4)8 ,4 50 443 .887

Acr es of crODlind per man. y!. r of f.r. labor sa sa

Total far~ receipt s per I'I4n-ye.r of f.r~ l.bor , 11 , 892 , 69, 600

orH£R fACTORS

MaMy hetors other lhan those presented a!)ove 4Hect future .. ilk

productI on. At t he natIonal level, current an d futu r e dai ry legh ht lon

wI ll have a major 1-o4ct on ~orth Carolina. Ear ly i ndicat ions aTe that

the Mil k Diversion Progralll that began Otl January I , 1984 has ended

the almon flve-yur long e~pansion In mil t productIon. However , t he

di ver sion pr09r~ alone Is not lik ely to create a shor t dQ e of Class' IIIIIk

In North Caroli na, nor ."11 it r estore ~ balance between pr oduc t ion and

sa les natIonally. There dr e sever al r easons for this ; the 11)'01

part lclcatl on rate (20" na tiona ll y, 16S In /l aTth Caroli na), the fact thdt

ma ny p.rt lcl oants were al r eady producl n9 less ". I lk than thei r pr ogram base,

the likelihood that fIlCH part ici pants pl dn to I .. cr use production af t er lIle

progr~ endS on Harch 31, 1985 , and the lact of product Ion constraints on

non-partic ipants .

Di versi on pr ogram part lci p~nti and non-participants a ll~ e ar e

affected by the December I , 19SJ support price reduction , t he 1.50

per 100 lb. a5st$srnent and high feed prlceL The combined effect

of t hese fa ct ors will be to r educe ml1 ~ IIr oduc t ion. In the short

term these factor s lead to addi ti onal culling of low or oducl ng co-s

and, H sustained .. ill le~d to a reduction In the number of da i ry

'.rnlS . Ho .. ever , the feed cw t loo~ Is highly uncer14in "t present.

Corn and soybean stoc~ s are small and planting was delayed by the wet

Spr ing weatner. Good gro .. ing condit ions In t he Miowest wi ll be

necessary f or nOrlM I yie l dS and somewhat lo .. er prices nat iont l1y . In

Nor th C,rol ln" many dairymen neeo good weather to rep leni sh f orage

suoplles after llle 1983 drought. The natlon,l suppor t ~ I ce In 1985

"nd beyond wi ll depend on lhe provisions of the 1985 far. bil l, whi ch

In tu rn wl l\ be 4ffecteo by the . Inners In the ~oveaber general el ection.

-20-

CO'lSUMr clelland for vir t u.lly all products Is lI~el1 to Incrent as

t ~e ec~~lc recovery continues and .s the neM n'tional oromotion prog""

gels unOer w'y. The fcanonlc recovery . 1so should I~prove the aff_ far~

.1ttrn.ll wu for dairy far. ,. .. l lIu . Interest rates ~re sttl l IItgh

enough ~d returns 10_ enough to discour age ~Jor Investments by . _i s tlng

d.ir~n .nd e .. try by others interested In dairy f.r.lng. Curren t

Interut rates are high enou'Ol" t o cuse clsh fJOOI problems for he<lvlly

indebted businesses wIth varl,bl e ra le lo.ns or businesses needing

short-ter. loan s. The debt 10,d of .. any d.lry bl/stlluses has been

Incr easing and the .blli ty to Sery ice thi s debt Is c.use (or co .. cern,

tllest r.ctors suggest thH current (May 198.) political and econcrntc

condl t l0'l5 h.ve brought to .n end the recent Incruses in .. 11 k ~roduct ion

by Nor th C.rolln.' S dairy Industry , al though Cl,ss ! s~~ l les r~ln

adequate. However, condi tions co~ l d change dr.stlcally in the c~'ng

II(Inths , depending on the effec ls of Iolu ther on f()l"ge s~pplles .nd

f eed prices. and the c~ul.tl¥e effects of ~.I' net far~ Inc~s In

put yurs. These fact()l's requ ire careful lIOnit()l'lng.

StHtO\RY AHO CC*CLUS IONS

The farm business data presented In this report shew th,t In gener.l.

1983 was a much less h~orab le year than 1982 for the 58 North Carol I",

d.lrymen who cooper.ted In the study. The . ver age blend price

received for .. Ilk in 19B1 ""5 514. 16 per l DO pounds . and the net costs

of prod~ct l on were S17.38 per 100 pounds of "'1k sold. For 1983 lhe

return to llaMgemen l wu (neg. tive) -52.62 Der 100 pounds of milk

SOld , c~pared to a -52.DO relurn per 100 poundS In 1982.

The blend pr ice Increased by 0. 5% and lhe quantity of "li t sold per

f.r" Incre.sed by 3.6% from 1982 to 19B3. lht total value of .. l l~ sold per

-21-

f.rm Increased by 4. IS. Tke t ot. 1 net cost of prOdutlng m\\~ per farm

Increa~ed by 7.9S from 1982 to 1983. Th is cosl Increase was tke result

of Increases In purchased feed cos ts , labor costs , depreciation ckar ges ,

a~d the fe dera l mjl~ as sessmen ts pa id duri ng IS8J. ~Iso. there we re fewe r

non _mil k recelots to offset production costs . r~ on ly i tem to ~os t a

decrease was the Interes t ckarge on net worth.

An e~ am l n . tlon of other ~asures of bus iness perform.nce provi ded -are

Informa tion on the f in.ncla l condi ti on of the cooperat ing far~ in 1982 and

1983 . Net opera t ing C. Sh f low was 14.8S lower in 1983 than In 1981 .n d,

even though the Infla t ion r. te moderated to 3.2~. t he major i ty of bus inesses

h.d more di f fic ulty ~et in g operati ng e~penses in 19S3 than In 1982 .

Other measures of farm earnings were less fav orabl e . also .

Net fa rm income, I . e., ne t ooera t ing caSh Income adjus ted for non_c.sh

I t ems , was S16 ,460 in 1983 , on ly 45 percent of t~e 1982 level . Thus the

return ~ to the resources supplied by the oper~tor and his fam il y were m~h

lo~er In 1983 than in 1982. Net farm inc~ was too s~al l to provide a

ret urn on net wor th lequ l ty cdp lt . l) eoua! to mar~e l raleS dnd to provide

the ~ar ket val ue of operat er and faml! y labor . Therefore. there was a

ne9ative residual amoun t . s a return to the operator for ~anagement.

This impl ies t ha t the aver 'ge operator ~nd his f~lly are not earni ng the

estimated ~r~et value of their resources. An ~ ltern'l i v e measure . return

on net North (equity capita l) also Showed a negative ra t e of re turn. These

results were improved li t t l e by a smal l Increase in reported far~land values .

based on USDA es t imates.

l~ dat a presented show a dismal pi c ture. Opera ti ng c. Sh f lows were

lower in 1983 compared to 198~ , net f.r~ ! nc~ deteriora ted ser ious ly, and

t he returns to famil y resources cont inued to be far below the ~.r~et val ues

-22-

.uumed h~re . Th~ fin.nchl ~ond i t l on .. des~rlbed in this report ~re likely

to lead to a red~~tlon In total production. Future produc t ion dlso wil l be

affec t ed by the .!ct IO!1s of par tici pants in the mt1~ diversion prograra and

t he respO!1se of nM-partlc ipants to current eConQRIic condit i ons. T~ e effects

of the ~ather on feed pr ices and the ~va l l.b ll i ty of for age are of major

impor t,nce . Loo~lng f ur t her ahead, lhe prov i sions of the 1985 f.r~ bill

.1 11 have f,r_reaching effects on dairy fa rmers ~d ~i l k produc tion across

t he n. t ion. Over.ll, the combination Of economic and politica l events is

Ihely to l ead t o lo .. er ~;I~ productlOl1. flallever. lhe magnitude , nd timing

Of th is change Is dlffl cull t o predi ct, Md car eful moni t ori ng 1Ii11 be

neC!SSdry .

J.)bl~ 14. Aver.ges .nC! HeUllr~s of Vartabl1lty of Selected Measures of Business Performance for ~B S~lect~d Hort~ C.ro l'"~ Gr.de A Datry Far lllS, 1981 and 1983

198Z 1983 ,,,. Ave"!1~ • Net cost Of producing ~llt ,

S, D. Average

oer 100 Ibs. U6.69 n,62 Sl 7.Jll

Blend pritt of 1II11~ per 100 Ibs . SIt.59 10." S14,76

Re turn t o ~an'9~"t per 100 Ibs. -S 2.00 S3.51 -5 2.62 I ot,l caSh Incoue S256 ,811 1I 23 , B33 5266,167

TOlal cash e ~penses S201 , 131 5109,468 5219 , 263

Net oper.llng cas h income 5 55,74D 5 30 ,750 5 47.5Dd

Het farm Incom.e , 36 , 493 , 35 , 204 5 16,460 Ret urn to m.nagem~nt - 5 31 , 25 1 S 38 , 539 -, 42 , 299

Labor , mdn'9~ t .nd ownersh ip Income S 38 , 44 1 , 35, 247 S 26 ,590

Rea l eslat e apprecl.tlon , 1,94 7 , 1, 436 S 10.130

R.te of relurn on net worlhb

- Including .pprectatton 1. 4" 8.B" _1.5" _ exc l uding ,pprec l atl on (" ) 0.9~ 8.B" .3. g:r;

Tota l .sse ts 5553 . 350 S298,829 5548,41 2

Far .. liabili t ies SlI1 , 2S1 Sl36 , 124 1121 , 265

Nel ;oorth S436, O(;) S239,194 5421,148

Percent eouityb ... ,. 15.61 18, n

Annual debt o.~nt S 28 , 10] S 24 , 427 S 21,U4

Ava i labl e f or f .... ill 1\v in9 S 39 ,893 S n , 201 S 31, 958

Tot .1 .. il k ules n bS.) 1, 558 , 235 737 , 256 1.614,195

Cow nUI:'.!ler s ( ~e.d ) 103.5 48,2 104,9

Mil k sol d per COlo' (I bs. ) 15 .055 z.on 15 , 395

J4ilt InCOIIIe per cow , 2 , 21 1 , 300 , 2, 273

F.rm l.bor (man-years I 3.62 I." 3. 1S

5 • D. • SJ,28

10.68

n , 28

S131 ,630

SI2~ , 170

S 34, 920

S 35 .135

S 38.504

5 35, S11 , 8,298

13. 5" !l ,41

1295 ,953

S144 ,482

S240,009

11.61

~ V , 538

S 31 .482

185 ,475

50 .3

1,90) , '" 1.69

Receipts per lI1~n _lur of labor "1,892 S 25 , 474 S 69 . 600 S Z1, I07

i s • D• refers to the st.ndar~ ~e ~ l. t lon , a me'Sur e of the distr i bution of observed values about the mean or average va l ue. If the distribution f ollo" 5 the "nor ... I" or tie l1 _shaoed c Y~ve , then 68S of t he observed , Ind I ~ Id ua 1 f ,rll values sho\lld lie within pl1l5 or ~ l l'l\ls one standard deviation fr om tile aver age (or "".n) value. and 95 percen t sholJl d lie _ It hln pl us or ~Inus t .. o standa r<l dev i ations from the .-e. n.

be• la f or 56 fa rms sho .. lng a nel _or t h 9reater than zer o.