Dairy farm financial performance: firm, year, and size effects

The purpose of this paper is to evaluate dairy farm financial performance over time utilizing farm financial ratios from three university business analysis programs. The evaluation includes measures of profitability, solvency, and liquidity by herd size.

Financial ratios to reflect profitability (rate of return on assets), solvency (debt to asset ratio), and liquidity (current ratio) were collected from Cornell University, Michigan State University, and the University of Wisconsin for dairy farms from 2000 to 2012. The distribution of farm financial performance using these ratios was examined over time and by herd size. Variance component methods are used to examine the percent of variation due to individual firm and industry aspects. A simple credit risk score is calculated to examine relative farm risk.

Dairy farm profitability performance is similar across herd sizes in poor years but larger herds realized significantly more profitability in good years. Findings were similar with respect to liquidity. Large herds consistently carried relatively more debt. Large herds’ financial performance was more uniform than across smaller herds. Larger herds had more financial risk as measured by credit risk scoring but recovered quickly to industry averages in profitable years.

The variation of dairy farm financial performance in an era of volatile milk and feed price is assessed. The results have important implications for farm financial management and benchmarking farm financial performance. In addition to helping to evaluate the efficacy of various price and income risk management tools, these results have important implications for understanding the benefits of the new federal Margin Protection Program for Dairy that is available to all US dairy farmers.