2C Comparison of Multiyear Averages

It is important to differentiate net earnings (profit) from cash flow. Farm businesses rely on cash flow to pay ongoing bills, but cash flow is not an accurate measure of profitability. Net earnings are an accrual measure of profit, which represents a farm business’s ability to provide an economic return for the operator’s investment and management. It offers the best measure of a farm’s profitability by adjusting cash farm income and expenses to reflect changes in inventories, accounts receivable, accounts payable and prepaid expenses. Conversely, some farms may show positive net income on an accrual basis, yet struggle with cash flow.

It is important to note that principal payments on debt, while a significant cash obligation, are not a deductible expense and must be paid out of earnings. Thus, both accrual net earnings and positive cash flow are essential for a dairy farm to survive and grow.

The average farm milk price at $26.66 per cwt. was $7.45, or 38.8% greater than 2021’s $19.21. It was $6.52 greater than the previous five-year average of $20.14 per cwt. (Figure 3A). In terms of actual (nominal dollars, not adjusted for inflation) milk prices, 2022 ranked 1st in the 43 years of the DFS. However, to better understand the true story of how milk prices have changed over time, we must account for the impact of inflation (Figure 3B). In terms of “real,” inflation-adjusted rankings, 2022 drops to 17th. The first year of the DFS, 1979, ranks first, with an inflation-adjusted milk price of $40.80/cwt. in 2022 dollars.