What is the difference between cost of production and breakeven milk price?

They answer different questions. Cost of production asks what it costs to make the milk on this farm, with notional charges for depreciation and the owners' labour so that any farm can be compared with any other. Breakeven asks what price keeps this owner's bank account from going backwards, using the actual interest, repayments and drawings instead. A lender needs both, because the gap between them is the effect of the finance.

Why is imputed labour included in cost of production?

Because otherwise the farms that use the most unpaid family work would look the cheapest. An owner-operator who takes no wage still works, and if the farm were sold or the owner retired, someone would have to be paid to do that work. The imputed wage puts that cost in at a standard rate, so a family farm and a farm employing a manager can be compared on what the farming actually costs.

Is dairy cost of production measured per litre or per kgMS?

It depends on how farmers are paid. In New Zealand and Australia milk is paid largely on its fat and protein content, so costs are expressed per kilogram of milk solids. In the UK they are usually expressed per litre, because that is the unit in which most milk prices are quoted. The two cannot be compared directly without knowing the milk's solids content, so a lender compares within one unit.

Does dairy cost of production include rent?

It depends on the definition. Australia's Dairy Farm Monitor Project reports interest and lease charges below its cost figures, so land rent sits outside them for owner and tenant alike. The UK levy board's full economic cost includes rent paid and adds an imputed cost for land the farmer owns, so land is included for both. New Zealand's benchmarking leaves the milking platform's rent out but charges support land to owner and tenant alike. In each case the aim is the same: an owner and a tenant compared on equal terms. The figure on a report needs reading with its definition.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Dairy Cost of Production: a Worked Example

What the milk costs to make, before anyone has lent against it.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

Is this farm struggling because of how it is run, or because of how it is financed? Cost of production is how a dairy lender tells the two apart. It prices a unit of milk as though every farm paid for the same things: the season's operating costs, the wear on its plant and buildings, and a fair wage for the owners' own work, with interest left out and the land treated alike whether it is owned or leased. A farm costlier than similar farms has an operating problem that more lending will not cure. A low cost and a high breakeven point to the debt.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

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// 01 — WHY A LENDER SEPARATES THE FARM FROM ITS FINANCE

Two dairy farms can show the same loss in the same season for opposite reasons. One spends too much to produce its milk. The other produces cheaply and borrowed heavily to buy the land. A lender that reads only the bottom line treats them alike, and gets at least one of them wrong: the first needs its system changed, the second may need only its repayments reshaped.

Cost of production makes the separation by stripping out the things that differ with ownership rather than with farming. A family farm whose owners take no wage looks cheaper than one paying a manager, so an allowance for unpaid labour and management goes in. A farm with new machinery looks dearer than one running old plant into the ground, so depreciation goes in. A farm with a large mortgage pays more interest than one inherited debt-free, so interest comes out. What is left is the cost of the farming.

// 02 — HOW IT IS BUILT, MARKET BY MARKET

Cost of production = (cash operating costs + depreciation + imputed labour and management

± change in feed on hand) ÷ units of milk produced

Left out in most definitions: interest, loan principal, drawings, tax, capital spending

Each market builds it slightly differently. In New Zealand, DairyNZ's benchmarking starts from farm working expenses and adds non-cash adjustments, among them depreciation, a labour adjustment, the change in feed on hand and a notional lease on an owned support block, to reach dairy operating expenses per kgMS; the change in livestock numbers adjusts revenue instead. Australia's Dairy Farm Monitor Project counts variable costs plus overhead costs, the overheads including imputed owner, operator and family labour and depreciation, and reports interest and lease charges separately, below earnings before interest and tax, with capital spending, principal, drawings and tax outside the costs altogether. In the UK, the levy board AHDB measures full economic cost per litre: all cash costs, including rent paid, plus depreciation, unpaid labour and a cost for owned land.

So the Australian monitor leaves land rent out for everyone, the UK measure puts a rent in for everyone, owner or tenant, and New Zealand's leaves the milking platform's rent out while charging every farm for its support land. Either way the owner and the tenant are compared on the same footing. Definitions also differ on whether income from livestock sales is deducted first. A lender comparing a farm with a benchmark checks that both were built the same way.

// 03 — THE EXAMPLE

Two New Zealand dairy farms, constructed for this page like every figure on it. Farm A produces 330,000 kgMS and borrowed heavily to buy out a partner. Farm B produces 300,000 kgMS and carries little debt. In NZ$ per kgMS:

Farm A Farm B

Farm working expenses 5.20 5.85

Depreciation 0.45 0.50

Imputed labour and management 0.35 0.45

Cost of production 6.00 6.80

Farm working expenses 5.20 5.85

Interest 1.80 0.60

Loan principal 0.50 0.30

Family drawings 0.40 0.40

Breakeven milk price 7.90 7.15

Farm A makes milk 80 cents a kilogram more cheaply than Farm B, and needs 75 cents a kilogram more to pay its way. The breakeven swaps the cost of production's notional items for actual cash: the drawings the family really takes instead of an imputed wage, the principal really repaid instead of depreciation, and the interest the cost of production leaves out. At a milk price of NZ$7.60, the example's:

Farm A: (7.60 − 7.90) × 330,000 = − NZ$99,000

Farm B: (7.60 − 7.15) × 300,000 = + NZ$135,000

Farm A, interest only for one season: 7.90 − 0.50 = 7.40 → + NZ$66,000

Farm A is the better farm with the heavier debt, and a season of interest-only repayments turns its shortfall into a surplus without changing anything on the farm. Farm B pays its way this season but earns NZ$0.80 per kgMS over its cost of production at this price, half of Farm A's NZ$1.60, and no repayment holiday changes that. Its question is the farm system, not the loan.

// 04 — THE MEASURES A LENDER READS BESIDE IT

Cost of production sits between two other numbers. Below it is farm working expenses, the cash cost alone, which a lender uses to question the season's spending line by line. Above it is the breakeven milk price, which adds the finance and the family and tells the lender whether this owner, with this debt, can pay its way at the price on offer. Cost of production answers the question in between: is this a good farm to be lending to at all, whoever owns it?

That makes it the measure a lender reaches for when the owner may change. A buyer, a sharemilker stepping up to ownership or a family member taking over inherits the farm's cost of production and brings their own breakeven. The lender reads the first to judge the farm and the second to judge whether the new owner's debt and drawings fit inside the price it is prepared to assume.

DEFINED IN ONE PARAGRAPH → · AGRICULTURAL LENDING → · DEBT PER KGMS →

// 05 — WHERE IT DECIDES A FILE

It decides what kind of help a farm in a bad season gets. A farm with a competitive cost of production and a breakeven pushed up by debt is a candidate for restructuring: a longer term, a season of interest-only, a sale of a non-core block to reduce the debt. A farm whose cost of production sits above similar farms needs a plan to change the system, and a lender lending more to it without that plan is funding the next loss.

It also decides how a lender reads a succession or a purchase, where the farm stays the same and the finance changes, as in Issue 03. And it decides the benchmark conversation. Because definitions differ, a farm's figure means little against a regional average unless both were built the same way, and a lender with its own farms in the comparison builds them all on one basis before drawing any conclusion.

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

NSW Department of Primary Industries and Regional Development and Dairy Australia, Dairy Farm Monitor Project NSW Annual Report 2024-25 — glossary — Defines overhead costs to include imputed owner-operator and family labour and depreciation and to exclude interest, lease costs, capital expenditure, principal repayments, drawings and tax, with total costs equal to variable plus overhead costs — section 02 and the FAQ.
Agriculture and Horticulture Development Board (AHDB), Trimming costs on your dairy farm — Cash costs include rent; full economic costs add machinery and buildings depreciation, unpaid labour and the value of owned land — section 02 and the FAQ.
DairyNZ, Western Southland Owner-Operator Annual Cash Budget 2026-27 — Below farm working expenses, depreciation, a labour adjustment, a feed inventory adjustment and an owned support block adjustment lead to dairy operating expenses per kgMS, while the change in livestock numbers adjusts revenue — section 02.

// QUESTIONS PEOPLE ASK

What is the difference between cost of production and breakeven milk price?: They answer different questions. Cost of production asks what it costs to make the milk on this farm, with notional charges for depreciation and the owners' labour so that any farm can be compared with any other. Breakeven asks what price keeps this owner's bank account from going backwards, using the actual interest, repayments and drawings instead. A lender needs both, because the gap between them is the effect of the finance.
Why is imputed labour included in cost of production?: Because otherwise the farms that use the most unpaid family work would look the cheapest. An owner-operator who takes no wage still works, and if the farm were sold or the owner retired, someone would have to be paid to do that work. The imputed wage puts that cost in at a standard rate, so a family farm and a farm employing a manager can be compared on what the farming actually costs.
Is dairy cost of production measured per litre or per kgMS?: It depends on how farmers are paid. In New Zealand and Australia milk is paid largely on its fat and protein content, so costs are expressed per kilogram of milk solids. In the UK they are usually expressed per litre, because that is the unit in which most milk prices are quoted. The two cannot be compared directly without knowing the milk's solids content, so a lender compares within one unit.
Does dairy cost of production include rent?: It depends on the definition. Australia's Dairy Farm Monitor Project reports interest and lease charges below its cost figures, so land rent sits outside them for owner and tenant alike. The UK levy board's full economic cost includes rent paid and adds an imputed cost for land the farmer owns, so land is included for both. New Zealand's benchmarking leaves the milking platform's rent out but charges support land to owner and tenant alike. In each case the aim is the same: an owner and a tenant compared on equal terms. The figure on a report needs reading with its definition.

THE IN-TRAY · ONE MINUTE

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THE NUMBER · THE LOAN · CAPACITY

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THE GLOSSARYIN ONE PARAGRAPHCost of production (dairy) What is a dairy farm's cost of production, and how does it differ from breakeven?