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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Cost of production (dairy)

What is a dairy farm's cost of production, and how does it differ from breakeven?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A dairy farm's cost of production is the cost of producing a unit of milk, per kilogram of milk solids in New Zealand and Australia or per litre in the UK. Definitions vary, but it usually counts working expenses plus depreciation and an allowance for unpaid family labour and management, and leaves out interest and rent, so it measures the farm separately from its financing. Two farms with the same cost of production can have very different breakevens, and a lender compares it with similar farms to judge whether the operation or the debt is the problem.

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.

// WHAT IT IS NOT

A breakeven milk price is the payout that covers every cash commitment, including interest, loan repayments and drawings; cost of production measures the cost of running the farm before it is financed.

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