What Drives the Financial Success of a Dairy?
Gary Sipiorski, Gary Sipiorski Consulting, LLC
December 3, 2021
Is looking at the past an indication of the future?
Civilizations have advanced to make life easier. Industry and agriculture have led the way in advancements. We have moved from hand tools, ox – horse – power, the industrial age, steam power, internal combustion power and now computer power.
Industry has given us new the tools, agriculture has made food abundant. Progress will continue. Technology is driving change.
There was a need for an increase in US milk production after the civil war until 1945. During WWI and WWII, the US needed milk for domestic production and additional production to feed the world. In the early l 980’s milk cow numbers and production exceeded the domestic consumption and government milk support shrank to $ 10.
Dairy producers were on their own to stay ahead of escalated expenses. The technology of refrigeration, innovations in manure handling, planting, forage production and high-capacity water pumps for wells was changing the dairy landscape. Frozen semen, genetic progress and now genomics drove milk output and now drives production efficiencies. Those that accepted the new tools grew. The slow-moving milk price was not keeping up with the faster moving input costs. Milking more cows to spread the fixed costs over more animal units led to producer innovations and profit. Technological progress in milking facilities, housing and cow comfort accelerated size of farms.
Where are the cows going?
The cows will go where the cows are welcomed. They will go where the processing plants are located. Where there is water, where feed is plentiful and affordable. Cows will be welcomed where people work and live near cows and accept the activities associated with livestock.
Current issues to contend with!
2020 was loaded with government payments contributing to over 40% of agriculture’s net income. That will not happen again. The year was littered with volatility and the Fed’s adding to the money supply. A multitude of events have created supply chain disruption. How are you prepared for what could be next?
As the consolidation of dairy herds continues the cost of production is being driven down by more highly efficient herds. $14 and $15 COP is being achieved by the very top herds. While the average COP of production remains at $18. Inflation is mushrooming every expense on a dairy. Yet the milk price and total dairy revenue struggles to keep up.
The answer has found itself in larger facilities that are milking more cows per hour and producing more milk per hour. Over-crowding housing while trying to keep cows c9mfortable has increased to 120% even 150% of capacity in some cases.
Labor is the second largest expense on a dairy followed by feed cost. Automation in milking facilities for prepping and dipping udders are continuing to be used and developed. Feed pushers are now mechanical. Robots are being used on larger herds. New expansion and remodeling have a goal to eliminate the number of steps employees make and minimizing the number of workers.
Gains in technology keep driving seed varieties, precision planting and faster harvesting of quality feed. As capital investments rise, owning, leasing, or hiring custom work decisions need to be thoroughly calculated and thought out.
A key question is, “Where and how many more capital investments will be needed to increase production and profit in the future?” The investment per mature cow for herds today will range from $8,000 to $20,000 per cow. Key contributors to the investment numbers are housing that is needed depending on the climate-location, machinery used for planting and harvesting. An even bigger investment asset is land.
Remember it’s the “cows” that make the money!
Not always possible, however the most efficient dairies milk only cows. They have a milking facility and comfortable housing. Therefore, the only labor needed is to milk and care for the cows.
Further asset investment and expenses now comes from how does the feed get to the dairy? Forage needs appear to be moving to higher corn silage diets. Hay and haylage is on the decline. This is all being driven on how many more tons of quality forage can be harvested per acer. Corn silage and haylage both contain a high percent of moisture. How far and what is the costs of moving that type of water?
The future depends on domestic consumption and exports!
At the present time there are 9.5 million dairy cows in the US. Before the 1980’s milk cow numbers and production satisfied domestic consumption. By the 1990’s the US exported products that were in excess of what the nation needed. Other countries just got what we had leftover regardless of if it met with their appetites. Today exports are critical at 1 in 5 pounds of milk leaving the US. If the abundant supply of milk is to continue worldwide competition must be realized. Produces must meet the specifications and price of the importer. A world buyer of dairy products does not care which country fills their orders. This will continue to place additional cost of production pressures on the US dairy producers.
Evaluating the carbon Market and Methane future!
Worldwide social and political opinions are driving the climate change discussion. Social media may be taking the platform. However, government policies will foster regulations. The debates may continue while some in the business of milking cows see opportunities. Herds that are large enough to justify digesters have made investments to produce electricity or gas. The return does vary from market to market. Future energy income from this type of technology along with crawling milk prices could find the dairy breaking even with milk income and profit from energy production. Europe is ahead on this topic with government support to farms of all sizes.
Even though this technology has been around for 20 years advances in science and engineering are continuing to move forward. With the present mind set, future innovations, equipment and structures could hold financial advantages for many.
It will be important to research and study what facilities are best for your operation. Relying on consultants, engineers, energy buyers, accounts, lenders, and attorneys is critical in making decisions. Investment money may come from nontraditional sources.
The methane reduction and capture issues now take on a different approach. Nutrition’s will play a key role. Forage programs, feed ingredients, and additive recommendations from nutritionist will be a factor. The capture of methane will require technology and an investment. The dairy industry is ahead in many ways in dealing with Green House Gas issues. The importance of dairy as nutritious food source is critical to human health.
Educating the public is important as generations of consumers are now born further from where food is produced. It is important for the industry to stay in tuned with social and governmental policies.
What will it take to be in the game
In the past taking care of the cows along with growing or buying high quality feed made a dairy producer money. Today the qualifications are much higher. A margin must be maintained. That means at the end of each day what are you keeping? The only way to know is you must be on top of your financials. “If you are going to manage it, you have to be able to measure it.” The answer can no longer be, “That is the job of my bookkeeper, accountant, or lender!” The dairy producer today must be a top third global producer. You are competing with the world.
That means you must know and have:
Yearend Current Balance Sheet for the dairy and a personal one as well.
A yearend Accrual Cash Income Statement.
A Projected Cash Income Statement.
Know, understand, and apply Key Ratios and the Farm Financial Council Standards.
Here are few to begin with:
Debt I Assets with a range of 30% to 70%
Current Assets I Current Liabilities 1.5:1
Operating Expense/Revenue Ratio6 5%t o 80%
Interest, Principal and Lease Payments not to exceed 20% of Revenue
Operating Profit Margin 10% to 25%
ROA 1% to 5%
ROE 3% to 12%
Business IQ (Dr. David Kohl) a checklist and score card can be found online. This will help with “critical thinking”
Knows cost of production (COP) – Written
Knows COP by enterprise – Written
Goals – business, family & personal -Written
Record keeping system – Accrual
Projected cash flow – Written
Sensitivity analysis – Written
Understanding financial ratios, breakeven – Written
Work with advisory team and lender
Marketing plan written and executed
Risk management plan executed
Modest lifestyle habits, family living budget
Written plan for improvement
Attends educational seminars/courses
This paper is based on history, experiences, and the author’s opinion. Each person must draw their own individual conclusions and decisions for what is right for their business.
Editor’s note: The author is a financial consultant with long experience in dairy farming, banking, and company management. He may be contacted at email@example.com or by phone at 608.279.8213. This information was presented at the 2021 Western Dairy Management Conference and is used here with permission.