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Factors You Can Control on Your Dairy Operation

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Greg Steele
Home > Education & Events > June 2018 > Factors You Can Control on Your Dairy Operation
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Dairy producers across the regions are reeling after they have received 2018 milk checks that are much lower then what they have seen since the downturn back in 2009. The reality is that they have significantly less revenue to manage their business with.  So what can be done? There are a handful of strategy’s that will work in most any downturn. Here are several practical steps you can take that are within your control that yield results.

Keep Financials up to Date
You’re probably asking yourself what you can do to positively impact your business. Making sure you have a reliable set of accrual financials for your business is a great place to start. They will be invaluable. Being able to monitor the actual performance of your business to the budget forecast is a key business fundamental. Looking to the coming months and anticipating shortfalls in cash flow will be very important in 2018.

Producers with working capital stored on their balance sheets will be at an advantage this year. In absence of working capital, many producers will have to turn to their lines of credit. Producers who used previous profits to reduce credit lines will have access to these lending reserves during this extended period of low prices. The other option will be take the cooperation of your lender, to gain access to working capital that may be lower down on your balance sheet. Working capital can be unlocked by refinancing exiting real estate loans and taking cash out to supplement working capital. This would only work if there would be adequate equity in real estate assets to support additional debt and most importantly it would cash flow.

Control Expenses
Another requirement of producers when reviewing their operating costs is looking at it with your business strategist hat on. The largest expense, is feed, which generally is the first cost to be evaluated. Experts would caution you against eliminating any feed ingredients, as that could impact production performance. While this is sound advice, many producers need to carefully review their feed costs as it represents 40-50% of the dairy farms expenses. A careful evaluation of ingredients should be made and balanced with the cost of the ingredients with how much they contribute to increased profits.

Controlling shrink with feed storage and handling can also have a big impact. Commercial dairy operations have very large quantities of forages stored in inventory and buy in high-cost ingredients. Producers can save thousands of dollars by improving feeding protocols and management to lower shrink by a few percentage points. Today, many feed professionals are available to visit a dairy to perform a complete assessment of you feeding practices which include feed mixing, handling and inventory management. This is a great way to identify and develop strategies to reduce shrink.

Feed is not the only opportunity to reduce costs. An area worth mentioning is net herd replacement cost which is defined as the difference between the cost of a replacement heifer and the value of the replaced cull cow. Keep in mind that the herd replacement cost is not the cost of raising a heifer, but rather her value as a replacement compared to her cull value. By carefully managing net herd replacement costs, producers can significantly impact operational performance and profitability. There are many expense categories that can be evaluated that will not impact production.  Producers should look over their five-year history to identify additional areas to reduce costs.

This also is a time to carefully evaluate capital purchases and only replace vital equipment and facilities.  Delay all non-vital investments in an effort to maintain cash reserves and liquidity. This should be the priority and will help prepare producers weather a down turn that lasts for an extended period.

Enhance revenue
This is an area that is getting a great deal of attention these days, as it should. Formulating your ration to maximize the combined amount of butter and protein sold per cow per day is having a significant impact on increasing the income for many dairy operations. It is a step forward in efficiency for the market rewards producers that sell high component milk. 6.25 lbs. is an ambitious goal for many Holstein dairy operations, however, it is the benchmark to strive for. Your nutrition consultant will be eager to work with you in the design of a high component ration, in addition to more money, it is also is healthier for your cows.

Cull the Herd and Manage Inventory
With today’s lower prices, the breakeven production where it pays to hold on to cows has increased. The dairy beef market can be a bit fickle and recently cull prices have improved so moving dairy cows out when their production no longer covers her variable costs in most cases is a good economic decision. With the wide adoption of sexed semen most every dairy business has a good inventory of replacement heifers on hand.

However, this is an area that can also yield significant savings to the business by not raising replacements in excess of what the farms needs are. We encourage you to work with you consultant, lender and reproductive specialist to understand what the replacement needs are for your dairy operation.

Expand Marketing Knowledge
Volatility of prices and expenses appears to be the one thing that has become predictable in the dairy industry. The market prices today may not provide much opportunity for profit. However, taking this time to work with marketing experts and business consultants to understand emerging opportunities and prepare a solid plan specific to your business will pay dividends. Today’s market might be a good example of pricing milk with the intention of minimizing losses. This can be difficult however, in some situations can prove as an effective way to identify and plan for the amount of loss you can expect.

Keep your lender informed
Throughout this time, it is important to keep the communications line open with your lender. They can often provide insight; tools and resources to help you effectively manage your finances during a challenging time. Lenders will welcome candid discussion. The ability to discuss options in advance of needs allows lenders to proactively identify solutions tailored to a specific producer’s needs and often results in producers having more options.

Nobody in the industry looks forward to a period of tight margins, especially after experiencing consecutive years of low dairy prices. However, making wise business decisions during this period will help producers not only survive but also strengthen their operations to fully benefit from the next round of high prices.

Greg Steele is a Senior Dairy Lending Specialist at Compeer Financial. For more insights from Greg and the rest of the Dairy Team, visit Compeer.com.
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