Strategies for Modernizing Dairy Farms Without Adding Cows
“Can I modernize my dairy without adding cows?” That is a question I have been asked by a few of my clients over the past two years. To answer that let, me set the stage for where it all started. From 1995 to 2000, we saw the first wave of dairies in Wisconsin transition from milking in tie-stall barns to building new parallel and herringbone milking parlors and housing animals in free stall barns. These dairies started at a modest size of 300-500 cows and quickly escalated in size over the next 10-15 years. Free stall barns were expanded, new barns were built and milking parlors were added. Double-12 parlors turned into double-24 and double 36-parlors, and even larger. These dairies are now the 1,500-4,000-cow dairies we see today.
A dairy farmer would plan an expansion and ask the lender if they were creditworthy to build it and add cows. That first wave of expansions took place 25-30 years ago, and some of those initial parlors are now in need of updating, modernizing or replacing. The trend today is to replace the old parlor with a new rotary parlor. Ideally, cows would be added to help cash flow the investment of a new parlor.
However, the landscape in the dairy industry is very different today. Milk processors play a major role in any expansion plan, and your plans to expand need to align with the processor’s ability to expand their capacity as well. Gone are the days of “build it and someone will always take my milk.” What if the processor says “no” to your plans to expand, even though the dairy is in dire need of modernization? That modernization will most likely involve a new parlor or major investment to upgrade the existing one.
All may not be lost. Here are some strategies that could allow for modernization of your dairy even if you are not allowed to add cows:
- Rebalance your debt: Work with your dairy lender or financial consultant to see if any loans can be combined and extended. In some instances, debt added for modernization can be combined with other loans and re-amortized with little or no change to the cash flow. Keep in mind the interest rate on your current debt and how many years are left it. Combining loans may result in losing your current rate and moving to a higher one, given today’s environment. Sometimes, you have to sacrifice a favorable interest rate to improve your dairy’s cash flow.
- Get better before getting bigger: Can you increase milk production or components from your current herd without adding costs? If your dairy is at its allowable base, focus on getting more components from the cows. Keeping raw milk volume the same while increasing components is like producing more milk without affecting your base. New milking equipment may improve SCC and milk quality, which can increase income.
- Identify cost savings of modernization: Rotary parlors can milk more cows with fewer workers, so modernization may result in significant cost savings, helping cash flow the investment.
- Add non-milk income: Many dairies are already generating additional revenue from beef breeding programs. However, you can explore other sources of income. Investigate the renewable natural gas (RNG) landscape in your area. Based on your size, you might be able to generate additional revenue by allowing a developer to construct an RNG project on your farm.
- Consider bringing in a partner: Is it feasible to bring in a partner who has money to invest in exchange for some ownership of the farm?
- Ask your processor again: Milk supply has tightened in recent months, and your processor might now be looking for more milk. Present a long-term sustainability plan for your dairy, which could include plans for the next generation to take over ownership. Telling your story matters.
The best answer to modernize your dairy is typically to add more revenue (cows) to help pay for capital investments over time. However, if you need to modernize but cannot add cows, these strategies may be worth exploring. While they may not work for every dairy, they could position you for future growth when expansion becomes possible.
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