Given the past year’s milk prices, times are hard out there right now for even very well-managed dairies. Tough times call for hard conversations and difficult decisions, and my role is often to lead the charge through uncomfortable situations in order to find the best solution for a dairy to work its way back into the black.
Simply stated, there are two basic steps to improving a dairy’s financial position: increase income and reduce expenses.
How to increase income
On the income side, the only thing we really have control over is getting more milk, but we have to figure out a way to do this without taking on additional costs. In some cases, it makes sense to add another milking. Moving from 3X milking to 4X milking for the entire herd is a way to quickly put more milk in the tank and money in the checkbook while maximizing current labor resources.
One of the most common areas of opportunity I see for increasing milk production is with feeding. I have a third party come in and run a TMR audit, which checks the accuracy and consistency of mixing and delivery.
By doing this, we can find points of error, like a feeder who cuts corners by not waiting for the scale to reset in between adding ingredients or fails to push up feed during a night shift when no one is around to hold him accountable. These are quick, easy fixes that do not cost a penny but can have a big impact on production.
How to reduce expenses
Here are four steps I use to help dairies cut costs:
1. Accurate, honest financials
In order to trim costs, it is crucial to first know what they really are. I cannot stress enough the importance of accurate and honest financial records. A lot of dairy producers spend their days in the barn or in the field, and managing finances gets pushed to the bottom of their to-do list as crops need to be harvested and cows need to be milked.
By hiring a qualified bookkeeper or outsourcing this work to a reputable farm accounting firm, you can have access to itemized lists of income and expenses. This is also helpful for me because I look at these things to see if costs are in line or if the farm may be overpaying for certain things.
2. Sit down, strategize with your vendors
I see a lot of dairymen who are good friends with the people who provide products and services to their farms, and this level of friendship sometimes makes it hard to initiate a conversation about cutting back on costs.
This is where I come in as the “middle guy” to bring up subjects that may feel uncomfortable between two “friends.”
As I go through the list of vendors to see where money is being spent, I look at all areas where money could be saved. I then invite the vendors to help come up with ways for the dairy to cut costs, such as improving efficiencies or deciding which products and services are absolutely necessary.
I find they are very open to sitting down and coming up with strategies to help their customers. I believe all your vendors want you to succeed, but you can’t succeed if you can’t pay your bills.
On one dairy I consulted, I noticed right away that their expenses for labor, breeding and vet work were very high. By talking to the vet, breeder and employees, we came up with a way to reorganize the cows so tasks could be performed more efficiently.
We moved open cows to certain pens and pregnant cows to other pens, so there was no longer a need to walk the entire pen for breeding or vet checks.
With this change, we were also able to move the vet check from weekly to every other week, which resulted in cutting the monthly bill for that service in half. We were further able to negotiate with the breeding company on their service fees and semen costs.
I also sat down with this dairy’s nutritionist and discussed each ingredient in the ration to find out why it was being used and what could be taken out. It turned out there were a few additives and binders that had been added long ago when there was a mycotoxin problem in the feed.
Though the dairyman was afraid to pull them out, he just could not afford to keep them in. By taking out some of these non-essential ingredients, we were able to reduce the ration cost by 50 to 60 cents per cow per day without sacrificing production, reproduction or health.
To relieve some of the fear of a future mycotoxin issue, the dairy is now doing a better job of harvesting at the right moisture level and packing and covering bunkers.
3. Find the root problems and fix them
As I look at a dairy’s expenses, I also look at their processes to see if money is being tied up in band-aiding problems that could be prevented in the first place. For example, on one particular dairy, the bill for drugs was astounding. The majority of medications were being used to treat transition cow health problems.
I spent time talking to the vet, vendors, nutritionist and employees, as well as observing daily farm operations, and it became clear the problems with fresh cows were starting in the dry cow pen, where they did not have feed in front of them at all times.
By determining this root problem and correcting it, we were able to prevent the need for some of the treatments and, thus, save money on drug costs and vet and labor expenses.
4. Do it yourself
When cash is low, it’s time to cut back on “luxury” items. Outsourcing things like pest control, laundry, lawn care or uniforms to professional companies may be nice, but those are all things you could easily do yourself.
When labor is short-handed, rather than offering overtime pay, the dairy owners may need to pitch in and roll up their own sleeves to get the job done.
If you are struggling to pay your bills, don’t wait to reach out to your lender. Build trust by being honest and having regular communication.
The harder times get, the more meetings you should have to keep your banker informed and share with him or her the steps you are taking to reduce costs and increase cash flow.
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