The only constant is change – and how dairy farmers handle change is critical to the future success of their operations. Whether change is seen as good or bad, it always presents opportunities. The question is: Will you capitalize on them?
That all depends on how you manage change. Keeping informed about the industry and the changes occurring in the environment in which you operate can help each farm be proactive about the changes that may impact their individual operation.
To manage change, it is critical to be proactive rather than reactive. Why? Because when you are proactive you have more choices. For example, if you decide to get snow tires on the day of the first big snowfall of the year, you’re going to find that you have to take your car to whichever shop can fit you in and buy whatever tires they have available.
If you plan ahead and get your snow tires before snow is expected, you can choose from a wider variety of products and service providers.
You can’t always predict the future, but by staying plugged into your industry, you’ll be aware of potential changes and will be able to adapt to them more quickly. Attending industry events and keeping up with what is going on can help you prepare for what is coming.
There are a number of trends affecting or poised to affect the dairy industry, and all of them will affect individual farms differently. With farms becoming larger, economies of scale may come into play, and this will likely result in new equipment being built to equip a certain size of farm, which could make it more expensive to operate a smaller farm.
This has happened in grain farming operations already, where it is not economically feasible to buy new equipment for a very small operation. As the dairy industry is not as heavily dependent on equipment, this will be less of an issue, but it could mean when planning future changes, the size of the operation could have a significant impact as to whether these changes are feasible at that time.
Regulations and reporting can result in spending more time and money on administration of the farm; even one extra visit by the veterinarian a year is a cost you need to manage. It is important to understand the regulations your farm is subject to early on so you can determine how you are going to handle evolving regulations and reporting requirements.
It is easier and cheaper to do it right the first time instead of having to do it again. As well, changes to foreign worker regulations and employment standards can cause additional challenges and costs. Often getting support from service providers can be a cost-efficient way to avoid frustration.
Input cost fluctuations are nothing new, but they affect the individual farm’s bottom line and create a risk that must be managed in the best way possible. There is an ever-changing landscape of management tools available, including changes in government programs and insurance.
Reviewing the programs you are involved in or not should be considered on a regular basis to ensure the opportunities are being maximized to benefit the farm. In addition, while there is no indication interest rates will go up soon, they are expected to change quickly when they do change, so having loans structured with the right mix of fixed- and floating-rate loans can help manage that risk.
The one thing we can say is that change is afoot. Planning for it now can make it a lot easier to handle.
Managing change is all about making good decisions, and one piece of this is financial fluency. The first step in understanding where your operation is going is to know where you are now. When you understand the historic results of your operation, you can use that information to help you plan for the future and determine the possible financial implications of your business decisions.
To understand the history of your farm, learn what your financial statements and ratios actually tell you. As an example, your debt-to-service ratio tells a story about how likely it is your farm can make its debt payments.
If your debt-to-service ratio is 1 to 1, it means that your EBITA (earnings before taxes, amortization and interest) is equal to your debt payments – so you have no room for error, all of your earnings are required to make your debt payments. If it’s 2 to 1, you can handle more debt payments or costs as more of your earnings are not committed to debt payments.
If your debt-to-service ratio is low, it can mean that your profitability isn’t sufficient for the level of debt or that your debt isn’t structured correctly and your payments are too aggressive.
As much as farming is an independent pursuit, at the end of the day, no one is on their own. You have a number of people on your team, from your spouse to your banker, lawyer, accountant and veterinarian. These people need to know where you want to go in order to provide you with the best advice. This is the value of doing financial projections.
Projections are assessments of what you think is going to happen in the future. They are based on the past and adjusted based on assumptions of what you think could happen in the future. Far from being dry numbers, projections are a communication tool that allows you to share your plans with your team so everyone is working toward the same goal – a goal that you have set out.
Having your goals in writing will make it more likely that you will achieve them; a study at Dominican University in California found that participants were 42 percent more likely to achieve their goals if they put them in writing.
In summary, industry trends will affect your dairy farm. Developing financial fluency so you can understand the history of your specific farm will help you determine how to move forward so you can adapt to change more easily.
With an understanding of your financial history, you can then develop projections that will allow you to communicate and achieve your goals in spite of an ever-changing external landscape. PD
- Business Adviser
- Livestock Services MNP LLP
- Email Kimberly Shipley