What will the dairy industry in the Southeast look like in 10 years? What will it look like in five years? I don’t pretend to know, but past history suggests the Southeast will continue to lose cow numbers and milk production. If current trends continue for another 10 years, a few people and a handful of cows may be all that is left. Some believe this has already happened in certain regions. I don’t believe this will happen throughout the Southeast, but trends are trends.
Lending has changed markedly since the period of low milk prices several years ago. Lenders require more equity up front and are less willing to loan to dairies that lack strong financial backing. Starting up a dairy is getting to be more and more difficult; the equity drain the first couple of years is difficult for many to overcome. This difficulty will get worse and not better in years to come.
For this reason, it is much easier for dairies to start where ownership has another existing dairy to ease start-up. The first dairy can seed the expansion dairy with cows, people and systems, offering a tremendous advantage over a brand new start-up. In many cases, ownership is involved in other businesses and desires the tax advantages of a new start-up dairy. A new start-up dairy is a somewhat unusual business in that the business can pay its bills yet show large losses on paper.
To alter the trends in the Southeast dairy industry, several things need to happen:
1. Well-managed dairies gain the ability to generate profit.
2. Successful dairies add cows or build more dairies.
3. Owners of other businesses get involved in the dairy business.
Technology will continue to evolve, as always. Technologies such as radio frequency identification (RFID), sexed semen and robotics will impact our industry in the next 10 years. Successful dairies are not necessarily the ones that adopt all new technologies, nor are they necessarily the ones that avoid new technologies. In the end, there are many models in the dairy industry that are successful such as low input, high input, niche, large, etc. Which is right for you?
Areas for dairy expansion throughout the United States will be limited by water, people and environmental issues. Will this provide an opportunity for the Southeast down the road? Does the Southeast offer critical resources such as cheap land and water? There are certainly areas in the Southeast that meet these criteria that have not been tapped.
Margins continue to shrink in the dairy industry, but opportunity for profit and growth remain. There is still a wide range of profit within our industry, with reported cost per hundredweight (cwt) ranging from just over $10 in some herds to nearly $20 in other herds. Do other industries have this much range in cost of production? It is generally accepted that Southeast herds have higher costs of production. Do we really know what our costs of production are? How can a dairy business be evaluated without this information?
What makes a dairy business financially viable? Are dairies that milk 3X more profitable than dairies that milk 2X? Are herds that use bST more profitable than herds that don’t use bST? Do larger herds generate more profit than smaller herds? Do high-producing herds profit more than low-producing herds? Do dairymen who wear brown boots make more money than dairymen who wear black boots? What is profit?
Many in our industry proclaim particular management strategies, such as the proceeding questions suggest, result in more or less profit. In my experience, there is no management style that is optimum, but successful dairies have common traits:
1. Cash flow
2. Low cost of production
3. Wise investment
Monitoring cost of production and striving to lower these costs, is key to long-term financial success. To properly monitor cost of production, a dairy should establish a relationship with an accounting firm that can accurately handle dairy-specific issues such as herd turnover. For some dairies, more production from management strategies like bST, 3X milking, cow cooling, etc. result in lower cost per cwt and fit their management style. For other dairies, lower investment and less aggressive management style lowers their cost of production and fits their management style.
Each dairy should strive to find the most profitable management style to suit its resources, abilities and personality. Dairies can profit under numerous management styles, provided they establish a philosophy, stick to it and execute it daily.
Once a dairy knows its cost of production, it naturally wants to compare their performance to others. This is fraught with error! Many issues can make the comparison invalid. For example, if one dairy ships 4 percent fat milk and receives a 50-cent quality premium, is it fair to compare it to a dairy that ships 3.3 percent milk and gets no quality premium? The dairy receiving premiums will certainly have some costs (that will raise their cost per cwt) associated with the additional income from the quality bonuses.
Dairy producers have the opportunity to incorporate various inputs into their operation. They are constantly barraged with a host of products and services that cost money but promise to yield a return. Dairymen need to carefully scrutinize these inputs, since most are impossible to measure. Any product that promises less than 2 pounds of milk response is difficult, if not impossible, to measure on the farm.
In my experience, any input that favors forage quality has a high chance of return. Forage quality is the base for which cow health and productivity reside. Selected cow comfort imports can also favor healthy and productive cows. Milking 3X or incorporating bST generally work, if managed properly. Expansion and facility changes need to be carefully evaluated. Growth or expansion should be a goal and not an ultimatum. Other inputs such as feed additives need to be carefully scrutinized.
During low milk price times, dairies need to focus on the following basics to lower cost of production:
1. Keep the barn full, whatever “full” is for the particular dairy.
2. Have a low rate of fresh cow culling.
3. Milk profitable cows; identify and remove unprofitable cows.
4. Get quality premiums and ship high-component milk.
5. Generate pregnancies.
6. Control feed and labor costs.
7. Cheat effectively.
A simple formula to guarantee profit in the dairy business does not exist. However, the dairy industry has offered the opportunity for profit and will continue to do so in the future for herds that can produce milk efficiently and at a low cost. PD
—From 2006 North Carolina Dairy Conference Proceedings
Greg Bethard, G & R Consulting, Inc.