Good luck in business is financial strategy in disguise. The most successful business owners have a financial game plan. Talent and hard work can only take a business so far.
How do you make your dairy more profitable so you are successfully and sustainably in business 10 years from now?
In corporate settings, questions like this fall to the chief financial officer (CFO). Different from a herdsman with crucial day-to-day decisions, CFOs must direct the business towards financially sound long-term decisions.
From a CFO’s financial planning instinct, genetics is a long-term business influencer. Individual cows are business units. The genetics used to create them affect production output, labor efficiency and expense risks. The potential of each cow business unit directly affects the entire operation’s net profit potential.
Focus on controlling what you can control
To send our business in the best direction, we need to understand our portfolio of risks. Looking through the eyes of a CFO, strategize your dairy objectives for efficiency and production expense management.
Dairy production will forever have a cyclical nature because of the business model dealing with live animals in a supply and demand market. When demand fluctuates, we cannot press a button to manipulate production from our business units.
The cycle is inevitable; we are not going to control global dairy demand. Instead, focus on what can be controlled to be safer during the cycles. Rather than making a fortune on the top side of a cycle and losing a fortune on the bottom, build a business that survives well through the bad and thrives in the good times.
The common thread among the best business operators is they consistently focus on efficiency.
To produce milk more efficiently and be stronger in cyclical times, we need to audit our internal influencers. Make sure you are getting all you can out of your current cows. Genetics aligned correctly with herd profit needs will maximize cow production efficiencies.
Creating a lean business
Analyze expenses which go into sending a tank of milk down the driveway. Look for ways to reduce inputs. The largest expense will always be feed. Use genetics to develop future generations with reduced feed intake requirements.
Large cows eat more than moderate sized cows. Bigger-sized animals have bigger feed intake requirements for maintenance. Genetic selection for reduced cow size can reduce the amount of feed the herd is using for body maintenance. Produce as much milk with smaller feed requirements.
Labor is another costly input. In herds considering expansion, remember expansion increases labor requirements. Good labor is harder to find than feed. The more we can minimize the number of employees needed, the better. Low input and healthy cows reduce the amount of labor needed in your hospital pen.
Health traits are well worth the investment to create cows that are less labor-intensive. Cows genetically opposed to health problems, such as transition cow diseases, create a smoother operating herd and keep cows out of the hospital pen.
Forecasting business needs in the next 10 to 20 years, consider how environmental and animal rights groups will affect management protocols. If a day comes where we cannot rely on hormone or drug therapy to breed or treat cows, we will have to rely much more heavily on the genetic potential of the cow herself.
If we start breeding today for a healthier, more fertile cow, we can be prepared if the industry threats become a reality.
Do not leave any money on the table. If your dairy receives a somatic cell milk quality bonus or component bonus, consider weighting these traits strongly in your breeding program. If long days open is cutting into your income-over-feed margins, invest in high-fertility genetics to get cows bred back more quickly.
Being a wise investor
A CFO must be able to identify areas of a company which are most efficient and how the company can capitalize on this information. The ideal profit cow is going to be different between dairies. This depends on facilities, milk markets and environment. However, it’s typically not as simple as pinpointing the cow that has the highest production output.
For many dairies, the most profitable cow is a strong producer, but easy to maintain because of solid health and fertility traits. The extreme producer might generate the highest income, but at the end of her productive life might also have higher expenses.
The moderate producer with lower inputs and fewer expenses will often return a higher net profit.
Selecting the right genetic traits for your cows is similar to giving an employee the right tools to do an optimum job. To develop the right genetic plan, a producer must first understand what really drives the dairy’s profit.
Make sure there is a correlation between the phenotypic areas of profit, such as how you are paid for your milk, and the genetics you are investing in.
Producers can rely on industry consultants to help guide them where they need to be in order to answer their business needs of profitability and sustainability. Use of composite indexes like Net Merit Dollars (NM$) or Cheese Merit Dollars (CM$) is also helpful for making balanced progress.
Dairies always need to be strategically focused on creating cows that will work best in their specific system. A herd can have the best management with elite facilities, but genetics will eventually limit the environment potential. When all other systems are well-managed, building the right cow genetically for the long-term will convert into total business productivity and efficiency.
The CFO breeding program mentality is about enabling the operation to be risk adverse with a solid future for profitability. Making a cow which is lower maintenance and has reduced inputs helps a dairy maintain strong footing in a cyclical market. Enable your operation to stand strongly regardless of the market factors you cannot control.
Richard Williams is the North American general manager and Mandy Brazil is a genetic specialist with ABS North America.
PHOTO: Choose a breeding strategy that reduces risk and optimizes efficiency and return on investment over the long term by adopting the mindset of a chief financial officer (CFO). Photo illustration by Kristen Phillips.