Doug Johnson, director and ag strategist with Moody’s Analytics, says in today’s agricultural world it’s not just the economy that can make or break a producer, but rather how the ag economy, technology and experience converge.
“The world of ag production is changing rapidly and becoming not just more financially challenging, but also more technological and ‘scientific,’” says Johnson.
“As challenging as agriculture has been these past five-plus years, the future of agriculture is very strong but will require a different mindset from producers and ag lenders going forward,” he adds. “Historically, production drove profits and growth. The future will require a very focused, ‘business’ mindset on data and knowing the numbers. Technology can automate operations but doesn’t automatically make it profitable.”
Evaluate data and business plan
All dairy producers should be familiar with the dairy operation’s data and business plan. When looking at the operation’s data, Johnson suggests asking:
- Do the numbers make sense?
- Historically, what trends happened and why?
- Are projections comparable to their historical trends?
- What do you plan to do differently?
- What’s driving the change in numbers on financial statements?
- Are the changes tangible or perceived?
- Is the operation and industry trending the same direction? If not, why?
- Is the operation stable, gaining or losing equity, and why?
When analyzing the business plan, it is important to know:
- Will new technology pay for itself and provide for a more stable future?
- If commodity prices are high, what is being done to control expenses, capitalize on profit opportunities and remain relevant for the next 5-10 years?
Question your lender
Johnson says producers should think about what is the first question they ask their lender: Is it whether they will finance you again and if they think you will survive another year?
A better mindset, Johnson says, is to have your banker help you develop a long-term plan. Ask your lender how you compare to other dairies they work with; ask what producers who are making money do that you are not.
“Sometimes it is not about looking for answers, but rather is it about asking the right questions,” he says.
In the 1970s, dairy producers were production focused, and then in the 1980s, they were financially focused. In the 1990s, they were focused on both production and financials, but today it is all about management, he says.
“What is going to save you?” he asks about today’s tough dairy economy. “If you are waiting for the markets to save you, then you are farming your way out of business.”
In the not-so-distant past, a dairy producer had to be a jack-of-all-trades. Today, most producers are turning to specialists who focus on a niche part of the business. The typical farm owner or manager could easily be working with eight or more parties: a lender, accountant, nutritionist, agronomist, veterinarian, marketing specialist, commodity broker, seed dealer, legal consultant and cooperative representative, in addition to several people running the day-to-day activities on the farm.
Too often, these parties are “siloed” and the producer meets with each one individually to discuss upcoming production plans. Johnson encourages group meetings with all of the specialists, including your lender, at least annually. “Bring your entire team into one room and decide what the operation will look like in five years,” he says. Then figure out how to make that happen.
Ideally, these collaborative planning sessions should happen after harvest but before year’s end and, if possible, again in mid-summer to evaluate how the plan is working. The future success of dairy operations may depend on this network of specialists working together for the greatest good of the farm, says Johnson.
Investing in technology
Before investing in new technologies, dairy producers need to take a good look at which technologies will help the farm make money and be more sustainable, Johnson says. He encourages analyzing technological “wants” versus “needs.”
What investments are best for a particular dairy depend on many factors, including size and current management. Larger operations might invest more in automation, while smaller producers might scale up more slowly and focus more on specialty market opportunities.
Before purchasing technology, consider how it will improve efficiencies, both from the perspective of cost containment and how it will provide gains in profitability. Consider the impact on labor, time management, if you can scale the operation to fit the technology and if you have enough time left in your “career” for the technology to pay for itself.
No matter the size of the farm, he recommends investing in software for break-even financial analysis. Many dairy producers could benefit from knowing their numbers better, not just to help them when talking with their lender but also for the success of their operation.
“At the end of the day, what will matter going forward is technology that provides data and efficiency gains that is affordable for the size of the operation,” he says.
Communication is becoming more important in the dairy industry and needs to occur early, often and be consistent. There should never be any surprises between those working together on an operation. “Be clear, remove emotion and let the data tell the story,” he says.
Johnson adds that the number one thing for dairy producers and their families to remember in tough times is to never confuse self-worth with net worth.
PHOTO: Doug Johnson is director and ag strategist with Moody’s Analytics. Courtesy photo.
Kelli Boylen is a freelance writer based in northeast Iowa.