For a long time, the industry has focused on production, sometimes regardless of cost. We have all heard, “Did they buy their milk?” In this income-depressed dairy economy, the producer’s focus must be on farm profitability, seeking to shave expenses without cannibalizing income in the process.
Where are you generating income?
While dairy farmers have endured repeated cycles of milk price fluctuations, the one constant was that dairies always had access to a milk market. Farmers now need to ensure they have a consistent milkshed to ensure market availability.
Second, they need to evaluate to whom they’re marketing their milk. There is a large disparity between what farmers are being paid for milk, depending if they go to plant A or plant B. 2018 comparisons showed upwards of $2.50 to $3 per hundredweight difference among milk processors buying milk in the same area. While not a simple undertaking, it’s worthwhile. Take five minutes to make the phone call. There hasn’t been a lot of activity, but some milk plants are beginning to seek additional sources of milk. While you may not have immediate access to a better market, more than likely you will be on the list for the future.
Take a team approach to evaluate key expenses
It is important to review the major items on the operation’s expense column: feed, labor, raising heifers and loan repayment. Review these expenses and operations with your management team; tap them for their expertise. While you are one operation, your consultants (including your lender, veterinarian, nutritionist, agronomist and business specialist) work with many different farms. “Mine” their wealth of knowledge. Ask about measurable results they’ve achieved elsewhere, and measure your own results. Nothing measured equals nothing managed.
Take a critical look at each expense category:
- Feed costs (cropping and purchased feed) make up the single largest production cost, representing more than 50 percent of a dairy farm’s operational expenses. Have regular, organized meetings with your nutritionist and agronomist, looking at your cows’ nutritional needs to make the best quality and quantity of milk.
The farmer in this scenario needs to say, “This is what I need for milk,” and it’s up to the nutritionist and agronomist to recommend what to plant or buy to reach that target. Dealing with substandard or inadequate feed supplies can make the difference between good quality, profitable milk and the alternative.
- Due to shortages, labor is already a top-of-mind issue for many dairy farmers. Labor costs in low-margin situations compound the challenge. Maneuvers include reducing costs or making do with fewer people. In terms of labor efficiency, it’s equally important to evaluate if you have the right people – including family members – working.
Is the person you’re paying $13 per hour doing half or two-thirds the work as the person earning $15 an hour? I frequently see this on the farms I visit, and it doesn’t matter what type of farm it is. By their nature, some employees are more productive and contribute more to the business. You may be better off having three $15-per-hour employees who produce versus four $11-per-hour employees.
Just because someone is born and raised on a farm doesn’t mean he or she is a productive labor unit. If “Johnny” comes home from college and wants to work on the family farm – especially if he’s bringing along his own family – the parent or owner must evaluate if the farm is big enough to support that additional family. From a business perspective, the question is: Do they bring enough value with regard to profitability? This needs to be measured in an unbiased fashion. Family members must be challenged to bring new skills and ideas to the farm to support your operation’s bottom line.
- Raising youngstock is no small expense, whether they are raised at home or sent to a custom grower. Evaluate costs to raise a heifer from birth to milking age: Is it $1,700 or $1,300? While I acknowledge cost is not the only factor, the difference of $400 per animal per year is significant for any size herd.
- Miscellaneous expenses also need to be on your radar. These include supplies, whether it’s machinery supplies, milking parlor supplies or veterinary and pharmaceutical expenses. Bid these out at least annually; it’s too easy to get comfortable working with one vendor. Dairy service industries are now looking to expand their sales and may be more willing to be competitive.
Monitor cash flow more frequently
While many operators perform annual profit and loss statements and take the time to plan their cropping or other operational schedules, more frequent analysis can be beneficial. A regular, monthly review of your profit and loss statement is an important tool to understand where shortfalls are. Top producers know their numbers monthly versus quarterly. Combine this with creating forward-looking budgets with your consulting team.
Look forward and communicate
Yes, the industry is in a challenging time right now. Looking backward and learning from your mistakes is important, but spend the majority of your time looking forward.
I can’t emphasize enough how important it is to lean into your consultancy team, and to vocalize your challenges. The more the team understands your challenges, the more apt they are to find solutions. My experience as a lender is those farmers who communicate with me the best are the ones I can best help. Your entire consultancy team’s goals should be to help you solve problems and attain goals.
As someone born and raised on a dairy farm and who now works in the financial industry, I recognize the current climate is extremely stressful. Taking the right steps to reduce operational expenses is crucial, and a well-thought-out leadership plan does pay dividends down through your labor pool.
It may sound trite, but attitudes are contagious. A positive attitude can pay dividends throughout your operation as well.
- Vice President/ Senior Agricultural Banking Officer
- Investors Community Bank
- Email Tony Betley
Did you know: Who holds farm debt?
When all the numbers are in, U.S. agriculture-related debt is expected to be a record high of
$409.5 billion in 2018, up 4.2 percent ($16.4 billion) from 2017 levels. The estimate, based on a forecast from the USDA Economic Research Service, projects 2018 real estate debt at a record $250.9 billion, and non-real estate debt at $158.6 billion. In 2018 inflation-adjusted dollars, farm debt in 2018 is the highest since the 1980s.
There are a variety of creditors that lend into agricultural credit markets. John Newton, chief economist with the American Farm Bureau Federation, provided a summary of institutions holding farm debt at the end of 2017.
Leading creditors, ranked by volume and percentage of total farm-sector debt at the end of 2017, were:
1) Commercial banks – $162 billion; 41.2 percent
2) The Farm Credit system – $159 billion; 40.4 percent.
3) Individual creditors – $40 billion; 10.2 percent
4) Life insurance companies – $15 billion; 3.8 percent
5) The Farm Service Agency – $10 billion; 2.5 percent
6) Farmer Mac – $6 billion; 1.6 percent
While the Farm Credit system was the second-largest creditor in agriculture at the end of 2017, these customer-owned cooperatives were the largest creditors in farm real estate, holding about 45 percent of the total.
For non-real estate debt, the largest creditors in agriculture are commercial banks, holding nearly 50 percent of the total. The Farm Credit system held about 33 percent, with individual creditors holding 17 percent.