Dairy profit possible?
ST. CLOUD, Minn. – Increasing efficiency, controlling costs and other ways to improve margin will be key for dairy farms as mailbox milk prices come in near cost of production for much of 2016. Tim Swenson, a senior dairy business consultant with...
ST. CLOUD, Minn. — Increasing efficiency, controlling costs and other ways to improve margin will be key for dairy farms, as mailbox milk prices come in near the cost of production for much of 2016.
Tim Swenson, a senior dairy business consultant with AgStar Financial Services, walked producers through "Ideas to Make a Profit with Current Prices" on Dec. 3 during the Minnesota Milk Dairy Conference and Expo in St. Cloud.
"It's not going to be fun; it's not going to be easy for some of us, but it's not all doom and gloom," Swenson said. "We have to look at how we've traditionally marketed but also look in the toolbox."
Swenson encouraged producers to consider three things heading into the new year:
• Are you reducing expenses for the right reasons?Cuts can be taken to the extreme, but where does that put you long-term? A producer could stop buying semen, but eventually they wouldn't have a herd anymore, Swenson said.
• Do you understand your purchasing style?All producers can think they're a low-cost producer, Swenson said. Numbers and spending histories can show whether that is true or not.
• What is the long-term effect of reducing expenses today?Going back to the no semen example, Swenson pointed out that with no herd, there would be no milk and no income.
Foremost, Swenson encouraged producers to know their own operations and to make their own decisions and to not be swayed by any "deals" being offered if it won't fulfill a true need.
"There's no one, set, easy answer" to getting to profitability with low milk prices, Swenson said. "Unfortunately, there's no silver bullet."
Figuring out where to make adjustments calls for self-reflection, Swenson said. Consider the goals of the business, your family and yourself. Are they aligned? Where do they overlap?
Getting to tactics for profitability, Swenson pointed out the easy way is to make more milk. To get there profitably, however, takes critical thinking. What are ways hospital cow numbers could be reduced? Or less milk could go to calves? If those things can be realized, there will be more salable milk.
Milk quality also has a role in profitability. Prep protocols and cow care should allow for maximum milk quality. AgStar and Zoetis partnered to study farm metrics, and one of the biggest takeaways was herds with lower cell counts had a higher probability of profitability. Swenson attributed the correlation to the total management intensity on the farm; if someone is paying attention to quality, they're probably paying attention to their finances, too.
Swenson also spoke to producing high component, or heavy, milk. Some processors look for higher amounts of certain components. Swenson showed an example of a processor that was paying more for higher protein levels to the point where it would be worth it to spend more on feed as an investment and another that was paying little for other solids.
"Adjust rations accordingly," Swenson said. "Understand where you're shipping milk, what it means and optimize your cash flow."
Producers should step back and consider what other options there might be for revenue:
• Timber or nonproductive land.
• Excess feed inventory. Especially with planning for next year, perhaps there's an opportunity to sell some corn for grain instead of cutting so much silage.
• Excess heifers. While prices are dropping, heifers still can be sold for above the cost of production.
• Other livestock and steers. Where can they make the most margin per head?
• Killer toys. Bought during good times, they are things that aren't necessary.
Feed is the top expense for a dairy, eating up about 50 percent of expenses. It's important to consider costs that go into making home-raised feed, not just what's bought, Swenson said. That includes seed, fertilizer, herbicide and custom work costs.
"Make forage quality a priority," Swenson said. "Get that extra half pound of milk, that extra protein."
Swenson also encouraged producers to actively manage their feed inventory and not let it go on autopilot. Managing bunkers to reduce shrink can save a lot of waste. Cutting back plastic two or three times a week instead of once and only taking down the feed needed for today can also help.
Refusals also can waste feed. Though refusals never will get to zero, perhaps feed could be pushed up more often to take refusals down.
Swenson brought up the idea of production groups but not in the sense of singling low and getter lower cows out. There might be a way to eek out savings by developing a solid ration for all cows but with more production-boosting goodies going to already high-producing cows. Producers should review all their feed additives critically, Swenson said.
"Ask yourself, 'Do we still need it? At the same rate?'" Swenson said. "Also consider what is the maximum change in production for the change in costs? Focus not on least cost rations, but on profit maximizing rations."
When assessing labor expenses, understand work output versus wage, Swenson said. Employee attrition can provide opportunities to build more responsibilities into a new position. At the same time, wages should be adequate so that training costs aren't piled on. Pay people well enough to stay and put the trainer to work.
Reducing replacement rates is another way to stave off expenses, Swenson said. Needing to replace cows that are less than 60 days in milk is particularly hard on a bottom line. Culling cows at the right time helps. A cow at dry off could fetch $800, and the same cow at less than 60 days in milk could pull $300 or less.
"Cows are going to leave our herd," Swenson said. "We need to maximize the amount we get from those cows."
Anything causing lameness issues should be addressed with a capital investment to fix it if practical, Swenson said. While it is a monetary outlay, it can save in veterinary and lost revenue costs down the road.
With other capital, Swenson encouraged producers to maximize efficiencies with what they have and avoid investing in unnecessary new paint. He also warned against hitch-pin syndrome: needing to have a separate tractor for every implement. Killer toys have to go to the bottom of the list.
"That's where you have to align your business, family and self," Swenson said.
Other areas where producers might save:
• Hoof trimming.Rations should be good for hooves. Animals shouldn't automatically go to the trimmer but be assessed for need. Avoiding emergency trims also can help keep bills lower.
• Vaccination program.While Swenson discouraged producers from getting reckless with loosening vaccination protocols, a reevaluation is a good idea.
• Fresh cow protocols.While some steps are needed, others might just be "because we always have," Swenson said. Evaluating animals individually might yield animals that don't need to go through the full protocol.
• Supplies.Stuff in inventory equals significant dollars, Swenson said. Consider actual use rather than purchasing history. Excessive inventories aren't necessary.
• Repairs.What are the result of incorrect actions by people rather than normal wear and tear? Can behaviors be modified? Depending on employee downtime and the cost of parts, replacing an item rather than repairing it may be more cost effective. Having a capital plan that spans several years can help even out capital costs in such cases.
To get to break even, debt structure should be addressed, Swenson said. It should allow for adequate working capital, cash flow and repayment capacity.
"You need to be sitting down with your lender and develop a plan," Swenson said. "Don't wait. Have this conversation now and keep talking all the way through. Your lender will be much more open than if you put them in a corner (down the road)."
Planning for next year, dairy farmers should keep in mind that choices have impacts and that keeping the long-range vision will help guide them.
Most importantly, "Your cows don't know whether their milk is $12 or $24. Continue to treat them like the queens they are," Swenson said.