Figure 1. Net Return for the top 40% of Dairy Farms from 50 to 200 Cows. Source: FINBIN, University of Minnesota Center for Farm Financial Management.
What will your farm look like in the year 2020? How about 2030? How many cows will it take to make a living? Is it better for you to raise or buy feed? What are milk and input prices going to be? Although these questions are all debatable, everyone should think about these questions when making business decisions. There are no ‘perfect’ decisions; however, some decisions are better for your desired lifestyle and profitability than others. Chances are that your farm will look different than it does today. This is nothing new. Think about your farm 10 years ago. It is almost certain that management practices and/or facilities have changed. One thing for certain is that the rate of change will not slow down.
Many things are likely to stay the same. Most of our farms will continue to be family farms. The Midwest will continue to have a competitive advantage because of our natural resource base. A recent Blimling and Associates study confirmed that the upper Midwest is one of the best places in the U.S. to operate dairies. Our milk prices are often among the highest in the country compared to other major milk sheds, especially the west and southwest. Our feed costs are also among the lowest in the country, resulting in some the highest margins.
Below are some principles that should guide your future business decisions:
- Family living cost will continue to increase. Median U.S. family income has increased 40% over the past 20 years and is currently over $50,000. A producer recently asked me if I thought there was a future for 100- to 200-cow farms. I don’t have a crystal ball, but the best small farms will likely remain competitive in the future. Net return before labor and management for the top 40% of herds in Minnesota and Wisconsin since 2007 has averaged over $900 per cow (Figure 1). Another point to ponder is that over time, margins per cwt have been decreasing and I suspect this trend will likely continue.
- Good business management skills will be essential. Kennesaw College business professors Astrachan and Kolenko surveyed 600 family owned businesses and discovered that businesses that used management teams, had frequent family meetings and developed a plan for the future had higher family member personal income and the businesses survived for more generations. Encourage everyone involved in the business to write short- and long-term personal and business goals. Review and share the goals. Develop business goals taking into account everyone’s goals. This is not an easy process. Family members may have conflicting views, but by writing and sharing goals, business members will better understand each other. Ask your management team about the practicality and feasibility of your goals. Develop an action plan to achieve your goals.
- Keep good production and financial records. These can be as simple or complex as you desire. Tax records are not adequate. Accrual systems better reflect the true performance of the business. As a bare minimum, track whole farm profitability. Better yet, track the performance of each enterprise on the farm. This will determine which enterprises are the most profitable and it can be used to focus capital investment where it provides the greatest return.With computers being the norm on farms, it is becoming easier to keep good records. Minnesota DHI offers a variety of computerized production software options. These provide information that is useful in making herd management decisions. Your farm advisors can also download the information and monitor your herd’s performance. There are many financial management software packages. These can be customized for your business. There are also software packages designed specifically for farming. Most states have farm management instructors who do an excellent job of business analysis and interpretation. There are also many independent consultants who can assist you with financial records.
- Calculate your cost of production on a regular basis. With the current volatile prices, an annual business analysis for most farms is not adequate. It is better to do at least a quarterly performance analysis. This will allow you to make more rapid business decisions ensuring the likelihood of business success. As you develop cash flows, make sure to conduct a “stress test”. What happens if milk stays low for 6 months longer than you anticipate or interest rates rise? Increased volatility requires businesses to be more nimble and rapidly adapt to change. This can be difficult for a capital intensive business like farming.
Following these steps will not guarantee business success. However, working with a good management team and family members to set goals for your business and developing a good record keeping system will greatly increase the likelihood of profitability and satisfaction of your business.
