Often, during financial stress, farmers are encouraged to cut more costs, but is a there a better way to achieve relief in a tight market?
Low milk prices over an extended period of time have created a great deal of financial stress on many dairy farms. Recently, a dairyman called and asked to sit down together to discuss options. As we sat in the kitchen, he asked the question about further cost cutting. Although it was a question being asked by his lender, I believe it is the wrong question.
Frankly, prices have been low long enough that I am sure most costs that could be cut have already happened. Rations have been examined to eliminate additives that may not have a payback, hired labor hours have been reduced, and optional maintenance has been deferred. But going beyond these and cutting essential investments that result in less milk production, reduced reproductive performance, or that create situations where labor is stretched beyond what is sustainable are normally counterproductive.
However, the financial reality is that something has to give. If not these, then what? I have talked with several producers lately about three general considerations: increase returns, cut waste and re-evaluate the business model. Let’s look at each individually.
1. Increase returns. Not only do I not want to lose milk production, but I would like farms experiencing financial stress to ship more milk by whatever combination of more milk per cow and more cows is most achievable. If you have underutilized barn capacity, buying milking cows may be feasible in some instances. Pencil out the investment costs and the predicted net returns. Reduce risks by buying from a known peer rather than at auction. Keep investment costs lower by purchasing animals past peak milk production. Buying pregnant cows would be a bonus.
Are there unused assets that can be sold to generate cash? Though this is a single time event, it can begin to help you focus on investments that generate money.
2. Cut waste. Rather than just cutting costs, look to reduce waste in the operation. Waste can be considered as something unproductive, having lower returns than should be expected or that increases costs. I challenge producers to identify three to five areas of waste in their operation and work to reduce them. In many cases, improvement can be achieved through management changes. Here are some areas to look at:
- Calf (bulls and heifers) losses above 2 percent
- More than 5 percent of heifers freshening after 24 months of age
- More than 5 percent of cows (second + lactation) with a dry period longer than 70 days
- Feed spoilage, shrink or loss
- Any fresh cow problems
- Quality premiums missed
- Milk fat percentage less than 3.6
- Employees standing or walking around or busy doing less valuable work
- Time wasted because of missing or poorly functioning tools
- Cull (including deaths) rate greater than 25 percent
These are just a few areas to look at and evaluate. The point is that you are already investing in each of these areas and you need those investments to pay back at the highest rate. When performance doesn’t meet these levels, dairy producers should evaluate management in those areas.
It may be that wise investments are needed to realize improvements. Use a partial budget to make the case to your lender that investment will not only increase the net returns but also have a positive cash flow. A partial budget spreadsheet and dairy cash flow spreadsheet is available from Michigan State University Extension.
3. Re-evaluate the business model. One family farm was faced with looking at their heifer raising options. They needed to decide to either buy the land and heifer barn they used or to seek an alternative. In this case, purchasing that land and older facility would add nothing to income and may not be the best option. This is a good time to consider a business model where calves are sold and replacements purchased or having heifers raised by someone else. These alternatives put the emphasis on managing the number of animals needed.
Another farm is working with a fellow farmer to raise heifers for them in exchange for keeping springers. The compensation is based on the daily cost of raising the heifers and value of the springers. The one had excess capacity that will now be used to increase returns. The other had animals in excess of his capacity. In this case, both producers will have needs met without cash outlay.
The knee-jerk reaction to financial stress may be to cut costs, but that may not improve the financial situation beyond the current month. It is better to improve the value of the operation by evaluating performance and maximizing investments while eliminating areas or assets that don’t return well.
The stresses caused by the current economic situation can lead to unhealthy choices for yourself as well as your business. Michigan State University Extension has resources and educators that can help you identify and manage stress. Use the stress you are facing as the instigator to drive improvement.
Source: MSU Extension