Archive for Financial Managment

It’s Time to Look at Dairy Bills from Both Sides Now!

We all want to pay our bills. After all, most people don’t get a great feeling watching debts accumulate. But things happen unexpectedly and, suddenly, you can’t make payments for everything on time.  Although you need to correct things quickly, making an ill-considered decision may mean wasted speed and wasted money!

When milk prices decline, the quickest response is to immediately cut an expense! 

Most often, somebody else’s bill becomes the first target: vet; nutritionist; feed supplier. What may be overlooked in this quick decision, are the positive ways these providers and consultants can contribute with solutions for the tight cash flow problem. It is short sighted to think that changing nutrition or health from monitored and managed to least cost or elimination will be the best decision. It is in everyone’s interest to work together to make the dairy profitable.

“My Business is the First Priority.”

Take note the important word is “business” not “bottom line.” Although the two may seem inseparable, a well-run, well-planned dairy business always comes ahead of dollar based decisions only.  Focusing on how you run the dairy will absolutely pay off to the bottom line.  Focusing on the bottom line could mean a savings today that is irreparably costly tomorrow. If you choose to cut something out of the chain, you may also be cutting profits due to losses from sick or dying animals and the resulting lost production and expensive solutions.

Everyone in the barn lane …. better be prepared!

This is not to say, that everyone in the dairy lane should be kept on your team. You want your cows to produce.  Your consultants and suppliers should contribute to that goal too. Let’s look at bills from both sides now:

The Nutrition Bill:

Engage a nutrition company that is willing to work with you not simply there to sell you product.  Make sure the nutrition company has a proven track record with dairies your size. The biggest is not always the one interested in solving your problems.  Find a nutrition company who has a person willing to check every cow – in the pen – from input to output, including manure.  You want to be presented with choices that have actual measurable outcomes, beyond the quick, “our price is lower!” answer.

The Vet Bill:

On the one hand, if the bill hasn’t changed much it may seem to be the easiest to complain about and then the easiest not to pay!

On the other hand, if the vet bill is actually higher than it’s been before, finding the reason is crucial, or you could be throwing the baby out with the bathwater.  It’s one thing if a business is solving its own cash flow crisis by charging higher rates, but if there are rising health issues or ongoing medication or medical emergencies, these need to be identified with both action and financial planning. Sometimes it’s a talk about brand versus generic medicines. Perhaps it’s as simple as reducing the age at first calving.  An example recently cited a dairy farm where age at first calving was 28 months.  The suggestion given by the vet was that lowering that number to 23 months would pay the vet bill for an entire year. What can you do better?

Are you Saving Money to Lose Money?

Perhaps you haven’t cut out the expertise on your team, maybe you have inserted your own.  When saving money, sometimes it seems that I did it myself is a good solution.  Some dairies mix own detergents, teat tip, pipeline cleaner.  Great!  If it works!  However, if the SCC raises the dominoes mentioned earlier start falling: SCC rises and you don’t get premiums

Don’t Get Caught up in the least Cost Solutions

Don’t get caught up in finding least cost solutions: whether they are yours or someone else’s. You decide to make little changes … cut back a couple of steps in corn growing schedule … less yield.  Lower quality corn silage …. Once again the dominoes start falling as a monetary cut back in the spring could cause significant financial losses during the winter.

What Effect is Loyalty Having on Your Bottom Line?

Every dairy farm has loyalties.  Those include a best friend, twenty years or more of service, a hunting buddy or a next door neighbor.  These can all be rewarding but let’s look through the lens of business. It all comes down to cash flow and the bottom line.  Goods and services are on the expense side of the ledger, and every manager must determine if loyalty is maximizing or draining this return over cost.

A sound financial plan will identify both sides of this relationship: “whom do you need the most?” and “Who needs you the most?” Write each supplier line down and assign a priority: labor, vet, nutritionist, feed supplier, equipment supplier.  Which ones are first and last on the list of improvements you a targeting to improve your bottom line.  Do you have every latest product line or piece of equipment from the supplier you’re loyal to?  What does it cost you?  Is there a way to balance what you are buying with the effect it has on making you more efficient or productive?  When was the last time that a consultant suggested modifying or cutting back to get through a downturn? Again… these must be measurable results, not just heartfelt feelings.

Whom are you Going to Cull? Do you keep Unproductive Cows Too?

It is perhaps easier to cull people sending bills to your inbox than it is to cull cows in the milking line. However, both are an important part of your cash flow (story).  Herd turnover and the milk quality produced not only affects the price received for the milk you send out, it financially impacts every step from calf to the milking line. How much money are you spending on raising calves that will never produce?  Consider all your options from breeding programs and sexed semen to setting up defined culling strategies.  Put your money where the milk is long before the animal is in the milking line.

All cows are not created equally profitable! All numbers are not created equal.

Don’t live or die, meaning kill your business, by blinding maintaining some magic number of total cows on your farm. Are you keeping everything to maintain a number that you consider ideal?  A pen of sick or low producing animals is costly.  Not only because of the effect on the net return over feed per day but also because of the potential for sharing their diseases.  Furthermore, the time and attention and FEED took away from better-producing animals is money and time wasted.

Planning for the Future means Planning to Survive.

In every business success hinges on finances.  You may be willing to have a less flashy lifestyle, but you must always pay the bills.  How can you generate more income?  How can you hold costs under control?  Revenue maximization is a planned response to both rising or falling milk prices.  It is a major challenge. The up and down cycle of change occurs every two or three years.  Producing a product that garners a premium is one of the few ways a producer can affect the milk price received.  Having a plan in place for both events is the only way to manage this volatile business.  Following a plan, will make surviving any crisis more likely.

The Bullvine Bottom Line:

Suppliers, vets, and consultants have bills to pay as well. Nothing in the dairy industry happens in a vacuum. If everyone reduces feed supplies, stops vet visits and decides to put the cows on a “recession diet,” the domino effect will go into play.  Soon there are expensive health, feed, and sourcing problems, that are even more costly than the initial lower milk price or cash flow crisis that prompted the short-sighted response. Everyone in the dairy chain benefits from looking at diary bills from both sides now!




Get original “Bullvine” content sent straight to your email inbox for free.




What other costs should I be cutting?

Breaking News ScreenOften, 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

When creating 2016 budgets, keep in mind family living costs

In 2014, the total noncapital living expenses of 1,350 farm families enrolled in the Illinois Farm Business Farm Management Association (FBFM) averaged $81,711–or $6,809 a month for each family (Figure 1). This average was 1.2 percent higher than in 2013. Another $7,225 was used to buy capital items such as the personal share of the family automobile, furniture, and household equipment. Thus, the grand total for living expenses averaged $88,936 for 2014 compared with $89,130 for 2013, or a $194 decrease per family.


Income and social security tax payments decreased about 3.8 percent in 2014 compared to the year before. The amount of income taxes paid in 2014 averaged $38,801 compared to $40,328 in 2013. Net nonfarm income continued to increase, averaging $39,676 in 2014. Net nonfarm income has increased $11,866, or 43 percent in the last ten years.

In Figure 2, total family living expenses (expendables plus capital) are divided by tillable operator acres for 2005 to 2014. In 2005, all of the family living costs per acre averaged about $84 per acre. This increased to $116 per acres in 2014. The 10-year average is $102 of total family living expense per acre. If we compare this to the 10-year average of net farm income per acre of $204, then 50% of the net farm income per acre is family living expense. If we look at the average year over year increase for the last ten years for family living per acre, the annual increase was 3.4% per year. The five-year annual increase per year would average 3.1%. Therefore, as you work on your crop budgets, keep in mind that a 55 cent price change on 200 bushels per acre corn is about equal to the average total family living expense per acre.


When you take total family living expenses minus net nonfarm income this equals $64 per acre in 2014 and was $62 per acre for the five-year average. This would be the part of family living that is covered by the farm income. In addition, there is another $51 per acre in social security and income taxes to be covered by the farm in 2014. The five-year average for these taxes was $39 per acre. A 30 cent price change on 200 bushels of corn per acre is equal to the 2014 family living cost that would be covered by the farm.

More information about Farm and Family Living Income and Expenditures can be found here.

The author would like to acknowledge that data used in this study comes from the local Farm Business Farm Management (FBFM) Associations across the State of Illinois. Without their cooperation, information as comprehensive and accurate as this would not be available for educational purposes. FBFM, which consists of 5,600 plus farmers and 60 professional field staff, is a not-for-profit organization available to all farm operators in Illinois. FBFM field staff provide on-farm counsel with computerized recordkeeping, farm financial management, business entity planning and income tax management. For more information, please contact the State FBFM Office located at the University of Illinois Department of Agricultural and Consumer Economics at 217-333-5511 or visit the FBFM website at

Source: University of Illinois

Family farm managers earn less, but gain ’emotional’ wealth

jp-FARMERS-superJumbo[1]After hours harvesting forage, managing livestock and milking cows, new Cornell University agricultural economic research shows family members who work on the family dairy farm make $22,000 less annually than comparable hired managers, but are handsomely compensated with “socioemotional” wealth.

“While $22,000 seems like a large penalty, there are nonfinancial rewards they experience working for the family business,” said Loren Tauer, professor at Cornell’s Charles H. Dyson School of Applied Economics and Management, who with lead author Jonathan Dressler of MetLife’s Food and Agribusiness Finance, published “Socioemotional Wealth in the Family Farm,” in a forthcoming Agricultural Finance Review.

There are roughly 5,400 dairy farms in New York, large and small. “Family members like to work for the family farm, as it brings prestige and satisfaction by working with siblings, cousins and parents,” explains Tauer. “The socioemotional part is that these family members feel an attachment to the dairy farm. It’s a warm and fuzzy feeling.”

Further, Dressler explained that socioemotional aspects of running a dairy farm “create a sense of pride and belonging, as collectively each family member is contributing an effort toward a common family goal.”

Dressler and Tauer examined dairy farm income in 1999 through 2008 and showed that New York farm manager median salaries varied widely from $41,884 in 1999, to $64,466 in 2004 to $74,986 in 2005, all adjusted for inflation to 2008 dollars. While the family farm managers were paid on average about $22,000 less, family members were compensated in other ways, such as with equity in the family business, which includes land values and the value of the operation — all of which have risen over time.

For family farms, Dressler and Tauer estimated a 5 percent current return to equity and asset appreciation of 10 percent, for a total return to equity of 15 percent. With “sweat equity,” Tauer explains, children eventually inherit farms or are given an opportunity to purchase farms at a low estimate of the farms’ value. That future ownership opportunity and the chance to work with family members offset reduced annual compensation.

Source: Cornell University

10 tips for tough financial times on the farm

In recent years, farmers and ranchers have enjoyed profitable times, but many experts, including the USDA, are predicting stress ahead in the ag economy. The American Bankers Association is helping producers prepare by providing key financial considerations.

“Thanks to recent boom times, many farmers and ranchers are well-positioned financially for the next couple of years, but falling commodity prices, a stronger dollar and a probable increase in interest rates should encourage all producers to get their financial house in order,” said Steve Apodaca, senior vice president of the ABA’s Center for Agricultural and Rural Banking. “One of the most important things a farmer can do during volatile times is keep the lines of communication open with his or her lender.”

To help producers prepare financially for the changing agricultural economy, ABA has prepared the following tips:

  1. Cash is king. Carefully examine every capital purchase that will require additional debt. Ask yourself if the expenditure will generate the cash flow needed to pay for itself. If the new item can’t create enough new cash to pay for itself over a reasonable period of time, defer the purchase.
  2. Let a farm budget be your financial road map. Without a budget, you’ll be financially lost. Use a farm budget to track all income and expenses and update it frequently—it will help you maintain the direction of the business.
  3. Analyze your farm’s financial position and performance. Are you getting the maximum return from your investments? If not, why? Are your non-farm assets generating a maximum return? If not, can any be sold?
  4. Examine your debt structure. Finance long-term assets, like real estate, with long-term debt. Finance shorter-term assets, like machinery, with shorter-term debt. Is it possible to increase your long-term debt to pay down your short-term debt? When deciding to use your long-term equity, make sure your need is extremely significant.
  5. Prepare for your financial review with your banker. Have current inventories, cash flows and balance sheets ready, and provide the information your banker requests. If you are having financial problems, put your thoughts about how to resolve them on paper so your banker can review them with you.
  6. Ask your banker about the USDA’s guaranteed farm and rural development loan programs. Your debt can be restructured over a longer period at a lower rate if the USDA provides a credit guarantee to the bank. If your banker does not know about the programs, set up an appointment for you both to visit a USDA Service Center.
  7. Review your hazard and fire insurance coverage. Increasing your deductibles can lower your premium. Carefully review every item on your inventory list and consider eliminating coverage on obsolete or low-risk items.
  8. Examine your life insurance policies. Many whole-life policies contain provisions that allow you to borrow against or deduct premium costs from the cash surrender value at low rates. What type of life insurance do you have? Is it worthwhile to maintain a costly whole life policy when you could get similar coverage from a less expensive term policy?
  9. Deal with financial problems immediately. Talk to your banker early and often. A good way to avoid serious financial problems is to identify and resolve them early. Take a team approach; create a personal “board of directors” of people you know and respect—including your banker—who can be your sounding board.
  10. Keep a clear perspective. Think through business problems by temporarily getting away from them. Take a weekend off, or resolve to see at least one movie before it comes out on DVD. However you do it, it is important for you balance and shift your focus to other activities—it will make your home team stronger.

Source: ABA

DFA Risk Management offers MPP-Dairy webinars

Members who forward contract with Dairy Farmers of America (DFA) Risk Management and sign up for USDA’s Margin Protection Program for Dairy (MPP-Dairy) may be eligible for reimbursement of their base $100 MPP fee.

To learn more about this offer and the ways our risk management programs can work in conjunction with MPP on your operation, log in to myDFA and sign up for a free webinar covering MPP, the milk market outlook and risk management strategies.

Webinars will be offered at the following dates and times (all times are Central):

• Sept. 1, 11 a.m.

• Sept. 3, Noon

• Sept. 9, 1 p.m.

• Sept. 10, 2 p.m.

As a reminder, MPP enrollment for coverage in 2016 is open through Sept. 30, 2015. To learn more and to sign up for the webinars, DFA members should log in to myDFA at or call 1-877-424-3343.

12 Tips to Improve The Bottom Line of Your Dairy Operation

Dairy farm businesses are under extreme pressure. Producers everywhere are looking to boost their profitability wherever possible.  When it comes to growing profitability, the goal is to use simple, common-sense tactics for cost savings that go directly to your dairy bottom line.

Forget the TOP Line – YOUR Profitability starts on the BOTTOM Line

Too often we mistakenly focus on the topline (gross revenue, sales, even wins in the showring). That is costly and pays attention to the wrong end. Start by looking to the bottom line. The bottom line focuses on expenses. Not just the cost paid out but the benefits gained. And remember it’s the little things that count – a ten percent increase in profit is more likely to come from twenty things that contribute one-half percent each than from one thing that gives you the full 10 percent.

Here are 12 tips to start you on your way to a better bottom line and more profitability.

  1. Bottom-up budgeting. The first thing to think about is the net that your dairy enterprise must earn. Everyone involved in the dairy needs to contribute to this investigation of what is absolutely required to sustain a profitable operation. Communication of successes, challenges and future potential must be openly communicated. One of the primary advantages of bottom-up budgeting is that it is traditionally very accurate. As long as everyone takes care to look responsibly at their area of the operation, it will generally come out with an accurate estimate of costs. It is important that all input be received – without padding.  Accuracy gives the foundation to build on. Padding could defeat the whole purpose!
  2. Set targets and achieve You need to be looking at key performance indicators (aka KPIs) and measuring your dairy against them. It is essential to know what you are comparing to so you can work towards it. . When possible, try to quantify the results you are aiming for with quantities, percentages, dollars or time. This will allow you to measure what you have achieved and readjust accordingly. Ideally, you should set goals for the long-term, and then mini goals that are short-term and ultimately tie in with the bigger picture. Differentiating between the two will help you from becoming overwhelmed or discouraged, and will also assist in always keeping the long-term perspective in mind when the day to day threatens to make you lose sight of it.
  3. Make sure the goal is in the right hands. This means the goal must be achievable as a result of your own hard work and determination, or with the willing assistance of someone already in your network. If you have no control over the outcome, it does not make for a realistic goal. Everyone has a role in meeting goals. Each individual, each team and every dairy animal will contribute to the bottom line profitability if they are assigned measurable goals that are linked to that outcome. In order to increase motivation, employees need to be allowed to participate in the goal-setting process. With agreed upon actions and measurable outcomes everyone can identify how their contribution contributes to the success of the dairy operation. Most importantly, when approaching completion of a goal, set a new one.
  4. Beware of false savings. When times get tough, it is tempting to cut back on expensive inputs. Fertiliser or other soil treatments might go on the chopping block. Grazed pasture is the cheapest feed for dairy cows.  When ensiled for the winter it is the lowest cost feed. Saving on crop input costs could indeed be false saving. A better way of saving money would be testing soils tri-yearly and applying the right quantities of slurry, farmyard manure and fertiliser. False economies are everywhere, and the way to avoid them, as much as possible, is to take a strategic approach to thinking through them. Economies of taking away feed additives; doing without automation or adding more free labor (i.e. family) could actually cost more in the long term.
  5. Shop around. Make sure you get three quotes for everything that is purchased for the farm. Don’t forget to look at electricity, labour and even borrowing money. Getting quotes from power companies is easy, or you can use a broker. If you use self-employed labour or a contractor getting quotes can be appropriate or comparing other affordable options. Quotes for money means, simply, talking to other banks than your own. It’s in your profitability’s best interests to compare all suppliers on the basis of price, capabilities and performance. It’s false saving to have a cheap price that doesn’t provide results (see #4).
  6. Milk your milk check. Depending on particular countries, provinces and states .. there are many different rules to meet in order to receive your milk check. It is in your profitability’s best interest to increase the milk price in whatever ways are available to you. Take advantage of all the bonuses available. That could be for butterfat, protein, quality or pattern of supply. Seasonal incentive pricing exists in many areas so take advantage of it also!
  7. Make good on your grazing. Some advisers suggest that now is the time to intervene if your grass is not at its best. With half the season left you could still fix it. Mow and either feed the grass or bale Fertilise the field and get it back in the grazing rotation within 30 days. Also reconsider those late cuts. They are always more expensive to harvest as silage, so graze it or make dry bales to reduce costs.
  8. Manage the short term AND always make sure you have a plan B in every scenario. A plan is the one which has been put on the piece of paper. If it is not on the piece of paper, if it is not in black and white then it is just some random set of ideas and not a If you are really serious about creating a profitability plan, you will make efforts to write it down somewhere and share it with others. Of course, just writing your plan down on paper won’t make it “profitable”. But it is a good start.
  9. Always be better. In many countries, dairying is definitely seeing difficult times but that doesn’t mean there aren’t opportunities for improvement.Set some goals for changes that you want to make to your dairy ­
    1. Continuous improvement should be the number one “VALUE” of the profitable dairy operation.
    2. Continuous improvement is linked with rewards and recognition.
    3. Continuous improvement should be supported by continuous training that is measured for effectiveness.
  10. Calculate the ROI of everything you do. ROI is a more important metric than any conversion rate simply because it takes ‘COST’ into account. As long as you take ‘Cost’ into consideration, you can’t go wrong with improving your business bottom-line. Calculate ‘cost per acquisition’ for all of your dairy (show string; advertising; genetics). Even calculate ROI of all of your meetings, business travel and lunches. What about the days it takes for you to do all your accounting? Equipment repair? Building maintenance? Does your milk production suffer when you have to wear one of your other hats? Vet? Office manager? Field manager?
  11. Hire an Expert. There is always an opportunity – lost or gained – when you choose to do things yourself in which you are not an expert or when you hire someone who is not an expert.
    While you may gain by not writing a check to someone else, you could still be putting money down the drain. When your bookkeeping, animal health protocols, feed supplies or equipment maintenance are sub-par, any one of them could be substantially reducing your bottom line and be costing you your time, your health, mediocre results and even complete failure.
    Hiring an expert may not be profitable at first but, in the long run, can be the best bang for your buck. Not only will you recover your entire hiring cost sooner but you will also make a lot of money on top of that, and you will continue to do so for an extended period. However, all of this can happen only when you first understand that you can’t be an expert in everything and that you need someone who is really an expert in their field.
  12. Manage for Improvement. Efficiency is gained when revenue per cow grows.  Technology, genomics, robotics all are tools, so your herd can become more productive and you don’t have to add new headcount to grow.  What if you could replace your lowest 10% of performers with new cattle that matched your top 10%?  This would result in an enormous productivity boost at virtually no incremental cost.  There are many techniques to improve productivity, but the point is that constantly growing headcount certainly will result in overhead growth but won’t necessarily lead to profitable revenue growth. Focus on acquiring or raising only the best animals. Your best milk producers are your most profitable producers. If you don’t know your best producers yet then get to know them ASAP. If you don’t know which animals are driving up expenses …. Find out ASAP. According to the Pareto Principle (also known as the 80–20 rule), 80% of your costs come from 20% of your herd. These 20% of your herd are hurting your bottom line. The other 80% are your high-value You need more of these best producers to improve your business bottom line. So gradually start reducing your herd of those high expense producers. Aim to breed more cattle targeted at reducing your most limiting genetic factor or factors (reproduction, feet and legs, calving ease).  It is not really rocket science, but some dairy business owners and managers just don’t get it. They remain busy in acquiring low-value animals because they have never made the effort to identify and target their best producers.  Low-value producers — still produce milk — but all milk isn’t equal.  Even though it’s all the same once it’s in the milk tank, there can be quite a difference in the cost that got it that far. The lowest producing cow in the milk line may already have run up extra costs because she was sick as a calf.

The Bullvine Bottom Line
A dollar gained in revenue is an excellent thing assuming it builds profitability. However, remember, only a small portion reaches net earnings.  A dollar saved from cost, however, goes directly to the bottom line.  So move your focus away from the top-line and engage in a systematic approach for improving the bottom line. It’s the best way to ensure long-term dairy profitability and sustainability.



Get original “Bullvine” content sent straight to your email inbox for free.




9 Ways To Spring Clean Your Dairy Record Keeping!

As the weather turns slightly warmer and our eyes zero in on the greening up of the season, it feels like a good time for spring cleaning.  Wouldn’t it be wonderful if you could profitably apply that urge to financial record keeping on the dairy farm? You don’t have to answer anyone but yourself but here’s another key question: “Did you file your tax return without the mess, stress or bother?”  Or are you still recovering from late night headaches, lost documentation syndrome and the guilt of missed deadlines?  If all was not smooth running in the financial records department, now might be the perfect time to tackle desk drawers, plastic bins and maybe even shopping bags that are overflowing with financial statements, receipts and correspondence. These are the signposts of your record-keeping shortfall! Forget about the annual shame and blame over “how did this happen?” and target a complete turnaround starting now!

1. Stop Crying Over Spilled Milk Records

Don’t blush! You are not alone. Despite the so-called digital age, paper records seem to have multiplied. You only have to watch one or two reality shows such as Clean Sweep, Pub Makeover, or Restaurant Disaster – to learn that unsuccessful businesses have one thing in common.  They do NOT keep good records.  There may be exceptions out there who manage well amid visual chaos, but it is hard to imagine.

It doesn’t surprise me that the owners and managers of struggling businesses are able to recognize, through increasing debt, declining morale and disappearing customers, that they are in trouble. What is surprising is that they keep on doing the same things they’ve always done -namely ignoring the paperwork -while continuing to hope for a different end result.

2. Plug The Hole In Your Milk Income Bucket!

We must get ourselves into the home or dairy office and commit to doing “forensic organizing” among the paper piles. We could be facing a mountain of receipts, stacks of bills-to-be-paid, overlooked notices and, as usual, a huge backlog of filing. Have you ever lost a registration certificate that you know you received, but you just can’t put your hand on? Do you find yourself facing multiple pages of feed bills and yet you’re not sure if this supplier is worth the expense? Have you paid more than you care to admit in late fees and premiums because you couldn’t face the mountain of paperwork? If so, there is a hole in your dairy income bucket.

Yes, too often struggling operations have dairy offices that fall somewhere between an archeological dig and a garbage dump. Nevertheless, that doesn’t mean the correct course of action is to give up and throw it all way. Records are crucial. Indeed, the size of the mountain is not an excuse for mismanagement. The most important feature of well-kept records is that they must be easily retrieved….for reference, legal backup and decision-making and maintenance. You must commit to plugging the leaks caused by mismanaged record keeping.

3. Lost Records Must Be Found

It all comes down to three ways of finding: finding the information, finding a way to store it and finding a way to use it. Ignoring the problem is not an option. So begin by gathering all the paperwork into one place. Having multiple disorganized locations (in the house/in the barn/in the truck) is merely providing an excuse to procrastinate and, even worse, it’s an opportunity for losing things! Once you have gathered all the paper into one location, take that massive pile and — one paper at a time – get it into the proper primary sort: cattle; crops; equipment; bills owing; bills paid. To do these sorts, you could use plastic envelopes or, if the piles are especially huge, plastic bags.  Apply a quick label and all like items can be gathered in one location. Your first quick sort will put everything into only three piles:  “To Do” To File” and “To Read”. When you start to see order forming out of the chaos, you will have taken the first step in recapturing lost money and missed opportunities. If you want to plug up that bucket hole, start by “restoring order”.

4. Records must be Used to Provide Value

There are many ways to keep records.  Some managers use methods that were in effect generations before them —- and are still successful.  Others are adapting to modern technology and revise and streamline their information flow to keep up with the digital age. Regardless of the specific method, the real test of your record management system is measured by one thingHow useful is it?  The best kept records that sit twelve months of the year in a drawer or file will still be there when the dairy operation fails! Data must be used for spotting trends, used for making decisions, used for revising inventory and used for negotiating terms. Dairy operations are dynamic, and decisions change based on the accuracy and use made of the records that are kept — and used!

5. Paying Bills in the Short Term Doesn’t Guarantee Long Term Stability

You may have decided at this point, that this article has nothing for you.  After all, even though your records are not perfect, you are keeping the bills paid. Finances 101 encourages us to believe that if the bills are paid, all will be well! However, in actual fact, there are other variables that must also be in order before we can ensure that all is well on the dairy farm. Short term solutions like using credit to pay bills or selling necessary equipment might allow the bottom line to remain in the black temporarily, but could prove ruinous in the long run. The three main financial statements – balance sheet, income statement, and cash flow plan — give the full picture and must be maintained and used in conjunction with each other to provide a clear picture all three of the farm’s business situation. Proper usage of these three information sources can only be done with consistently up-to-date and accurate record-keeping.

6. Keep Records Beyond the Simple Cash Flow Numbers

The top 1% of dairy managers separate themselves from average or poor managers by being meticulous about records that go beyond the simple bank balance or bottom line.  These managers are looking for any information that allows informed decision-making regarding economies of scale, herd size, farm structure, capital investment, feed costs per animal and genetics.  They are enthusiastic collectors of any statistic, research or anecdotal advice that could positively affect their particular operation.  These are the managers who seek out formulas such as DE (dairy efficiency) and seek out other industry leading benchmarks beyond milk production per cow.

7. What are Good Records Worth to You?

The challenge for all dairy managers is to figure out the best way to manage the massive amounts of incoming paper and information. At best, the financial disorder causes mistakes, late fees, overpaying, raised interest rates, and debt. At worst, chaos in your finances can destroy your credit simply due to inaction on paperwork stagnating on your desk. Not using information that impacts your cropping, breeding, and genetic decisions, can also impact sustainability and economic viability.

8. You Need to Keep Records Before You Can Break Them!

The more information you have at your fingertips, the more opportunity you have to turn a struggling dairy business around.  With clear benchmarks, goal setting, priorities, you no longer are managing from crisis to crisis.  Each step up in records organization is a step forward for the dairy operation. Not using information that impacts your cropping, breeding, and genetic decisions, can also impact sustainability and economic viability. Whether it is saving on expenses, decreasing vet costs, raising production, reducing overhead or making better use of labor and equipment …. The first step is the same… you must have good records. The three crucial usage steps are: 1. Discover what you need. 2. Prioritize according to your goals. 3. Take Action!

9. Help is Available.

Every manager has strengths and weaknesses. Sometimes it is the perfectionist who falls behind with the false idea that the perfect time will come to do the complete job. It isn’t lack of ability that is causing the problem. It’s inaction. There comes a time when it makes sense for your business to invest in professional bookkeeping, accounting, and back-office support to ensure your records are always kept up-to-date and accurate. Timeliness is the key. Moreover, delegating those tasks that would be better handled by someone else will not only increase your available time, but allow for a more efficient labor structure.

Ask yourself these questions:

  1. Do you have the time to do the work required? Will catching up on finances cause you to fall behind in another crucial area?
  2. Do you have much experience, knowledge or skills when it comes to making the financial decisions your operation is facing at this Expansion, selling or taking on partnerships or reducing liability may need legal advice.
  3. Can you afford to lose any more money by continuing your current mode of record management?
  4. If things go wrong, are you comfortable taking responsibility for your record keeping decisions?

The Bullvine Bottom Line

Regardless of whether you’re motivated by a new season and the potential for growth and renewal, or whether spring woke you up and you’re now hell-bent on clearing out the cobwebs that are holding your dairy business back, it’s clear that maintaining proper books and records is vital to dairy success! Spring cleaning may seem somewhat ordinary but, when applied to record-keeping, it will take your dairy to extra-ordinary!



Get original “Bullvine” content sent straight to your email inbox for free.



Four common dairy business oversights using QuickBooks™

The Penn State Extension Dairy Team is nearing completion of its second offering for 2015 of the Using QuickBooks to Manage Your Farm Business online course. During these sessions, there were several underutilized features and common oversights among participants, regardless of business type, size, or location. The following are four of the more common issues and how to address them to help simplify your financial records process.

Generating Appropriate Reports

Financial management software, like QuickBooks, has the ability to generate reports using either accounting method: cash-based or accrual-based. Though accrual-based is the preferred method, many agricultural businesses still use cash-based accounting principles, and their data is entered to satisfy that need. To ensure accuracy in generated reports, they should be based on the method of data entry. For example, just because an accrual-based balance sheet is available to generate does not mean it is accurate.

Fix It:

First, know which method of data entry the business is using. Then, set the QuickBooks report default preferences to that method (Edit->Preferences->Select Reports and Graphs on the left menu, and then click on the Company Preference Tab; be sure the summary reports basis reflects the appropriate accounting method). Remember, some pre-defined reports in QuickBooks are set to cash or accrual and are not impacted by this preference.

Entering Bills and then Writing Checks

Knowing the accounts payable (and receivable) of the business is vital given today’s market swings and tight margins. Even for cash-based reporting, it is important to know what is in queue to come in and leave, and how that will impact cash flow in the short term and long term. Too often, new QuickBooks users will start by entering bills, but then overlook an important step. Instead of using the Pay Bills feature within the system, they will go into the check register and write the check out. Doing so prevents a linkage between the bill and payment, thus the accounts payable value will grow, even though payments are made.

A similar situation can occur with the accounts receivable and invoices or sales receipts. Not only will you need to receive payment on invoices, but depending on your preferences in QuickBooks, the money from these transactions will be held in undeposited funds until you go into the system to deposit them to the appropriate account.

Fix It:

If the error has occurred, you’ll need to remove the checks/deposits and re-enter them against the appropriate bills or invoices through pay bills or receive payments. Some prefer to deposit directly to their accounts instead of using undeposited funds. To do this, uncheck the Use Undeposited Funds Company Preference from the Payments Preference in QuickBooks (Edit->Preferences->Select Payments on the left menu, and then click on the Company Preference Tab). To prevent these mistakes from happening in the future, use the zoom feature on a Balance Sheet report and examine the accounts receivable and payable regularly to ensure transactions have been processed.

“Unbalanced” Balance Sheet

Loans and their accompanying assets are another area that can impact a business’ financial reporting success. Many farms are still doing cash-based accounting, and as such, may not realize that within financial management software, like QuickBooks, both structures are needed to accurately maintain balance sheet reports. Too often, only 1 of the structures, typically the loan, exists in the chart of accounts, without the companion asset. This causes the generated balance sheet to be inaccurate.

Fix It:

When adding loans to QuickBooks, be sure the appropriate asset is also created. Also include an interest expense account to track interest expense for the loan. Be sure when entering loan payments that the appropriate split between principal payment (that goes toward the loan) and the interest (which is an expense) are recorded.

Cluttered Chart of Accounts

The chart of accounts is the infrastructure to any financial management software. It provides the categories across various types of accounts (banking, assets, income, expenses, etc.). QuickBooks allows for numerous levels of accounts in the chart of accounts. For example, we could have an expense category for Direct Crop Expenses, and then sub-accounts for seed, fertilizer, chemical, and custom hire. If we wanted to know those direct expenses for corn and soybeans, we could add a corn and soybean sub-account under each of the previous 4 sub-accounts, thus growing our chart of accounts. This presents a reporting challenge then to summarize them by commodity because they are in individual accounts.

Fix It:

QuickBooks has a classifying feature called classes. The class is a label that can be added to any transaction, and it allows for quick summarizing of data in various reports. Class labels are a preference that may need to be turned on (Edit->Preferences->Select Accounting on the left menu, and then click on the Company Preference Tab; be sure the class tracking is checked). Be sure that your class list contains the general enterprises of the business, as well as an overhead class to capture those costs that go across enterprises.


Managing the finances of today’s dairy businesses takes dedication and time. Today’s tough fiscal environment has driven the need for more accurate and regular reporting of the current status of the business. When using financial management software systems, such as QuickBooks, it is important to remember what accounting methods are being used, generate appropriate reports, and be sure the structure of the data meets the function needed by the dairy business.

Source: Penn State Extension

Protect Your Milk Price in Either Direction

Whether milk prices rise or fall, the Livestock Gross Margin for Dairy program is a good choice for managing risk. Here’s why.

By Ron Mortensen, Dairy Gross Margin, LLC

Managing risk involves answering questions regarding a dairy’s financial situation. What is your break-even? What do your cash flow projections look like? What milk price does it take to meet your objectives?

These questions are a little different than market-oriented topics. That is another can of worms. Are milk prices in an uptrend? Is demand growing or shrinking? Are there new highs in milk prices (or new lows in feed prices) that should be considered in a marketing plan?

In answering both the financial and market questions, we have always talked about blending marketing tools to reduce risk for your dairy operation. For example, the blend could be up to 33% in forward contracts, 33% in USDA’s Livestock Gross Margin for Dairy program (LGM-Dairy) or put options and 33% open. The reason for the mix: If prices go higher, you only have 33% sold. If prices go lower, you have 66% covered with LGM-Dairy (or put options) and futures. Blending provides the opportunity for managing financial risk, while still benefitting from strong prices if they occur.

LGM-Dairy and options strategies have worked great for the past few months. You may have paid a small premium. But the market moved significantly higher, giving you a big cash flow boost over the minimum price protection from the LGM product.

The last few months were a big win for those of you who set up the marketing strategies with something open on the top. Why is this important? Because everyone needs to earn back some of the losses for the past tough years and/or build cash reserves for the future.

A picture seems to say it all. Margins are good from a historical perspective. How long they last is still an issue. This chart does tell us, once we get to the high end, that margins do move lower. Selling into a big discount or lower prices can be hard. The advantage of using LGM or options is that, if the milk futures markets do move higher, you do not get trapped. If markets do move lower, you have coverage.

Mortensen graph 2 20 14


The big question: What if I could take these margins and have a minimum guarantee? Would it give me good cash flow?

A final thought: It can be hard to sell into a discounted futures market. This is the situation right now, with milk prices lower almost every month for the next 10 months. The discounts can turn out to be correct, and cash milk prices can go lower. However, prices can climb higher if strong demand continues. LGM-Dairy or options are a great choice. If prices go lower, you have coverage. If prices move higher, you can capture the gains.

Ron Mortensen is principal of Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products, and owner of Advantage Agricultural Strategies, Ltd., a commodity trading advisor. Contact him at or visit

Study shows tax proposals would cut ag income, hurt borrowing cap

Proposed changes to the tax code restricting the use of cash accounting by agricultural operations would reduce agriculture’s access to capital by as much as $12.1 billion over the next four years, according to a study released by Kennedy and Coe, LLC and Farmers for Tax Fairness.

The study prepared by the independent research firm, Informa Economics, revealed that U.S. agricultural producers forced to switch from cash-basis to accrual-basis accounting under new laws would have to pay out as much as $4.84 billion in taxes during the next four years. Additionally, borrowing capacity of these operations would decrease by another $7.26 billion over the same time period.

“The Informa study quantifies what we’ve been hearing from producers across the U.S.,” said Jeff Wald, the CEO of Kennedy and Coe, a national agricultural accounting firm. “This tax payment and subsequent loss of financial flexibility will have a major negative effect on America’s agriculture. Meeting the immediate tax burden is going to be very difficult for most of the affected operations.”

According to the study, “In aggregate, these farms have less than $1.4 billion in current cash on hand to pay the additional taxes. If the tax bill associated with deferred income comes in an unprofitable farm year or if the producer cannot otherwise meet the capital requirements, the farmer or livestock producer may have to downsize to survive (e.g., sell land or livestock).”

“The impact of these changes would extend far beyond producers and would affect their lenders, processors, and other key suppliers,” said Brian Kuehl, Director of Federal Affairs for Kennedy and Coe. “Producers will no longer have these funds available to buy tractors and combines, or invest in labor and other inputs. These purchases support a lot of small towns and ag-related businesses, small and large. The economic effects of these proposals are potentially staggering.”

In 2013, the U.S. House Ways and Means Committee and the majority staff for the U.S. Senate Finance Committee both released discussion drafts of tax-reform proposals that would reduce the number of agricultural operations that can use cash method of accounting.

“Farmers in America have used cash accounting for decades,” adds Kuehl. “Cash accounting is a simpler form of accounting and allows farmers to better manage volatility and risk. They are already at the mercy of external factors for input prices, commodity prices, and weather. Requiring a change to accrual-based accounting takes away the one thing they can actually control: their cash flow. It just doesn’t make sense. Producers already face enough risk.”

The study used U.S. Department of Agriculture data to estimate the financial impact of congressional proposals to require agricultural operations with more than $10 million in gross receipts to shift to the accrual form of accounting.

In January, 33 agricultural organizations including the American Farm Bureau, the National Cattlemen’s Beef Association, National Corn Growers Association and National Pork Producers Council sent a letter to the Senate Finance Committee expressing their concerns about the proposed changes to the cash-accounting rules.

“Cash accounting combined with the ability to accelerate expenses and defer income gives farmers and ranchers the flexibility to manage their tax burden on an annual basis by allowing them to target an optimum level of taxable income, commensurate with long-term annual earnings,” according to Bob Stallman, President of the American Farm Bureau Federation. “Cash accounting also gives farmers and ranchers the flexibility they need to plan for major investments in their businesses and in many cases provides guaranteed availability of some agricultural inputs.”

A full copy of the Informa Economics report can be found online (

Source: Kennedy & Coe

Can you produce milk for less than $46USD/100 kg of milk?

Milk is a commodity.  While you can get different levels of fat and protein content etcetera, for the most part all milk is seen as the same.  As the world goes to more and more global trade, milk producers around the world need to realize that in a commoditized market, he who produces the lowest cost milk will win.  Currently the world average cost of production is $46USD/100 kg of milk.  So for those countries and producers that either don’t know their cost of production, or know it and see that it’s over $50USD/100 kg of milk, this is a direct wakeup call!

A recent IFCN report shows that low cost regions Argentina, Peru and Uruguay, Central and Eastern Africa  Central and Eastern Europe and some selected countries in Asia (except Japan and large farms from China) all had the lowest costs of milk production  in the world.  Also very noticeable in the report was how countries like Canada, Mexico, Norway, Sweden, Denmark, Portugal and France all had costs of production over $60US/100 kg milk.


While most major milk production countries in the world have seen their costs of production increase significantly over the past 12 years, the range of difference has come much closer together.  Some low cost production countries from 12 years ago are now almost at par with countries like the US.  New Zealand was actually the lowest cost producer back in 2000, with average cost of production at $12 USD/100 kg of milk, but with increases in input prices and an appreciating currency, costs increased to a level of $35 USD per 100 kg milk.  That is an increase of over 291% in just 10 years!  With such drastic changes in costs of production, it’s no wonder that New Zealand milk producers are having trouble competing on the world market.

As milk production becomes more globally than regionally focused, it’s countries like Chile, Peru and Saudi Arabia that are going to have the competitive edge.  It also means that countries like Canada, Sweden and France are going to find it harder and harder to compete.  Furthermore, it indicates that the world’s biggest dairy product exporters (on a milk equivalent basis) who are currently New Zealand, the European Union and the U.S. could start to see South American countries joining them on these top lists.

Actually the world’s cheapest milk is made in Cameroon, where it comes from beef cows and is a by-product of producing meat.  There the production costs work out to just $1.82 per hundredweight.  But it is not produced in such mass amounts that it can be considered a world player.

One of the scariest trends for all dairy producers is how the cost of production is increasing while the price of milk is not increasing at the same rate.  This trend is sure to cause many problems for producers around the world as we go forward.  Another scary trend for producers is the volatile price of feed, as was very evident in the summer of 2012 when milk prices fell and feed prices increased. Also when you factor in the increasing costs for transportation, environmental issues, food safety and labor, in the future where milk is produced could be quite different from where it has been produced up until now.

The Bullvine Bottom Line

World economic models will show you that, over time, those who can produce their products the cheapest will win.  This is also true for Milk.  As free trade agreements are breaking down the barrier to entry into many countries and the removal of government support programs, more and more producers are going to have to look at their operations and see if they can compete in a global marketplace.  If you cannot produce your milk for less than $46 – 50 USD/100 KG of milk, or you simply don’t know your cost of production, now is the time to either shape up or get out. The future does not look bright for those who can’t answer those two questions.  It is not too early to start planning for your future.


Get original “Bullvine” content sent straight to your email inbox for free.


What’s the plan?

Are you just starting out?  Are you growing your breeding program and needing to get bank financing?  Maybe you’re transitioning to the next generation.  Whatever your situation a well-thought-out business plan is the vehicle you need to get you there.  Like any other viable business, your farm is more likely to succeed with a written business plan.

For many the thought of taking the time to write a business plan seems too daunting.  There are so many other things that need to be done.  But that is exactly the reason you need a business plan.  With so many things that can impact your dairy operation, you need to know how to steer through the issues.  The following are just a few reasons why your farm needs a business plan:

  • To avoid big mistakes: The last thing you want to do is work on something year after year , only to realize you were doomed from the start to fail.  That is exactly what can happen to many dairy operations.  Because they don’t take the time to plan everything out, they don’t account for all the potential mistakes they could be making.  Instead, they try to “change” the plan as they go along.  The problem was there never really was a plan to start with.  Developing and sharing a business plan can help ensure that you avoid the hurdles and sprint down the right path.
  • To counterbalance your emotions: If you are like many dairy breeders you are very passionate about your ideas.  The problem is this driving passion can make you susceptible to losing sight of reality.  It’s a lot to carry on your shoulders.  There are times that you may be overwhelmed by doubt, fear, or exhaustion.  When your emotions get the best of you, having a business plan lets you step back, and take an objective look at what you are doing and why, what you know for a fact and what you are trying to figure out.
  • To make sure everyone’s on the same page: Chances are, you are not building your farm by yourself.  Ideally, you’ll have family, children, maybe even parents involved.  A business plan helps get everyone involved and heading in the same direction.  There is nothing worse than find out part way down the road that someone on the team had a different plan than you did.  When I was in University, many classmates went back to the family farm.  Now some of them were very wise and established a plan before going back to the farm.  However, others didn’t and now find themselves lost and facing an uncertain future.
  • To develop a game plan: Dairy farming is a business.  Breeders forget that at their peril.  As with any sustainable business, execution is everything.  That means you have to set priorities, establish goals, and measure performance.  You also need to identify the key questions to answer, like “What will we specialize in?”  “Will we breed for profit or personal genetic gain?” and “What is the next generation transition strategy?”  These are all things you’ll address during the business planning process.
  • To raise capital.  If you raise or borrow money—even from friends and family—you’ll need to communicate your vision in a clear, compelling way.  A good business plan will help you do just that.  A good business plan will not only make it easier for you to get the financing you require to achieve your goals, but oftentimes it will help you achieve lower financing rates, or qualify for a  larger amount of financing.

More often than not, dairy producers have a basic business plan for their farm, but they certainly don’t have a plan for their genetic programs.  They may have some basic ideas about what type of cow they want, or what are their minimum requirements for sire selection, but they haven’t sat down and developed a clear genetic program.  This means setting measureable goals from start to finish.  What sires they are going to use.  How will genetics play a role in herd profitability?  What type of cattle will be needed in two years.  You see the breeding decisions you make today, typically won’t affect your profitability until two or three years from now.  This is especially true if you are planning on selling genetics (embryos, calves, bulls…).  You need to have a very clear plan.  These ventures require a significant financial investment, and no financial investment should be made without a clear understanding of exactly what the expected return is.

The Bullvine Bottom Line

Of course no plan is any good if you don’t follow it.  That doesn’t mean you cannot change the plan.  Actually, I think the plan should always be adjusting.  The marketplace is always changing.  A clear but flexible plan is exactly what you need to steer you through the good times and the bad times.  Plan on it!


Not sure how much to spend on that great 2 year old or heifer?
Want to make sure you are investing your money wisely?
Download our Dairy Cow Investment Calculator.



When the Traditional 5-C’s of Credit Aren’t Enough

If you have been attempting to secure credit for your farming operation in recent months – you likely have found bankers to be very cautious. You likely have heard the bankers indicate how carefully the government bank examiners are scrutinizing there loans and portfolios. Where were those bean counters when Freddie Mac and Fannie Mae gave out money more freely than an inebriated sailor?

Financing has really changed from the mid 1990’s when the dairy industry was going through a major retooling. During the 1990’s a business plan could be put together for a dairy and if the operators met the “Five-C’s of Credit” the plan had a strong likelihood of being approved. Today, the Five-C’s are more rigorously scrutinized than ever.

Not only is the character of the owner(s) important but the reputation of the business is also important. Does the community have a positive perception of the business and the employees that work for the company? Does the agricultural business use currently approved production practices and modern technology? What kind of environmental track record does the operation have? Have they been a good neighbor?

Capacity refers to the business’s ability to meet its obligations, remain viable over time and simply make money.

Commitment is a given. Does the key person(s) in the operation have a history of overcoming challenges? I just spoke with a producer struggling to remain positive through the challenges of this wet spring. Larger operations have a distinct advantage in respect to the day-to-day struggles of operating a farm because the emotional struggles can be shared by the staff. Farms that have made it through hardships and made financial progress over the long haul are attractive to lenders.

Collateral is the fourth of the 5 C’s of Credit. Collateral has to do entirely with the strength of the balance sheet. Are the assets fairly valued or are they inflated to make the balance sheet look more positive? During much of the late 90’s and early 2000’s, many dairy farm balance sheets were upside down. That is, the lenders owned more of the farm than did the farm. This was due to the fact that for a dairy to modernize, it took a lot of new capital. Once the dairy had retooled it’s self for the future, the debt was paid down and the balance sheet recovered. When it comes right down to the nitty-gritty, can the lender get out from under the collapsed business without losing money? Most, if not all ag lenders, want to avoid a foreclosure like the plague.

Lastly, the conditions of the loan are addressed in the business plan. Conditions generally include markets, consumer trends, economic predictions and environmental considerations. We all know how global our economy has become. Farming has historically been an industry based on the production of commodities. Increasingly, more agriculture producers are vertically integrating by entering into the processing and marketing of their products to wholesalers or directly to the consumer. This takes a great deal of market research to meet the condition requirement of the loan proposal.

Most producers will not pursue direct marketing of their products but lenders are requiring prospective borrowers to come prepared with multi-year monthly cash flow projections complete with a sensitivity analysis designed with a range of product prices and cost projections. Most experienced agriculture lenders now require a marketing plan using risk management tools as a part of the cash flow projections.

In these tough financial times, the 5-C’s of credit remain important but they may not be enough. When the banker rejects a strong proposal the borrower must receive honest feedback. What are the specific reasons for the rejection? Are the objections fact or does the bank lack capacity to make the loan? Is the lender technically up to date to properly evaluate the loan request? Agricultural lending has become so involved that many banks have made the decision to withdraw from the market but are reluctant to express this to prospective borrowers.

Work hard on strengthening the 5-C’s of your farming business, find an agricultural lending partner that is knowledgeable regarding modern agriculture and be on top of your financial game at all times.

Greg Booher, Farm Business Instructor at Lakeshore Technical College, East Central Wisconsin provides assistance to dairy producers in the region.

Why you should get rid of the bottom 10%

Before there was Donald Trump, there was Jack Welch, one of America’s greatest business leaders in history. During Jack Welch’s 20-year career as chairman and CEO of General Electric, GE’s company value rose 4000%.  That is a 200% per year growth rate.  More than 50 times that of the average company.  How did Jack do it?  He got rid of the bottom 10% of GE’s employees every year.

Such bold and committed action could also apply in dairy farming. Although most of us are so entrenched in our own operations that we cannot always be objective. But we should be objective. Managers must make the tough decisions. Are you ready to Fire the Bottom 10%?  Management choices or decisions could very well be significantly dragging down your profits.

Random Poll

So The Bullvine polled dairy producers asking them:

“In managing your dairy enterprise, if someone said to you fire the Bottom 10% in order to increase your profits what would you do?”

The following four management areas were the ones the producers identified as their top “fire the bottom” moves.

Heifer Rearing

Producers tell us that the easiest and quickest change they can make is to stop raising all their heifer calves. In the past selling springing bred heifers or recently calved in first calvers was a revenue source. Some long for those days to return. The reality is that those days in North America are not about to reoccur with increased use of sexed semen and producers finding ways to retain still profitable older cows.

One producer in expansion mode dropped his heifer numbers back and used the barn space and feed to milk more cows. He did it using the heifer sized free stalls for a group of 22-26 month old milkers. Another producer changed his program to lower feed costs using a very high forage diet for all milking females thereby needing more cows to fill his daily milk shipments. His plan is that by dropping from 75 to 65 pounds of milk per cow per day he will have less cow turnover, a shorter calving interval and more profit per cow per day of productive life. Profit per cow per day (sometimes referred to as daily return over feed costs) is a term all producers are now using extensively.

Some producers report selling all heifer calves to a heifer raiser with the option of buying back needed replacements at $200 over going market price for any of his own heifers. He is very satisfied with them and he knows their ancestry. The only limiting factor being he must take care not to cause his farm any biosecurity problems with the reintroductions. He is considering testing his reintroduction for common diseases. But still sees that new cost much outweighing the cost for feed, labour or capital costs associated with raising his own replacements.

Reproductive Performance

Producers tell us that reproduction is their biggest thief of profits. Changing reproductive performance is not easy to put in place. Steps being taken include: not breeding back cows or heifers that have a history of poor reproductive performance; milkers requiring a fourth breeding are not rebred;  purchasing heat monitoring systems; creating a group of cows 60 days in milk until confirmed pregnant or a decision is made not to rebreed and using high genomic bulls instead of AI.

Other producers have worked with specialists and redesigned their transition cow program. Many report excellent results relative to calving, no retained placentas or metritis, quick entry into the milking string and high percent of first heats post calving by 50 days in milk. They have found a savings in staff time handling problems and maintaining detailed records.

Still other producers have handed off heat checking to their AI technician with very good results. It is one less job for the milkers and animal feeders to do.

Animal Health

Producers share about the frustration with the excessive time required by a sick cow, or a lame cow or a sick calf. ‘If only we did not have to be taking an extra twenty minutes per day to deal with each animal with a health problem, besides the drugs cost  and lost milk’.

One producer shared how he has built an expensive barn and manure handling system only to find that the number of cows with feet problems has exploded. His thinking is that producers are too willing to accept lameness, feet problems, foot trimming, footbaths, loss of milk, treatment costs and other detrimental issues as a cost of doing business. To that he added that in the end he had to spend even more money to re-design his housing system and now he has sand wearing out his equipment.  He actually longed for the good old days when cows could walk on dry natural surfaces.

Few of the producers see a way clear of health problems. This suggests that, as an industry, we need to think – if what we are doing isn’t working for us we definitely need to step back from the problem and find effective approaches to handling animal health.


Producers have given this topic much consideration and many have implemented changes. The list was quite long but it often does not hurt to repeat what producers are doing. The list includes: install robotics; milking the cows less than 120 days fresh 3x; hiring out the field work to a custom operator thereby eliminating labour and capital cost; capturing more cow information at every milking in both parlour and tie stall barns, (as mentioned above) heat detection systems; training and assigning specialty jobs to staff; purchasing software programs that capture and analyze data so manager can make quick accurate decisions and the list went on. In all cases it appears that dollar cost-benefit criteria were used to base decisions on. Definitely this is an area that producers feel more comfortable with. Which is reassuring given that the average herd size is growing and wage rates are increasing.

The Bullvine Bottom Line

Jack Welch earned a reputation for brutal candor in his meetings with executives. He rewarded those in the top 20% with bonuses and stock options. Sometimes as dairy breeders we are guilty of looking at our operations as a way of life and not as a business.   The hard truth is the dairy business decisions need to be based on dollars. Firing poor performers is not just good for your dairy business, it’s necessary. Where do you draw the firing line?






Not sure how much to spend on that great 2 year old or heifer?
Want to make sure you are investing your money wisely?
Download our Dairy Cow Investment Calculator.








Re-think Your Dairy’s Interest-Rate Fix

Unbelievable, historically low interest rates have now been with us for four years. Many dairy producers have continued to ride the variable rate because those rates are rock-bottom low. Variable rates generally change monthly, but no one has noticed because, in the last four years, rates have gone no place.

Variable interest rates are mostly based on the Prime Rate, which, by definition, is supposed to be the best rate to the best customers. To a large degree, that definition has been lost. Prime is the Over Night Fed Funds rate that banks charge one another to borrow money back and forth overnight, which today is 0.25% plus 3.00%, giving us a Prime Rate of 3.25%.

The second rate used for variable rates is called LIBOR (London Interbank Offered Rate), which is a composite of bank rates across the globe. That rate is running around 3.60% at the writing of this article.

Sometimes lenders will have an inter-bank rate of their own based on their cost of funds and internal factors.

Regardless of how the variable rate is derived, it will be a lower interest rate than a fixed or locked-in interest rate. The real question is what is right for your dairy? A lower variable rate that can change monthly or a longer-term fixed rate?

A lender will normally offer you borrowed rates that are tied to their cost of funds or deposit or bonds that fund those loans. Remember, all a lender does is take money with one hand, pay the depositors an interest rate for the use of the money and loan that money back out at a higher rate, then use the difference to pay staff and show a return. The lender will match the deposited money to the borrowed money for a specific amount of time. So, when the depositor’s certificate of deposit or bonds matures, the loan comes due for a renewal.

So we do not forget, the overall U.S. interest rates are watched and moved by the Federal Reserve, which is totally separated from the government. They have a two-part mandate from Congress to keep people employed and keep inflation under control. The Fed, as it is commonly known, controls the money supply, which, in turn, moves interest rates up or down. It is the overnight Fed Fund rate that people focus on, which will move the U.S. bond market all the way to the 30-year U.S. Treasury Bond. All other borrowing rates in the U.S. are based on the U.S. bond market, considered to be the safest place to invest money.

Over last four years, since the “Great Recession,” the Fed has been trying to stimulate the U.S. economy with low interest rates. This is in hopes of getting businesses to employ more people and get the general public spending more money. The U.S. economy, or GDP (Gross Domestic Product) of all goods and services, is driven 70% by consumer spending. The Fed has even been buying U.S. Treasury debt or bonds to keep interest rates low. So far, economic recovery has been slow. The Fed has gone so far as to say it plans to keep interest rates low until the end of 2014. Recently, some of the Fed Governors who vote every six weeks on interest rates are thinking the Fed has done enough and rates should start moving up.

So what does all of this mean for your dairy? There are a lot of moving parts to the Fed’s decisions. Interest rates cannot stay low forever. Once interest rates start to move, “all” longer-term fixed rates will begin to move up. It is possible they could move fast. Those producers who lived through the 1980s remember all too well 16% and even 18% interest rates. Today’s general economy could not stand for anything near those rates. A movement of a few percentages would get the public’s attention.

To take out whatever risk you can in this high expense rate environment of operating a dairy would be responsible. Talk to your lender about a longer-term interest-rate fix. You still have to make the final decision. It certainly is time to give it some serious consideration.

Gary Sipiorski has a long career in the banking industry, doing business primarily with dairy producers. He has been associated with the Citizens State Bank of Loyal, the Graduate School of Banking in Austin, Texas, the Independent Community Bankers of America, the Governor’s Task Force on Growing Agriculture in Wisconsin, and the Advisory Council on Agriculture, Industry and Labor for the Federal Reserve Bank of Chicago. In 2008, he joined the Wisconsin-based nutrition firm, Vita Plus Corporation, where he is dairy development manager. Contact him at 608-250-4267 or

5 Hot Business Trends for 2013

Dairy Today – The year ahead may not be another record breaker for crop profits like 2012, but no question, 2013 still looks to be a good year for profits for producers who can pull the marketing and buying trigger when margins present themselves.

This is true both on the sales and input side. Here are five hot trends and strategies savvy producers are making good use of:

  1. Become a True Profit Hedger.
    Increasing numbers of progressive farmers are taking a lesson from the books of successful grain and other agribusiness companies: Don’t be exposed. That means to lock in inputs, such as fertilizer and seed, plus lock in commodity prices, at the same time. That’s called locking in a true profit margin, leaving nothing for guesswork. More farmers are doing this, true hedging, and more will be doing so in 2013.
  2. Be Risk Adverse.
    Managing risk doesn’t stop with crop insurance and forward price selling. Despite low interest rates, you want to be in a strong cash position, a minimum of 33% working capital to revenue, experts say, and two months’ worth of expenses in the bank, CDs, money market accounts, investments readily convertible to cash. This not only protects you from any downturn, it also gives you cash to take advantage of great asset deals when agriculture undergoes a correction.
  3. Think Global.
    Four international hot spots in 2013 will have a lot to do with your profits, and you need to keep your eye on all of them.

    1. Corn and soybean crops in Brazil and Argentina this winter. If crops there are less than ideal, prices could sail sky high.
    2. How far Chinese economic growth tumbles—or rebounds—and what impact that has on meat use, and all importantly, oilseed and grain imports.
    3. Whether Europe can resolve its debt problems.
    4. What kind of a production year the Black Sea region has particularly Ukraine and Russia, both likely to plant a lot more of everything to take advantage or rising prices.
  4. Manage Volatility.
    Price volatility, true, is not going away, but volatility goes far beyond that. For instance, new corn and soybean growing regions in the U.S. are extending into north and west, areas with highly volatile weather and production one year to the next, and this has not been factored into a lot of models.
    Furthermore, crop growing regions globally are expanding into areas with highly volatile weather one year to the next, too. As a businessperson, this means huge fluctuations in your profits from year to year that you need to be prepared for. For example, if weather is great around the globe next year, corn could be $4-something at harvest, if terrible; it could be $8-something.
  5. Cheap Money.
    Eventually, the U.S. economy will turn around and when it does, look out interest rates. As a result, lock in as much of your interest rates in fixed rate middle and long term instruments as possible, with the absolute minimum in short-term variable rates. The good news on rates, however, is that you have a little time: rates in 2013 are likely to stay near current levels, that is to say, historically low. But when rates are 4% and 5%, half the long-term average, the pressure can only be up, so be advised.

Be fair to your heirs

Dairy Herd Network – Ponder this scenario:  You have four children. One of them wants to come back to the dairy farm. The other three work off-farm.

“We can afford to pay you $1,000 per week,” you say to the farming child. “But you know, we always said we wanted to treat you kids equally, so we’re going to pay each of you $250 per week. That way you’ll all be treated equally.” Is that fair? No, it’s certainly not. Most people would agree that the child who works for the business should receive the full $1,000.

“If that’s fair during life, what changes at death?” asks John Baker, an attorney and administrator of the Beginning Farmer Center, part of Iowa State University Extension.

“There’s this presumption that if we divide things equally, in some way that makes it fair,” Baker says. “I don’t know where that idea came from because ‘fair’ and ‘equal’ are not the same thing.”

Distribution of the business assets can be an equitable arrangement for both on-farm and off-farm heirs. Here are some considerations to keep in mind during the planning process.

Assets, not heirlooms

“Farmers tend to look at farm business assets as though they are family heirlooms. They don’t consider them to be business assets,” Baker says.

Consider the situation where you have a set of plates that great-grandma brought from the old country. There are only four left and you have four children. Naturally, you’d want each one of them to have part of the family legacy.

“I think that’s a wonderful thing to do. It passes on the family history,” Baker says. “It’s not a very good business transition model, though, because you’re fractionating the ownership of the business assets.”

It’s wise for not only you, but also your heirs, to leave their sentimental attachment at the door of the planning process.

Elwyn Voss, financial services representative with The Voss Group in Norwich, N.Y., asks his clients to think about this situation: Say you have a son or daughter who left the farm 20 or 25 years ago. If that child dies, what is the brother or sister on the farm going to get out of that estate?

“The answer is zero,” Voss says. “If your brother or sister leaves the business and goes off and is very successful in whatever they do, they don’t think, ‘Gee, my brother or sister back on the farm ought to get something out of this.’ So why do we have this problem with the farm?”

The problem, Voss says, is sentimental attachment.

“It was their home. They saw mom and dad work it, and most of the time they didn’t see their sibling work it. He was going to high school and then college,” Voss says. “When he came back, they never really saw him working. They were all gone.”

Think it through

As you work toward a plan for asset distribution, think through the potential ramifications of your actions.

“If we have $10 million of assets and $5 million in debt, we have $5 million in equity leftover,” Voss says. “The son taking over the farm has all that debt to deal with… If he’s one of four children, the next thing you know, he’s got to deal with threefourths of the equity. So the non-farm equity becomes his farm debt.”

Your plan for distributing the business assets also can put heirs into business with each other when they had no intention of doing so. This can backfire on more than one level.

“My experience as an attorney tells me that death brings out the best and worst in families, and usually it’s within about half a second of one another,” Baker says.

Plus, your unintentional business partner’s knowledge of modern dairy farming practices can be severely limited.

“I tell people that I grew up on an acreage,” Baker says. “My father got rid of the cattle back in the early 1950s. I don’t know anything about that business anymore. It would not be a good business decision to put someone in business with me, and yet that’s what we see happen.”

Do it now

Taking the time to put together a comprehensive asset distribution plan will not only move the business forward, but equitably compensate both on-farm and off-farm parties.

“There are lots of tools that can be used very effectively by farm business owners to put together a comprehensive business succession plan that helps to keep the business assets together and also provides a form of compensation for the in-business heirs and the non-business heirs, without destroying the business,” Baker says.

“If you don’t sit down and do some business succession planning, there’s a good chance that your family will no longer have a farm business. And, there’s a good chance that the farm business will no longer have a family.”

For Dairies, Last Straw with Lenders?

Dairy Today – In California, Texas and Idaho dairy country, anti-lender sentiment is high amid shrinking credit lines.

Nationally, dairy customers are the most stressed of all the Farm Credit System’s agricultural customers, says Bill York, CEO of AgriBank, based in St. Paul, Minn.

Corn and soybean farmers have crop insurance to fall back on if crops fail. But dairy producers will struggle to find enough feed to get through the next year, and will pay dearly for it if they find it.

“There will be a lot of creativity in putting together rations in the coming months,” York says. “And there will be need for increased operating loans to cover those costs.”

In California, Texas and Idaho dairy country, anti-lender sentiment is high amid shrinking credit lines. Some producers claim that lenders have withdrawn support for the dairy business and are too quick to move troubled dairies into special-asset status.

“Lone Star Land Bank courted a lot of dairy loans in 2006, but they’ve decided to exit the dairy industry,” says Darren Turley of the Texas Association of Dairymen.

Wells Fargo, one of the nation’s largest dairy lenders, disputes claims that it has withdrawn its support from the dairy industry.

“Wells Fargo has banking relationships with individual people and businesses, not industry groups,” says bank spokesman Gabriel Boehmer. “Wells Fargo remains committed to dairy producers throughout the U.S., including California, whose businesses and strategies appear to be viable over the long term. Wells Fargo believes that successful dairy producers will recognize that the risk profi le of this industry has changed and will make appropriate adjustments to succeed.”

Herd liquidations and dairy closures aren’t always because the lender didn’t do its job, says Mitchell Harris, CEO of AgTexas Farm Credit Services. “A lot of lending and dairy business models were not designed to handle the level of challenge we’re seeing in the dairy industry,” he says.

But Harris also urges producers not to paint all financial institutions with the same broad brush. “We haven’t foreclosed on a dairy since AgTexas was formed in 1999,” he says.

While AgTexas is still making loans to dairies, it’s busy counseling worried dairy producers, Harris says. The lender has used USDA loan guarantees to help some of its dairy borrowers work through the tough times.

“If you’re working with a borrower who has a challenged situation, the worst thing you can do is pull the operating line,” Harris says. “There are a lot of reasons why you want to keep that line of credit in place. It’s not just about compassion. As a lender, you need to consider the impact of caring for and preserving the cattle while helping the borrower to preserve as much equity as possible. If the herd husbandry is not adequate, the value of the dairy herd can deteriorate by 50% in a matter of hours or days.”

By: Catherine Merlo, Dairy Today Western and Online Editor

BMO Puts Together Drought Relief Package for Farmers

The head of BMO Financial Group says society rightly expects bankers will stand behind the people who put food on our tables. Bill Downe says that’s why they’ve put together a financial relief program to help customers affected by dry conditions throughout much of North America. The program allows BMO customers to apply for working capital assistance, deferral of loan payments and other measures. BMO Canada’s National Manager of Agriculture, David Rinneard, says they’re hoping these initiatives will help alleviate some of the problems being faced by Ontario farmers. BMO customers are advised to contact their local bank about their particular needs.

Send this to a friend