While it might seem tedious and boring to some, for others, the desire to excel at financial risk management for dairy producers is becoming an essential component of a well-rounded farm management plan. Because the world of Ag finance is constantly changing, Pennsylvania’s Center for Dairy Excellence (CDE) has recognized the need for keeping the Ag finance and banking community informed of the latest in state and federal pricing policies. Accordingly, they have worked to help develop risk management strategies to help producers plan more effectively for unforeseen changes in the forces that affect dairy producers.
Recently, CDE hosted more than 100 dairy lending and financial consulting professionals to a daylong conference and workshop on financial risk and management planning. Widely recognized experts in the field of dairy financial risk management were on hand to offer the latest in governmental policy changes. They also shared ideas for successful risk planning.
Dr. Greg Bethard
Kicking off the seminar as Keynote Speaker, Dr. Greg Bethard, international consultant and currently CFO at Pagel’s Ponderosa Dairy, Dairy Dreams and Rons Cheese in Kewaunee, WI, began by challenging conventional thinking with regard to how dairy producers tend to define their success when it comes to determining their farming success. He said most dairies have three enterprises within the structure of their operation. They include farming, milking cows and acquiring replacement animals for the milking herd. He said benchmarking is dangerous and that setting goals and then tracking ones progress is more effective.
Interestingly, he said that while several recognized benchmarks make for interesting conversation, they really do not matter when it comes to profitability. “Cull rate doesn’t matter,” he said. “Milk:Feed ratios don’t matter, however margins do! Milk per cow per day is also outdated as a way of measuring performance of a dairy cow as well.”
He said costs, such as feed costs/cwt, labor costs/cwt and replacement costs/ cwt need to be allocated properly to know what is really going on. He noted by diluting these costs over more pounds of milk produced is the best way to improve profit margins. He suggested that farms add cows until they achieve this balance.
Additionally, Bethard offered 10 “keys” to a good profit and loss statement and to making money in the dairy business. These included, keeping the barn full of milking cows. “Stay at 100 percent every day,” he said. “Strive for healthy fresh cows. Minimize replacement costs by not ‘breaking good cows,’ replacing ‘broken cows’ with new ones, replace unprofitable cows and sell low producing cows before they are ‘worn out.’”
Bethard said producers should recognize quality and component premiums and strive to hit those targets whenever possible. “Premiums don’t move with milk prices,” he said. “Do everything possible to maximize income over feed cost. Generate pregnancies in heifers and cows. Cut costs intelligently as well, but don’t sacrifice in key areas that need to be maintained for success. Control labor costs per cwt of milk. Finally, minimize ‘shrink’ in the operation. Maintaining a goal of low cost milk production is very important,” he noted.
Devoting time and attention to a number of aspects of dairy production and dairy farming, Bethard concluded his presentation by listing 10 efficiencies that matter and that should be monitored regularly to control profitability. These include money corrected milk/cow per day. Static income over feed cost per cow per day is the second item. Third, is to maintain a goal of maximizing capacity of the milking herd with a goal of no less than 98 percent of the cows in milk at any given time. Fourth is a margin goal of $2 per cwt of milk over the long term. Fifth is a replacement cost of $1.50 or less per cwt of milk over the entire herd. Sixth is assessing actual income over feed costs. “$10 per cwt should make a lot of money!” he said.
Seventh is to try to keep labor costs at $1.50 per cwt or less. “Don’t lose good people over this,” he said. “Pay more to keep good people.”
Eighth is keeping ‘Non-Big 3’ (and hauling) costs per cwt to less than $4 per cwt. Ninth is to monitor milk per stall per hour as a guideline for successful production. 150 pounds per stall per hour for parallel systems and 200-plus pounds per stall for a rotary system is a good guideline. Finally, keeping tabs of dry matter intake is important as well. Less than 1.0 pounds after refusal is a good goal.
Concluding the day’s events in an afternoon presentation, Bethard looked to the future to offer his ideas of what the industry will look like in the not-too-distant future. He said exports are critical and that U.S. producers should expect to gain a larger share of the world market. He said the number of producers milking 30,000 cows or more will increase, primarily because the larger businesses are better able to withstand the economic downturns more successfully than smaller operations. He sees 20-30 percent exports. Robotic milking will play a larger role in the coming years. Because of the increase in efficiency, dairies will become more integrated with processors. On a “local level,” Bethard said Pennsylvania will continue to be a top 10 dairy state because of its infrastructure, access to consumer markets and the number of consumers in the northeast region. He noted that the trend for fewer and larger dairies would continue as they become more efficient operationally.
Mark Stephenson and Chuck Nicholson
Highlighting the latest in federal dairy policy and what it will offer dairy farm families, Dr. Mark Stephenson, Director of Dairy Policy Analysis at the University of Wisconsin, teamed up with Dr. Chuck Nicholson, Clinical Associate Professor at PSU Smeal College of Business, to offer clarity on how the new initiatives will work and how to plan for the future. With everyone wondering what the features and benefits of the Margin Protection Program (MPP-Dairy), Stephenson and Nicholson set out to help clarify the benefits and strategies associated with this new risk management tool. In a brief overview, they attempted to provide samples of strategies for two dairies, one milking 100 cows, then contrasting that with a much larger operation. With at least 113 possible combinations of margin and percentage production history available within the program guidelines, lenders could begin to see the greater number of risk management tools available to dairy farmers under this new program. Clearly, there is more flexibility and many more choices than previous programs.
Fortunately, for producers and lenders alike, there is an MPP-Dairy Decision Tool that can be found online, that helps navigate the decision-making process, giving users the information needed to make MPP decisions effectively. This tool simulates future margins using the individual dairy’s numbers along with current, forecasted data on markets and other variables that can enter into a decision of this kind. Located online at: www.dairymarkets.org/mpp/, producers can work with their financial planning team to help define a strategy that will help weather future variations in financial margins that have historically been unpredictable.
While dairy farmers are able to tailor the MPP-Dairy program to meet their specific risk tolerances, generally speaking, MPP-Dairy is a “hybrid program that combines insurance, risk management and countercyclical payments” as a way of helping protect the farmer’s future. With many possible strategies, it is important that producers work with financial planners and/or bankers to develop a strategy for their own particular operation. The easy-to-use Decision Tool is a helpful way to incorporate the individual dairy data into a workable plan for any operation. The impact of potential long-term lower margins within the industry, can act as a motivation to producers to enroll in the MPP-Dairy program. By not participating, producers would risk facing low margins without any additional assistance from MPP-Dairy during difficult times.
CDE Staff Q&A
PA Secretary of Agriculture George Greig welcomed the attendees and introduced CDE Executive Director, John Frey who moderated an overview of the work that CDE is performing to help make PA Dairy Farmers more successful. Calling upon CDE staff members Emily Yeiser, Alan Zepp and Don McNutt to offer an overview of their responsibilities, he then opened the session to questions and answers.
For more information on the CDE, visit their website at www.centerfordairyexcellence.org .