by Katie Navarra
Low milk prices have made the past two years difficult. The coming year could be a bright spot for farmers as milk prices are expected to rise nearly $2 in 2017.
Despite the news of rising prices, some are looking at the coming year with guarded optimism.
“Everyone is happy about the higher CME prices,” said Andrew Novakovic, PhD and the E.V. Baker Professor of Agricultural Economics at Cornell University. “But, there is a lot of baggage that the dairy industry is dragging into 2017 that we have to contend with.”
Feed shortages caused by the 2016 drought, processing backlogs, distressed milk and the fluctuations in international markets contribute to make dairy a challenging industry. Those factors are what make long-term financial planning critical to the sustainability and success of a farm.
Novakovic and Jason Karszes, Cornell University ProDairy Farm Business Management, offered insights on how financial planning benefits a dairy farm, in the good times and bad, during the Jan. 12, Strategizing the Future: The Future of Milk Markets and How to Develop an Economic Plan workshop. The event, hosted by Cornell Cooperative Extension (CAAHP, CCE Saratoga, & Central NY DFC Team), highlighted factors that will be affecting milk markets in the next few years and how to develop an economic plan.
At the end of the day farm businesses face the same challenge as any business. Like companies in other industries, dairy farmers need to decide how much their long-term survival is based on an ability to be a low-cost producer versus an ability to garner a higher than average price. Often, cost then becomes the driving force in production and management strategies for dairy farms.
“At the end of the day, most dairy farmers focus on cost because they don’t see themselves as having much ability to gain a better than average price,” he said. “To be sure, there are farmers that milk Jerseys, go organic, or choose grazing because they see a price opportunity, not because average costs are low ($/cwt).”
Long-term financial planning can help any farm chart their future path through the good years and the challenging ones.
What’s in a plan
There are a variety of plans that differ in scope and purpose. A business plan typically deals with the overall design, operation and purpose of the business. A marketing plan focuses more on issues related to what you do with your product. In most businesses this would involve things like identifying customers and channels of distribution as well as pricing strategies.
“For dairy farms, this more frequently involves price risk management strategies,” Novakovic said.
When a dairy farm decides to join a cooperative, they are transferring the responsibility to think about sales and marketing to the cooperative, but they still are exposed to variable prices and net returns.
“Thus, we typically tell farmers they should think about how they will respond to a low margin/low liquidity environment before they find themselves stuck in that environment,” he said.
The goal of creating a business plan and a marketing plan is moving a farm closer to being “ready” to make difficult decisions in challenging times. When these factors are considered in advance, you have an opportunity to think through hard choices rationally and calmly.
The phrase “long-term” planning is somewhat ambiguous. Is a long-term plan five-year plan or 50-year plan?
“The length of term relates to the specificity of and commitment to the plan. It is hard to be very specific about a 20-year plan but it is fairly pointless to be vague in crafting a five-year plan,” Novakovic said.
While crafting a five-year plan the farm owner or manager sets goals and objectives to work towards, identifies the farm’s vision and writes or modifies the mission statement. The plan should also define the company’s objectives and develop strategies to achieve the farm’s mission and objectives.
A long-term plan should not be written in stone. Instead, it should be a dynamic process that takes into account outcomes, evaluates options and revises strategies as need be. The plan should include steps that track progress and to plan for future progress. Some plans or goals are short-term, targeted for a year or less, while others are used for long-term planning — time frames of three to five years or longer.
It’s generally true that farmers make production, operations, and marketing management decisions based on the long-term average expectations about prices and financial parameters. Cost competitiveness may be an over-arching business goal, but how one achieves that goal is designed around a multi-year expectation of financial returns.
“Farmers don’t make decisions on whether to expand, how to feed, how much feed should be homegrown, what equipment to own, etc. based on what happened to the price of milk last month,” Novakovic said.
What happens to price, good or bad, is important and may influence some decisions, such as culling choices, but in the big picture farmers manage their business around longer term averages. Even though there will be better years or worse years, farmers have to deal with those set of issues in the short-term and that is most definitely different than altering the entire design of the business. In boom years, this may mean figuring out how to manage high tax liabilities. In bust years it probably means how to handle serious liquidity challenges. These are important things to manage and address.
The benefit of this kind of planning is addressed by the old adage of “it’s hard to know when you got there if you don’t know where you are going.”
“It’s quite possible that one can survive and even prosper by stumbling blindly through life, but that is as risky in a business as it is in driving a car,” he concluded.