by Rebecca White

During a recent meeting this question was raised: “When our dairy producers come to us and ask what they should  do about the feed costs and milk prices, what are we suppose to tell them? This seems impossible”.

My response: tell them to stop being victims to the market. Maybe my harsh answer came out because it was the end of the day or maybe I have been to countless meetings discussing cost of production and solutions to decrease farms’ breakeven milk price and keep getting asked the same question. At point are we putting to much blame on external factors?

I don’t question that we need milk price reform but until that happens, we must work with the system that is in place.

Some dairies today, and even through 2009, have been doing well. What makes them different than the dairies who “can’t seem to catch a break”? That is a pretty complex issue but part of it comes down to the mind set of the dairy operator: they don’t let themselves be victims of the markets.

3 keys to controlling your destiny:

1) Know you cost of production and breakeven margin, IOFC, and/ or Class III milk price at all times

Knowing and understanding you cost of production and everything that goes into will allow you to see where changes need to be made to decrease your costs or increase revenue.  If your breakeven is too high, figure out why – is your milk production not high enough? Is your current IOFC too low because of rising feed costs? Do something about it now.

2) Know your feed inventories

It frustrates me to no end when I hear “I’m running out of corn silage in a week” or even better “I ran out yesterday”. The best solution to this problem is probably a more expensive one than if you had planned on how much you could feed to certain groups to make it last as long as possible. And if you still needed to purchased additional feeds, you could have done  so when the markets are favorable instead of forced to buy whatever is available. In a resent article from Dairy Herd Management Magazine “What did we learn from this year’s drought?” a dairy operation knew that they had enough corn silage to last them the year but they would have to buy shelled corn. Their forward thinking and planning allowed them to set a plan in motion. Another dairy operation forward contracted land rent and purchased feed. It may be expensive but he know exactly what those costs are going to be and can now react to them.

3) Understand how to forward contract milk and feed prices and other risk management options

Even if you don’t contract your feed or milk, get set up to do so in  moments notice, you can react to changes in the markets more readily. Livestock Gross Margin (LGM) insurance is a contentious topic, not always available, and some have not been pleased with the outcomes. Regardless, you should still understand how it works, what your breakeven class III milk price, and corn and soy equivalents of purchased and total feed for your lactating cows at all times. Talk to a trusted insurance agent who has experience with LGM policies and know that if you call them the Friday morning of an open LGM period, they won’t have time for you. Call a few weeks before to get an account set up and give them a chance to understand your needs and what they can offer you.

These 3 things will help allow you to react to the markets immediately, not be victimized by them. Sitting back and choosing to not do any of these things is the riskiest way to dairy farm today. Drought, high feed costs, low milk prices, tight margins, and lack of resources is the new normal. The days of grin and bear the tough times are over. Now is the time to take control of your farm and its future.

 
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By Rebecca White

Do you utilize technology to improve your dairy production or fall back on it when your management techniques are inadequate?

Today at the Penn State Dept of Animal Science Seminar, Dr.  Kathy Soder from the USDA-ARS-Pasture Systems and Watershed Management Lab, presented “Opportunities, Challenges, and Research Efforts in the Northeastern Organic Dairy Industry”.  Dr. Soder discussed why dairy producers chose to transition to organic and some of the pros and cons. One of the pros was producing milk under organic standards and regulations  forced the dairy operators to become better managers, or at least the ones who were able to succeed.

Some of the rules that are included in organic dairy production include exclusion of chemicals in crop production and “no” antibiotics for animals. I use “no” because if an animal continues to be sick, antibiotics must be used for welfare concerns however, they are not allowed back into the herd.

Because of the limited amount of technology you can use on an organic operation, the managers are forced to address issues immediately or prevent them from happening in the first place in order to succeed and stay in business. By no means does this indicate conventional dairies are not addressing issues or preventing them but I raise the question: are some dairies relying on technology to fix mistakes rather than enhance productivity?

Technologies have helped the dairy industry and will continue to allow more opportunities to produce abundant, healthy and affordable food for years to come. Utilizing these technologies should allow dairy operations to produce milk more efficiently and improve profitability. However, if the technology is fixing poor management, where have we gained on efficiency? If you utilize a product that will increase your milk production by 10 lbs but cows aren’t being bred back in a timely manor or age at first calving is 28 months, did you gain profits or was your investment a wash?

I fully support the utilization of products that can help dairy producers. But I remind you to always bring it back to the basics: if your management is not meeting your full potential how will a band-aid fix a bullet wound?

I often get questions about types of feed or new products to increase milk production and I usually answer back with questions about their cow comfort. The bottleneck or the most limiting factor that is inhibiting maximum production is usually a management issue on these farms. Access to water and feed, clean stalls, bunk space, sprinklers and fans,  and quality forages are all areas that can be improved on these dairies but often overlooked especially when the promise of a quick fix is an option.

I hope all farmers will be allowed to make decisions on their own farms without being over regulated but with the current atmosphere I fear that more regulations will be put in place deciding what technology can be utilized. I urge all dairy producers to be the most effective managers and utilize technology as an enhancement to their profitability, not a crutch.
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PSU Herd IOFC –September 2011

 by Virginia Ishler

The challenge for September has been the fat test. The end of August and the first test in September gave the appearance that the herd was moving back up to 3.50%. Then it dropped to 3.30% and has not budged for the entire month. We have been feeding the BMR corn silage at 50% of the ration dry matter. I decided to go back to our winter type ration of 40% corn silage and 17% haylage. This lowered the canola meal and increased the corn by a few pounds. The ration still contained 65% forage. This change was made during the second week of September. Evaluating production for the month, it was striking that for the first two weeks production averaged a consistent 73 pounds and weeks three and four the cows averaged 79 and 81 pounds respectively. So we got a production response but fat test stayed the same.

After our September DHIA test I evaluated the groups’ fat tests comparing against August. This is where I found my answer. Comparing fat test in August and September, the high group and 2-year old groups went from 3.30% to 3.53% and 3.40% to 3.54% respectively. Since we test at the end of the month, this improvement in fat test corresponds to the ration change. The fresh and low groups remained the same at 3.55% and 3.70%, respectively. These two groups are receiving diets formulated for their specific requirements and their rations have not changed. The problem group was the tie-stall barn, which was at 3.0% fat. These are animals on research trials receiving all different kinds of diets. When I took the milk component contribution of each group and calculated the fat test for the herd I came up with 3.39%, which was very close to what we got in the bulk tank.  To get the herd test to at least 3.50%, the high and 2-year old groups would need to average 3.7% fat and with the groups averaging 106 and 82 pounds that may not be achievable. However, this demonstrates how one group contributing 22% to the bulk tank can have a huge impact on the overall herd. It also means that making ration changes for the herd are futile right now because as long as tie-stall cows are testing that low there may be very little opportunity for improvement.

The extremely wet weather has made it hard to get corn silage harvested. Yields per acre are down so it requires covering more ground to get our bunks and bags filled. We are opening the last bunk of 2010 corn silage, which should last until January. It appears that our tonnage request for corn silage may not be met. Fortunately we have ample straight alfalfa and grass silage stored. With the potential of limited corn silage, the young-stock will continue on all hay-crop forage and so far the dry cows and springing heifers have done well on limited corn silage (5 pounds of dry matter).

For the month of September the herd averaged 76 pounds with a 3.34% fat, 3.00% protein, 222,000 SCC and 7.4 mg/dl MUN.

Income Over Feed Costs (IOFC)

Accrual versus Cash basis: What does it mean and why it’s important to dairy farming

by Rebecca White

What is accrual and cash based accounting?

From www.accountingcoach.com :

“Under the accrual basis of accounting, revenues are reported on the income statement when they are earned. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.”

For example, if you received a shipment of feed in October, 2010 but the bill doesn’t get paid until February, 2011, on a cash basis, that expense would be considered part of 2011 but on an accrual basis, it would be considered part of 2010’s expenses.

Why does it matter? For a business analysis, it’s important to match the expenses with the related income.  The money you spent on feed to make milk in October may not have come out of your checkbook until February, but those expenses need to go with the matching income. In other words, how much money did it take to make money?

Milk checks also need to be accounted for on an accrual basis.  This can be confusing since you receive December’s milk income in the middle of January.  Also, when it comes to milk checks I have often seen dairymen record the net milk price as income rather than the gross milk check as income. Hauling and marketing should be considered an expense.  Your gross milk income should be reported as your income and even though your net check has already taken out the hauling and marketing expenses, on an income expense report, they should be considered an expense.

But why does it matter?

“The only thing a cash-based system truly reports is how much cash is left, but it misses much of the explanation of how and when it was obtained or spent….A cash-based system may seem easier to maintain because all accounting events are tracked by the flow of cash in and out of the business. It’s essentially a checkbook.”

If you only look at the cash based approach to your dairy’s accounting system, you are missing an opportunity to analyze your business and see the true picture of your dairy’s profitability.

Still not convinced that an accurate business analysis is important? Ask your lender- he thinks it’s important. When you want to borrow money, they will look at financial ratios and analyze them to determine if they will grant you a loan. Accurately analyzing your business allows you to make improvements and create a stable lending opportunity.

Example

Below is an example showing just milk income and feed expenses in August on a cash or accrual based accounting system.  Even with this very simple example, there can be a huge difference between the methods. If you track Income Over Feed Costs (IOFC), the accrual basis is the only way to know how efficient you are at producing milk during that month.

Welcome!

Dairy Farming during economically straining times can be hard enough. Keeping up with market trends or educating yourself with risk management options can seem overwhelming and most people don’t start dairy farming to become accountants. This blog will be an educational discussion about dairy farm profitability that will highlight key areas of risk management education, basic financial information, and areas of dairy farm management.

Who Should Read this Blog?

Dairy producers and agribusiness professionals serving the dairy industry.  Even if you are working in a part of the dairy sector that focuses on other areas other than specifically dairy farm profitability or risk management, this is an opportunity to educate yourself on the basics and help you better serve your clients.

We hope you enjoy this blog and find it to be a helpful resource. Please feel free to comment or send suggestions!

What is Profitability?

by Rebecca White

The definition of profitability from acountingcoach.com is:

“A word to describe whether a company is able to earn more revenues than expenses.”

Sounds simple enough. Is your dairy profitable? Was your dairy profitable this past month? This past year? The past five years?

Dairy farm profitability is more complicated than whether you have money in the checking account at the end of the month or not. An Income Statement or a Profit and Loss Statement for a period of time (usually for a one-year period) determines if a dairy farm is profitable. It reports all revenues and expenses and the net income.

Another important financial statement for your dairy is the Balance Sheet. This will list all your assets and liabilities and is used for other indicators of profitability.

Other Measures of Financial Health Common on Dairies

There is more than one way to size up the financial health of a dairy operation. Here is a short list of measures or indicators of profitability and each topic area will be explain in more detail in following blog posts to come!

Cost of production: How much does it cost you to produce one hundred pounds of milk?

Debt per cow: how much debt does each cow have to carry?

Financial ratios: Return on Assets (ROA), Asset Turnover Ratio (ATR), Operating Expense Ratio (OER), Debt: Asset

Where do I Start?

If you haven’t been involved with a profitability assessment of your dairy operation before, it can seem overwhelming. Ask your accountant or loan officer for an explanation of your income statement and balance sheet. Usually, loan officers develop balance sheets for their clients before a new loan is granted. Income Statements use information from your Schedule F from your farm income taxes or from your accounting software. Click here to find out how.

More resources can be found on our website at www.das.psu.edu

For more information about profitability assessments, visit our Managing for Dairy Profitability website

Questions? Comments? Please feel free to contact us directly or leave a response below.