I have been asked about the future of the dairy industry several times over the past year. Milk prices have been low for 15 months, and production continues to expand on the west coast. Many local dairy farmers are giving serious thought to what the future might hold. The first thing you need to do is determine profit per farm, or the (Income/cwt. – cost/cwt.) multiplied by the number of cwts. of milk produced. Three things that can be done to increase total profit. o Increase income/cwt. o Decrease cost/cwt. o Increase the number of cwts. produced. Let’s look at some options for several common situations. A young dairy producer with a small herd who does not want to expand. The only way to be competitive and profitable in the long term is to maximize margin/ cwt. I recently saw the DHI record of one Minnesota herd of about 40 cows with a 32,000 rolling herd average with low culling, excellent reproduction (12.1 month calving interval), very low SCC and low feed cost. These factors will allow the herd to survive for a long period of time. Because not everyone has the management skills to handle this situation, it’s important to analyze your skills and determine whether you have the ability and desire to be among the best herds in the state. Grazing is one way to lower the cost of production. Another way to increase income is by producing organic milk. This is a niche market for producers who decide to pursue it. Many producers are able to increase income by selling genetics. This could be through lower culling rates and selling heifers. Some people sell embryos or bulls. Many producers have begun to supplement farm income with off-farm income. Young dairy producer trying to get started. It is difficult to start a dairy operation if you don’t have a substantial amount of equity to begin with. One essential element is to have excellent production skills. Because access to capital is limited, it is important to only invest in high-return assets such as cows. Capitalization in land and machinery are almost certainly going to make it more difficult. Older dairy producer with a low debt level. Older producers should work on management skills, control debt and invest minimally in capital items. Your dairy operation will become obsolete over time, but the chance of recovering large capital investments in a sale is unlikely. Invest in items with a rapid rate of return – such as TMR mixer – and save labor. If you are an above-average manager you will be able to stay in business for an extended period of time. Save money outside the dairy operation for retirement. Older dairy producer with considerable debt. You are in a similar situation as the young dairy producer. Work on management skiills and minimize margin per cow. The other option is to decrease debt load by selling land or machinery. Again, it is important to save money outside the farm for retirement. Farm income could be supplemented with off-farm income. Older dairy producer with a child wanting to transition into the dairy operation without expanding. It is time for children to take over if the farm is carrying debt and/or if the senior partner has not done a good job of saving money for retirement. One option is to have a supplemental off-farm job until the senior partner is ready to exit the business. Some of the most successful arrangements are where the child purchases the cows, rents the barn and purchases all of the feeds. Good communication is key and having a realistic projection of cash flow is essential. Often the problem is that two families end up trying to live on enough income for only one family. I wish someone could wave a magic wand and increase milk prices, but that would really change the current mindset of Americans. Producers must continue to work within the political arena to make sure their interests are heard. Now is a good time to evaluate your business and determine if you are achieving the lifestyle and income that you desire. If not, re-evaluate the options that are available. If you are struggling with these decisions call us at (800) 450-6171 or (320) 255-6169 and we will be glad to help you sort it out.
