Dairy Information: Center Focus Column

Defining Character in Extraordinary Times

By Jayne Sebright, Interim Executive Director

During the past nine months, I have heard Pennsylvania Secretary of Agriculture Russell Redding mention several times that these are extraordinary times for the commonwealth and for Pennsylvania’s agricultural industry. The term, Extraordinary, is defined as “beyond what is usual, ordinary or established.” To me, this means these are times unlike any other, offering both immense opportunities and a quest to overcome the challenges in realizing those opportunities.

JayneWe also can use this term to describe much broader issues in the industry. In dairy, our new normal is defined by increasing uncertainty shaped by heightened consumer expectations, greater market transparency in how food is produced, a global marketplace, growing labor issues, stricter environmental regulations, and increased volatility in our milk pricing system and in all commodity prices.

In referencing these extraordinary times, Secretary Redding has also noted two needed fundamentals. In particular, I heard him reference that a budget only works if it is balanced and nothing ever gets done without communications. When you consider our current dairy economy, these pieces are critical for any business working through the next six to twelve months.

A Budget Must Be Balanced to Work

USDA’s Economic Research Services estimated the national average total cost of production in February 2016 at $21.48 per hundredweight. That figure includes both operating and overhead costs, and some economists would say that it’s estimated higher than the actual average. However, it doesn’t take long to figure out that an All-Milk price of $15.70 per cwt. and a production cost of $21.48 per cwt. doesn’t make for a balanced budget. Futures prices on the Chicago Mercantile Exchange (CME) don’t show any signs of relief soon, either, with the Class III milk price not approaching $15 until June 2017.

Most dairy farm families are evaluating every aspect of their budget right now to take any access out of it. Most importantly, know your cost of production. Analyze your income statement quarterly or even monthly to make sure your expenses are remaining consistent or decreasing. Evaluate each expense to make sure it is necessary and in line with both historical and industry projections. Go the extra mile to bid expenses out and challenge your suppliers to keep costs in check. Be careful, though, not to compromise key herd management protocols just to cut costs.

With cash flow extremely tight, monitor accounts payable and communicate with vendors as much as possible to avoid excess finance charges for late payments. If possible, opening or increasing a line of credit would alleviate those fees and allow you to stay more current with vendors. Some producers are working with suppliers to find different solutions, such as paying for annual services through monthly installments or averaging out costs in cases when they are higher in one month than another.

On the income side, take advantage of every opportunity to add revenue to your business. Work with your nutritionist to keep components up, and make sure protocols are in place to capture every available quality bonus. Also, consider what opportunities you have to increase revenue: Are there extra heifers in your inventory that you could cash in; do you have land available to cash crop; is equipment available for custom work; is diversification possible through another animal enterprise or agri-tourism venture?

Communications Is Key

Whether it is with your suppliers or your lender, with your employees, your partners or your spouse, communicating openly and regularly about your finances and your ability to maintain cash flow is important to maintain relationships and find solutions. Many farms have found tremendous value in having a profit or management team in place where budget issues can be discussed. Often times, by bringing in additional perspectives, solutions that you hadn’t thought of on your own can be uncovered. And, sometimes, what you didn’t think was possible becomes the strategy that carries your business through the downturn.

Individual one-on-one communications is also critical. If you are falling behind on accounts payable, keep in touch with your suppliers and communicate when payments are being made and what your plan is. They want to see you succeed as much as you do because their business depends on the success of you and their other customers and clients. Make sure they know they can trust your word. A business can rebound as soon as prices come in line, but relationships take a lifetime to rebuild.

Control the Roller Coaster

This year’s Pennsylvania Dairy Summit hosted by Professional Dairy Managers of Pennsylvania and the center featured a producer panel on adding revenue and controlling cost. One of the producers on that panel likened dairy farming to riding a roller coaster, which is an analogy we heard many times. He added that, when riding that roller coaster, you can do one of three things: Close your eyes, act surprised or stay in control. When you close your eyes, you only realize how far you fallen once you finally open them. Acting surprised doesn’t do any good, either, because you knew what you were getting into when you got on the ride.

Staying in control is the best way to enjoy the ride, he said.

There is no doubt that we are facing extraordinary times within the dairy industry right now. We all have a choice – we can close our eyes, act surprised or control the ride. I believe that it is in these extraordinary times that a person’s true character is defined. Staying calm and working through solutions is the only way we’ll get through the economy downturn and be positioned for improved margins in the future.

At the Center for Dairy Excellence, the budget impasse has given us the opportunity to re-evaluate and redefine our business model moving forward. This discovery period has resulted in renewed and strengthened partnerships, positioning the organization well to move forward as a central coordinator of resources, both at the farm level and to the broader industry.

We remain focused on our mission of empowering the people, creating the partnerships and coordinating the resources to grow dairy profitability in Pennsylvania. We believe there is tremendous long-term opportunity within the dairy industry, despite the current downturn. We look forward to continuing to serve as a resource to individual dairy farms, businesses and the broader industry.

Most importantly, we are here to help. If you want to work with a consultant to evaluate strategies for guiding your business through this downturn, we can help you identify someone in the industry. If you are looking to assemble a profit team, we can help you reach out to a facilitator and coordinate your team. We also have resources that can help you identify trends and evaluate your business. To learn more, call us at 717-346-0849 or email us at info@centerfordairyexcellence.org.