Dairy Information: Center Focus Column

What Your Banker Heard At Our Financial Conference

By John Frey, Executive Director
Center for Dairy Excellence

A few weeks ago, 115 Pennsylvania bankers, lenders, accountants, and other dairy consultants attended the Center for Dairy Excellence’s annual Dairy Financial and Risk Management Conference. In all likelihood, your lender was in the audience for this event, which has become one of our favorite events at the center. The intent of this day-long conference is to focus on those things every lender should know as they work to help their dairy clients build the right capital structure and profitability model for their dairy business.

FreyAt this year’s event, we invited Dr. Greg Bethard to join us and speak both in the morning and in the afternoon. Greg has spent his career consulting to dairy farms around the world. Just recently, he has decided to make a change in his career and has entered into a partnership with a Midwest family in a growing dairy operation. In his morning session, Greg discussed what he referred to as the “Top 10 keys to a Healthy Profit & Loss statement” for a dairy farm. For purposes of this column, I would like to share a few of these “keys” which Greg mentioned.  For a complete list, give us a call at the center and we’d be glad to share them with you.

Keep the barn full and stay at 100% production capacity

Every dairy farm in Pennsylvania has a maximum capacity. Your maximum capacity is the total annual pounds of milk you would ship if every available slot or stall was filled with a productive cow producing at the highest level achievable for your operation. If you have 100 stalls and 80 pounds average daily production is achievable, your 100 percent annual capacity is 100X80X365 days or 2.92 million lbs. Greg emphasized the importance of shipping a lot of money corrected milk (MCM), further defined as the Value of Milk Generated, relative to cost of feed. Your DHIA provider in all likelihood provides this information, and your nutritionist most certainly has this in his or her sights. Having your Profit Team evaluate capacity potential for MCM for your dairy and determining where your proximity to capacity has been for 2014 would serve as a good way to begin goal setting for 2015.

Manage replacement costs / trade in value

Greg encouraged the dairy lenders and accountants in the room to evaluate replacement costs on a cost per hundredweight basis by establishing a “trade in value” of each cull cow. He begins with determining the average price per cull cow, including the “zero price” for cows died and factoring in the number of cows available for cull annually. With favorable market values for cull cows, assuring optimum harvest condition for cull cows, optimal availability of replacements, and optimal production and reproduction management all lead to a lower replacement cost per hundredweight. Greg used the example of a two herds with identical production and cull rates. Herd one was averaging a 25 percent premium price for market cows due to superior management and having more culls to sell because of a 5 percent (vs. 10% for herd 2) death loss. This combination of factors led to a 50 percent lower replacement cost. Greg offered the following decision making tips to those in the room: Don’t break cows, offer a career change to unprofitable cows, replace broken or inefficient cows with new ones, and don’t wait until cows are worn out to sell them.

Generate pregnancies and cut costs intelligently

Greg challenged the audience to help dairy producers focus on projected cow flow and lactation demographics and to know the total pregnancies needed to assure the “stall capacity element of the capacity equation” is being achieved. Greg emphasized the importance of optimal dry cow and fresh cow management to assure healthy transitions. Achieving this leads to improved reproduction and consistent cow flow, eventually equating to subsequent higher levels of MCM production. Finally, cost cutting opportunities are usually available but should never come at the cost of increased money corrected milk, according to Greg. Intentionally evaluating key costs per hundredweight associated with the “big three” cost centers can be a valuable discussion for any Profit Team or producer / consultant discussion. The big three, referenced by Greg, are Feed, Labor, and Replacement costs, all measured on a per hundredweight basis.

In summary, this conference provided all in attendance improved insights into what makes the most profitable dairies the most profitable dairies. Greg emphasized these farms come in all shapes and sizes, but they all have those things discussed above in common. They all ship a lot of money corrected milk. One new tool available for producers and consultants to use to evaluate additional opportunities for increased farm profitability is the Dairy Analyzer Program available on the center’s website. This tool developed in partnership with University of Pennsylvania provides an easy analytic to compare current performance to “goal level”. For more information on the tool, contact the center at 717-346-0849 or click here.