Archive for December, 2009

Business harmony: New song needed in a volatile dairy business world

To keep your dairy business in tune, ‘harmonize’ strategic clarity and consistency with agility and resilience.

By Dave Natzke

C.K. Prahalad, University of Michigan Ross School of Business professor, writing in a BusinessWeek column titled, “In Volatile Times, Agility Rules,” suggested business managers must “harmonize” two critical capabilities: 1) strategic clarity and consistency; and 2) agility and resilience. What’s that mean for dairy in this volatile era?

Strategic clarity

“Many dairy farm families do not have a strategic vision embodied in a mission statement,” said Geoff Benson, professor emeritus in the Department of Ag & Resource Economics, North Carolina State University. “Organizations can handle extreme change only when they can address it within a clear strategic framework. Otherwise, they can only wait and react.”

Unfortunately, a strategic vision on many dairies either lacks clarity or is not based on fundamentals, Benson said.

“A strategic vision, operational efficiency and financial management are the keys, but I do not believe these are ‘givens’ in the sense that they are widely practiced in the dairy industry,” he explained. “Many dairy managers do not understand the basic economics of the dairy industry or, if they do, they don’t have a plan to cope with it. Many focus on production efficiency, which is important, but they too often ignore profitability as an over-arching management goal and in decision making. Some production practices may be efficient, but not profitable.

“Financial management is the weakest of the three,” Benson said. “Part of this is the lack of focus on profitability; part is the lack of a cash-flow management strategy to cope with volatility (and this is harder to do if you are not profitable) and net worth issues (building wealth, reducing debt as a goal, maintaining solvency and ensuring adequate collateral for credit.)”

“Other than working hard and producing as much milk as you could, not a lot has needed to be strategic on dairy farms in the past,” said Ken Bolton, University of Wisconsin-Extension Center for Dairy Profitability. “This has changed, and is something many producers struggle with greatly. We tend to understand that if doesn’t matter to the cow, it doesn’t matter. We must build our understanding that if it isn’t strategic to achieving our core mission, it doesn’t matter. Many producers may want to rethink their core mission of minimizing their income tax liability to one of building wealth. Some have the opportunity to change their way of life mission to one of producing profit. These are seismic cultural changes that do not come easily to any of us.”

Management categories

Wayne Weiland, regional business manager with Standard Dairy Consulting, categorizes overall dairy management into three categories – financial/business management, people management and cow management. For example, process control is a people management issue; marketing is a business management issue; and stocking density is an example of a cow management issue.

Strategic clarity falls under both people management and business management, Weiland explained.

“You need to have a clear strategy for the business, and you must be able to communicate that strategy to your employees, so they can help move the business in that strategic direction,” he said. “It empowers your employees when they know where the business is headed, and they make better minute-by-minute decisions that will be consistent with the overall strategic direction.”

Consistency

“Consistency is a people and cow management issue,” Weiland said. “Can we do things the same way, every day? Consistency is still what makes cows perform best. The old saying: ‘It’s better to be consistently wrong than inconsistently right’ is worth examining. If I have a dairy doing something consistently wrong, it’s much easier to identify and correct than if I have them doing it inconsistently right. Then it’s both tough to find the problem and difficult to correct.”

Management requires monitoring. To be resilient or agile in times of volatility, dairy managers need an evaluation process or system for dealing with change, said Mark Kinsel, president & CEO of Agricultural Information Management, Inc. That includes a crafted, proactive approach to dealing with changing conditions, not a reactive, “seat-of-the-pants” response. “Have contingency plans for changing condition,” Kinsel said. “Be confident enough in your plan that you stay the course once you make a decision to change, and don’t try to constantly tweak the plan at every turn.”

Volatility necessitates change

Business volatility changes management needs and skills, warned Ron Curran, manager, market development, AgSource Cooperative Services.

“Whether people, processes or finances, the most important management area for managers to focus on is the area that is weakest today,” said Curran. “Become better educated, both formal education and informally, by keeping an open mind, travelling and soaking up knowledge wherever and whenever you can.”

Weiland agreed. Getting outside help or hiring people who match needs or bring specific skills may be necessary.

“If I’m a great financial manager, but can’t manage the day-to-day labor force, then I better find someone who is not just good, but great at doing this,” he said.

People, business skills

Most dairy farm managers are blessed with a great amount of technical intelligence in the areas of production, said Gregg Hadley, University of Wisconsin-River Falls/Extension assistant professor and farm management specialist.

“But most dairy farm managers could use more technical intelligence with regard to the business management aspects (processes, financial management, risk management, human resource management),” Hadley said. “To keep the management team and workforce motivated in these volatile conditions, managers might need to develop the emotional intelligence (understanding people and how they react) aspects of human resource management.”

Consistent performance requires a consistent message, added Alvaro Garcia, dairy science associate professor, South Dakota State University. Red flags might include asking milkers to do a thorough job with cow prep and udder stimulation, and later complaining about the time it takes to milk and the need to cut down labor costs; or asking employees to lower somatic cell counts, and then complaining when milkers use more gloves than normal.

Non-economic volatility

Adding to the need for agility is the fact economics is not the only volatile force facing the dairy business, said Jeffrey Bewley, animal scientist at the University of Kentucky.

“Dairy operations most likely to maintain their positions in the dairy industry are those that are the most resilient by being the most prepared to deal with change, uncertainty and the pressure of internal and external forces,” he explained.

“A resilient dairy develops creative solutions to dealing with change as the ‘rules of the game’ change,” Bewley continued. “Dairies will become increasingly more complex with increased consumer concerns for food safety, animal well-being and environmental impact. Resilient dairies take advantage of existing strengths, absorb system shocks and adapt to changes by taking advantage of the new opportunities they create. Striving for resilience may help you avoid the traps that occur when the dairy is viewed as a constant, unchanging system.”

2009: A HARD LESSON IN ‘BREAK-EVEN’

One of the dairy management lessons of 2009 may be a greater awareness of “break-even” milk prices – because so many producers were looking “up” at them.

“There are many more people that know their break-even point today than did two years ago,” said Wayne Weiland, regional business manager for Standard Dairy Consulting. “Back then it was an exercise conducted by the most savvy business-minded owners who were really looking at margins and maximizing their return on capital and profit on a total system/business basis. Now, almost everyone knows where the break-even is, because almost everyone was operating below the water line and had to come up with ways to inject capital into the business – by borrowing more or eating equity.

“This became more visible (at 2009 milk prices), since it was more of a checkbook balance issue: ‘Do I have enough money to pay the bills?’ When you don’t, it’s clear that the break-even is above $10/cwt. I heard comments like: ‘If we could just get back to $13/cwt. milk, at least I wouldn’t be losing money every day.” That tells me they know their break-even is $13/cwt., even though they may not have done the mathematical calculations,” Weiland concluded.

Even greater awareness is needed, advised Gregg Hadley, assistant professor and farm management specialist at the University of Wisconsin-River Falls and UW Center for Dairy Profitability.

“The increase in market volatility has increased the awareness of break-even and other cost-of-production concepts,” Hadley said. “But in order to understand one’s break-even, you need good accounting. Most farm accounting is done with tax management in mind. This type of accounting is largely cash transaction-based.

“Dairy farm managers need to understand how profitable their operations really are, and this requires accrual accounting techniques,” Hadley continued. “Furthermore, in order to get farm managers financial information they can really use, less emphasis needs to be placed on financial accounting (records for external use) and more emphasis needs to placed on managerial accounting (records for internal use).

“Once the accounting is in order, the manager needs expertise to analyze the records,” he said. “If the dairy manager isn’t willing to invest the time to develop this skill, he or she needs to make sure someone on either their external management team or internal management team can analyze the records and make practical recommendations based on their analysis.”

Beyond milk prices, producers should also understand the break-even production level for cows in their herd, said Jeffrey Bewley, animal scientist at the University of Kentucky.

“When cows are not covering their variable expenses, other options (culling or drying off early) should be explored,” Bewley explained. “I think more producers were concerned about this number over the last year, but we still aren’t where we need to be. In the long run, producers may also need to understand the future profitability (net present value or retention payoff) of each individual cow to make more informed decisions about which cows should stay in the herd.”


California/Arizona: Fred Machado ends 40 years in California dairy industry

By Ron Goble

EASTON, Calif. – The Machado Dairy is quiet now, except for a few hundred young heifers still being fed at the nearly vacant facility.

No longer are cows being fed and milked at Fred Machado’s dairy farm southwest of Easton in Fresno County.

“We were losing a lot of money every month and we needed to make a choice,” explained Machado. “We either had to get out of the dairy business, or go to the bank and borrowed $1 million against our land that we worked so hard to pay for over the years. Looking down the road, I couldn’t really see any light at the end of the tunnel, knowing what the situation was in the dairy industry.

So my wife, Maxine, our son Arthur and our daughter Kathi, set down at our kitchen table and made the hard decision to sell our cows. That was December 2008.”

Soon after that family meeting, Machado submitted a bid in the first CWT program of 2009 and it was accepted.

Machados still maintain their dairy facility with the hope of leasing it out when things turn around in the industry. They sent about 900 cows to slaughter, but kept approximately 550 heifers that Fred will eventually sell over time.

“We have a very good facility. We don’t have freestalls, but the corals are in good condition and everything else is up to date,” Machado said.

The dairyman diversified early in his dairy career so he had options. He bought numerous parcels of land near the dairy and in 1996 began to develop his acreage. Today, in addition to farming 100 acres of winter forage and corn for the animals, he and his family farm 240 acres of wine and raisin grapes, and 350 acres of almonds.

Machado said everything they have developed over the years is a tribute to the hard work of his entire family. He and Maxine have been married 52 years and have included their children in the farming enterprise. Kathi handles the business office for the farm and the dairy. Her husband, Paul Woodward handles the farming and Arthur Machado has management responsibility for the overall farming and dairy operations.

Machado spent his earliest years in the Azores where he started milking cows when he was 8 years old. When Joe Machado returned to America in 1949 with his family, Fred was 16.

He and his father started working on a Fresno area dairy as milkers. “My father didn’t want to milk cows, so we picked grapes, picked cotton, chopped cotton – you name it we did it,” Machado recalled.

“My father didn’t like farming or dairying. During World War II Joe had worked in the steel industry here and wanted to return to that. Eventually, he was hired by Pittsburgh-Des Moines Steel Company where he worked for 30 years until he retired.”

When the Korean War came along, Fred joined the U.S. Navy. “When I got out of the service in 1955, I wanted to farm, so I rented 40 acres and started growing alfalfa and cotton. The owner eventually sold me the land for nothing down and 30 years to pay,” said Machado. “That was our start and we’re still living on and farming the same ground today.”

By the time Machado started the dairy in 1970, he was farming 1,000 acres of alfalfa, corn, cotton, and sugar beets on land that he either owned or rented. “I was selling alfalfa for $18/ton and toward the end of my dairy career I was paying $270/ton.

“In the early years, Maxine and the kids would be changing irrigation lines in the row crops while I was taking care of the cows and doing the rest of the farming,” Machado said. “We started the dairy with 50 Holstein cows, milked in a side-opener parlor – three cows in front of each other on each side of the pit.”

Six years later, Machado built a new double-10 herringbone milking barn and once that was up and running he remodeled his old parlor into a double-9 herringbone.

Before he was done, Machado was milking 1,500 cows 2X with a total 3,800 including heifers, bulls and dry stock. Rolling herd average was about 21,000 lbs. with 700 lbs. butterfat. His herd averaged about 70 lbs. per cow per day.

“The dairy industry was good for a long time. It had its ups and downs, but never like it is now. When milk went to $9/cwt and hay at $270/ton there was no way to be profitable,” the dairyman said.

“Of course, we’ve got a world economy that went sour. But we’ve wrecked the dairy business in our own country ourselves. And what wrecked the dairy business is greed,” he declared. “I think a 2,000-cow dairy is reasonable today. But when you build 10,000- or 20,000-cow dairies, you’re asking for trouble.

“The huge dairies producing rivers of milk that they can’t get rid of only think about getting bigger, but they have no clue what they are going to do with the end product.”

Machado said his cooperative was expanding when they didn’t have the capacity. They were dumping milk and then assessing the membership to pay for their mistakes.

“Everybody is expanding without thinking of the consequences. The sad thing is that a lot of good dairy producers are going to be out of business as a result. And I don’t see much changing in the next few years.”

Machado, now 77, was honored recently as the “2009 Agriculturist of the Year” by the Greater Fresno Area Chamber of Commerce.

Machado is well-known in the farming community and has been involved with the Fresno County Farm Bureau for more than 50 years. He has served in several positions, including past president and also has held numerous leadership positions in other agricultural organizations.

He has received numerous honors for his dedication to agriculture and volunteerism, including distinguished service awards from both the Fresno County Farm Bureau and the California Farm Bureau Federation. He also served on the boards of directors of the National Milk Producers Federation, Challenge Dairy and Danish Creamery.

Fred said he plans on taking time to enjoy his grandchildren, do a little traveling, and continue his volunteer work at the Veteran’s Memorial Museum’s Legion of Valor in Fresno. That said, Fred still keeps a hand in the Machado Farms operation.

Southwest DairyBusiness: Vazquez family returns to Texas roots

By Lindsay Reyes

BOVINA, Texas – Passion for the dairy business in the Vazquez family started at early age. Currently, the manager of SD Farms, Mondo Vazquez originally from Stephenville, Texas, grew up on Jim and Jack Beyer’s dairy where his dad milked cows for many years.

“As I went through high school, being on the dairy I began to like being around the cows more and more,” Vazquez said. “I decided to pursue the A.I. side of the dairy industry. I began to see that Erath County was behind the times, so I head to California to learn more.”

Mondo Vazquez, with his wife Chela and son Jeremy, who was two years old at the time, made the move to California completely by their own choice. Mondo started working on the A.J. and John Bos’s dairy where he begin learning more about dairying.

“They taught me a lot more than I had learned previously at the dairy I grew up on. There I learned more about cows, A.I. and entering data onto the computer to keep accurate records,” he said. He worked for them as a herdsman for five years.

From the Bos dairy the Vazquez family relocated to Bakersfield, Calif. where he was offered a job by Amos DeGroot and Eric Goedhart. “I was offered a management position, which was a better situation for both Chela and myself. She was secretary and I was the dairy manager,” said Mondo. “We actually worked for Amos and Eric for about five or six years before we decided to move on and work for other dairy operations in Central California.”

From Bakersfield Mondo and his family relocated to Moapa, Nev., located between Las Vegas and Mesquite, to manage Moapa Valley Dairy, another facility owned by Amos DeGroot.

It wasn’t too long until DeGroot and Goedhart found themselves needing to hire Mondo and Chela back at their dairy. “A management opportunity was offered at their Arizona TCK Dairy with 1,200 heifers, and a double-12 parlor. We were there for about a year and a half,” said Vazquez.

“Amos had a dairy in San Jacinto (California) where he needed a new manager, so we moved again,” said Chela. The Vazquez family was in San Jacinto for about another two years. The land the dairy was on was in escrow during their stay. They had no idea how long it would be before the dairy would have to be moved due to development. “When the land deal closed, we only had six months to find a place to relocate the dairy operation and their cows,” said Chela.

“They started looking in different areas of the country, including places like Kansas. But when Amos and Eric asked us where we would really like to go, the discussion always seemed to lean toward Texas,” Chela explained.

The pluses for returning to their roots in  Texas came about because of the wide open spaces, less humidity and the availability of land to grow crops, as well as the proximity to the other dairies that DeGroot owns.

On March 15, 2005, SD Farms in Bovina, Texas opened its doors and they started milking cows. Mondo was on the farm while Chela was in California organizing the shipments of cows to Texas – a process that took about a month.

“I asked Chela to start sending me the tail end cows first and keep milking the high producers. We ended up moving 1,200 head and only lost one cow during the entire relocation to Texas. When I got to Texas it was snowing and when the cows arrived and got off the truck they where not sure what to think of the situation,” declared Mondo.

The transition from California was smooth and soon they began their 3X milking cycle, which they were able to maintain for about a year and a half.

“As our herd grew, the less time we had for milking 3X,” said Mondo. Cow numbers increased to 1,500, and eventually ballooned to 2,900 head, which they are now milking 2X.

From the beginning until now, Mondo has been the manager at SD Farms along with his wife Chela as the office manager. “Sometimes there were tough days. You work together at the dairy all day, then go home to each other,” stated Mondo. “It’s requires an adjustment.”

All employees at the dairy are from Texas. No one made the move from California. Thus, Mondo and Chela have spent a lot of time training employees, not to mention, getting the cows accustomed to the new parallel parlor, different from their previous herringbone setup.

“Every cow had to be physically loaded one-by-one, which was a little challenging,” said Vazquez. “I have to give a lot of credit to the employees we have now and the teamwork it takes to run the dairy. We couldn’t be where we are today without them.

“ A lot of people say that the Panhandle is great but, a lot of people don’t realize that it can snow, sleet, rain, and be sunny, all in the same day. You tell people that and they think you have to be nuts to live here. The swings here for herd health is incredible. It’s not like dairying in California. It’s definitely not easy to dairy here,” declared Mondo.

But, growing up in Stephenville gave Mondo good preparation for the challenges he is facing from weather. It’s that experience Mondo is putting to good use in Bovina. Along with the knowledge that he had gained previously, he has learned many new things along the way.

“I think we are fortunate to have bosses who will listen to us. When we told them we needed a maternity barn, they agreed and stood behind us, which really says a lot,” stated Chela.

Though Chela was not originally from a dairy background, it didn’t take her to long to become accustomed to the dairy lifestyle. “It’s a very family orientated  business. The whole family gets involved. Our oldest son, Jeremy, breeds cows on the farm now and our youngest boy gets dropped off at the dairy by the bus after school and goes out and plays with the cows and calves,” said Chela.

Without good employees and great neighbors, it would be hard to dairy in this part of the country, Chela concluded. But Mondo, Chela and their children are thankful for the local support network that is there for people in the dairy industry.


Precise Predictability: Precise Rations, Predictable Performance

New technology and products make more precise rations possible. With these rations come cost savings, more efficient use of feed resources and the same or better herd performance.

Submitted article

Cost savings, high production levels and reduced nitrogen excretion have earned amino acid balancing a place in ration formulation strategies. Even greater opportunity exists for precision and more predictable performance results.

 Glen Aines, Ph.D., technical support specialist at Balchem Animal Nutrition and Health

Glen Aines, Ph.D., technical support specialist at Balchem Animal Nutrition and Health

On individual dairies, determination of the return on amino acid balancing depends on two factors, according to Glen Aines, Ph.D., technical support specialist at Balchem Animal Nutrition and Health. “The return on investment (ROI) depends on herd response and ration cost. In seven recent research studies, the average change in milk components was worth 53¢/cow/day, assuming a protein value of $2.20/lb. and a butterfat value of $1.20/lb.

Chuck Schwab, professor emeritus at the University of New Hampshire

Chuck Schwab, professor emeritus at the University of New Hampshire

Chuck Schwab, professor emeritus at the University of New Hampshire and dairy consultant, would expect no less. Dr. Schwab has been involved in amino acid research since the 1970s.

“Historically, nutritionists have used a blend of rumen undegradable protein sources in an attempt to match the cow’s needs,” said Aines. “These feedstuffs, however, go through some transformations during rumen digestion that can further alter their amino acid profiles.”

Considerable variation in amino acid levels exists in common feedstuffs. Table 1 provides some typical values for amino acids in common feeds.

Typical values for amino acids in common feeds

Typical values for amino acids in common feeds

Protected methionine

The introduction of protected methionine products simplified amino acid balancing. The protected methionine, one of the first two limiting amino acids, survives the harsh rumen environment increasing availability and absorption in the small intestine. “Yet, some differences among these products exists,” noted Schwab.

Developing a protected lysine product proved far more challenging. Lysine is the other first limiting amino acid. The first rumen-protected lysine was introduced in the fall of 2008. Far more cost-effective and more precise rations followed. Nutritionists are confidently bringing crude protein levels down from 18%-19% to 16.5%-17%. The methionine and lysine levels no longer need to be assured by over feeding protein. Reducing the protein level also reduces ration costs.

Protected lysine

Research with the new rumen-protected lysine defines its benefits. The research used a control diet deficient in lysine. Cows were fed 0, 30, or 60 grams of the rumen-protected lysine. All diets contained approximately 16.8% protein, the same energy content and sufficient methionine to prevent methionine from limiting performance. Researchers then measured the specific response to increased lysine.

The decrease in percent crude protein makes room for more of other feedstuffs. “When producers save a pound of protein, they can put in a pound of something else. Why not put in a pound of something that rumen bacteria will respond to such as fermentable carbohydrates? We know that a pound of fermentable carbohydrate is probably good for 2 to 4 lbs. of milk,” said Schwab.

Use of amino acid balancing to decrease crude protein while maintaining or increasing performance is also good for the environment. Bringing down ration crude protein levels decreases nitrogen excretions.

Cows were fed 0, 30, or 60 grams of the rumen-protected lysine.

Cows were fed 0, 30, or 60 grams of the rumen-protected lysine.

Distillers grains

Recently, use of distillers grains from ethanol production has received research attention. Both corn and distillers grains are naturally low in lysine.

Ken Kalscheur, Ph.D., associate professor of Dairy at South Dakota State University

Ken Kalscheur, Ph.D., associate professor of Dairy at South Dakota State University

“In scenarios where we’re seeing a lot of corn-based products and byproducts in the ration, adding a protected lysine product certainly could benefit,” said Ken Kalscheur, Ph.D., associate professor of Dairy at South Dakota State University. “The question is ‘what ingredients are you using and what impact does that have in formulating for specific amino acids?’ ”

He looks forward to using the new rumen-protected lysine product in distiller-grains-based diets and seeing how it does on individual dairies. “I definitely think there are areas where it can be used, but it comes down to cost,” he said. “If it’s cost effective, people will adapt.”

 Lysine levels, ruminal bypass and intestinal absorption vary with the feedstuff and its processing

Lysine levels, ruminal bypass and intestinal absorption vary with the feedstuff and its processing

Processing affects lysine

Inconsistency in byproduct feeds poses a potential problem when formulating for amino acids particularly for lysine where bioavailability can be significantly reduced by processing. Lysine levels, ruminal bypass and intestinal absorption vary with the feedstuff and its processing. A good example of this is blood meal (see the Table 3).

Amino acid balancing

The process starts with the software for ration formulation. Many allow for amino acid balancing. Guidelines or assistance with balancing amino acids is available from most suppliers of rumen-protected methionines and lysine. The following steps lay the proper groundwork, according to Schwab.

1) Balance the ration for fermentable carbohydrates, such as high-quality forages and finely ground or steam-flaked cereal grains and adequate effective fiber.

“Fermentable carbohydrates support good rumen health and maximize microbial protein synthesis,” Schwab said. “Because microbial protein has a superior amino acid profile to rumen undegradable protein (RUP), higher microbial protein production allows nutritionists and producers to feed lower levels of more costly RUP.

2) Balance for methionine and lysine, the first two limiting amino acids. Replace low-lysine feeds with high-lysine protein supplements or the new rumen-protected lysine product.

“Many producers and nutritionists are moving from rations with 18%-18.5% crude protein to rations with 16%-16.5% crude protein,” Schwab said.

“The 2% difference in ration can now be filled with fermentable carbohydrates which support milk production,” he said.

Well managed herds can respond quickly. “We find that cows really respond,” said Schwab. “We’ll see the milk protein percent respond in just a few days. The full effects of the milk fat percent take longer, but typically appear within a month. Over time, the change in milk protein percent typically becomes more pronounced.”

Other typical expectations include:

• Increased use of homegrown feedstuffs

• Lower ration crude protein levels

• Feeding of more roughage to fill space created in the ration

• Increases in milk yield and components

• Reduced protein costs for reduced ration costs

• Less excretion of nitrogen into the environment

Facts about amino acids

• Dairy cows have nutritional requirements for specific amino acids; not for proteins.

• Essential amino acids cannot be made by the cow. They must be obtained from feedstuffs

• Non-essential amino acids can be made by the cow.

• Amino acids can be derived from either the microbial protein produced by microbial populations in the rumen (the highest-quality protein available to the cow) or from feedstuffs that are not broken down in the rumen, but are broken down in the intestine and absorbed.

• For efficient amino acid use, maximize microbial protein production and feed rumen undegradable protein (RUP) with an essential amino acid profile that mirrors the cow’s essential amino acid requirements.

FYI

• Chuck Schwab is professor emeritus at the University of New Hampshire and dairy consultant. E-mail: Charles.Schwab@unh.edu. Phone: 603-862-1341

• Ken Kalscheur is associate professor of dairy at South Dakota State University. E-mail: kenneth.kalscheur@sdstate.edu. Phone: 605-688-5482

• Glen Aines is technical support specialist at Balchem Animal Nutrition and Health. E-mail: gaines@balchem.com. Phone: 402-305-3909.

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