DAIRY FINANCIAL TIMES BY PAUL ANEMA – Learning to cope with change

2007 was a year like no other for dairy farmers. Dairymen saw record high milk and feed prices, increased regulation, and for many producers a creamery-imposed production cap in place or in the works. 

While no one is complaining about the record high milk prices, the higher feed prices and increased regulation by government agencies has by no means gone unnoticed. As with every era of change we are left with two options: 1.) Get mad, get organized and complain until it changes, or 2.) Adapt. 

Option One: Complain. There is certainly some level of merit to this chain of thought. Whether we like the program or not, Cooperatives Working Together, has shown that dairymen can unify and mobilize in an unprecedented fashion to facilitate change. Perhaps by working together dairymen could exert enough political clout to encourage legislators to enact policies that would encourage, rather than prevent, the construction of new milk processing facilities. It is no secret how most dairymen feel about Ethanol and its affect on our feed prices; if the dairy lobby was as well funded and organized as that of the environmental groups, it might have more success. This type of organized effort is needed, but a significant amount of resources and time is being spent longing for the days of cheap feed, limitless production, and growth that was constrained only by the amount of money the bank would lend us. Those days are gone. As a result, the industry’s best course of action is…

Option Two: Adapt. The dairy industry 24 Western DairyBusiness July 2008 is still a frontier with great potential and opportunity but in moving forward, those opportunities will not follow the same patterns as years past. While most dairymen have always been open to ideas that will make them more efficient, the preferred model for increased growth in profits has typically been add cows, add more cows, and then add some more cows. Because of creamery imposed production limits and increased restrictions from air and water quality boards, this option is off the table for now. So what can be done?

Learn from friends

Once upon a time, almond farmers had a difficult time getting rid of the almond hulls they now sell for $200 a ton. What resources are dairymen missing out on? With the increased cost of energy and increased pressure for new energy sources is it too far fetched to believe that dairies can capitalize on methane digesters? While there are questions about the reliability of the technology, and few would want to be the first to try it, dairy farmers would be wise to keep their eyes and ears open for new developments and creative financing that will likely come in the form of government grants and industry incentives.

Don’t Leave Money On The Table

I can’t tell you how many dairymen are losing out by not taking advantage of bonus programs with their creameries. These bonuses can amount to as a much as $.45 per cwt. On a 1,000 cow dairy this can easily amount to $10,000 plus per month. On the extreme end of the quality spectrum dairymen with substandard quality can get charged penalties that are even more costly than forgone bonuses. Even if you have to spend some money to clean up the milk barn or replace old equipment, these upgrades will often pay for themselves’ within a year if it lowers contaminants. Beyond the immediate benefits of quality bonuses dairymen must think about protecting their investment. If a dairyman loses his contract as a result of poor quality milk it will be difficult to sell that facility and tremendous value will be lost.

A Case For Crossbreds?

The argument in favor of crossbreds or seems stronger than ever. With limitations on production the two most obvious ways to increase revenue on the same base of milk production are buying quota (in those states where it is available) or increasing components. For those dairymen who do not wish to venture into the world of crossbreds consider tweaking your ration to take advantage of the high milk prices. For example: If you take a 1,000-cow herd in the month of March with daily production of 70 lbs. per head, each tenth of a percentage in butterfat and solids would increase the milk price by 2 to 3%.

While dairymen must be vocal to protect the industry as a whole, they must also be diligent in staying ahead of the curve and finding new opportunities for efficiencies. Even if the good ol’ days do return, imagine how much more profitable the industry could be if we learn to be efficient in the current environment.

FYI Paul Anema is a certified public accountant and partner with Genske, Mulder & Co., LLP: Modesto, Calif. He can be reached at 209-523-3573 or e-mail him at paul@ genskemulderco.com