Beating the Benchmarks
A tight rein on feed costs serves this dairy well – in any economic climate.
By Susan Harlow
If cost control is essential to prepare for the next upswing in milk prices, Milton Vaill of Vernon, N.Y., is ready. A producer who ranks in the top 25% most profitable dairies in Farm Credit’s Northeast Dairy Profit Summary, Vaill’s management approach helps in bad times – in preparation for the good.
Vaill Brothers Dairy keeps a handle on production costs, especially feed (see Table 1, below). In 2008, feed and crop expenses totaled $4.31/cwt., well below the $7/cwt. benchmark of the all dairies in the Northeast Dairy Profit Summary’s top 25%. Labor efficiency also shines.
At the same time, milk production in the 500-head milking herd doesn’t suffer. Cows averaged 23,150 lbs. (2X) last year.
Some of the management practices that help Vaill keep feed costs low:
• Contracting to buy commodities and flexibility in their use. Last year, the dairy averaged $3.22/cwt. in purchased feed costs, compared to $5.67/cwt. for the Dairy Business Summary benchmark.
“We will change commodities if the price gets out of hand,” Vaill said. “We’re not married to anything. If you do it right, you don’t lose production.”
For instance, when the price of soymeal shot up and Vaill didn’t have enough meal under contract, he substituted distillers grain. When cottonseed prices rose too high, he switched to roasted soy.
Heifer rations include commodities for their first 14 months; after breeding, they eat mostly forage. Even prefresh cows don’t get formulated feed – Vaill can put together his own ration from commodities and minerals. “As far as buying expensive feed, we just don’t do it,” he said.
Vaill is computer-savvy, but still gets his information from commodity suppliers by telephone. Decisiveness is essential.
“The biggest thing is to pull the trigger – know what you’re satisfied with and do it,” he said. “To not act on it will cost more money than to buy it a little high. With the crazy markets, if it’s a price that you can make money with it, you’d better lock it in and don’t look back, because the whole reason to lock it in is to protect yourself.”
Keeping tabs on how much you’ve paid in the past is also important, especially as prices become more volatile.
“Ten years ago, it was a game – you might save $10,” Vaill said. “Now you’ll save $100. Or $200. It’s much more serious.”
• Growing most of his own grain, including high-moisture corn and soy, which he sends off-farm for roasting. Economically, it makes sense. “If our yields are good, I have no problem with that, when corn is at $90, $100 a ton,” Vaill said. The dairy crops 1,150 acres – 600 in corn, 150 acres in soybeans and the remainder in hay.
• Grouping cows. The herd is divided into three groups: fresh cows, high-production and low-production.
He can feed the low group for $1.25 to $1.50/cow/day less than other groups. “I just feel they can go on to a different ration at a different stage of their lactation.”
An automatic ID system, purchased in 1991, makes grouping succeed, he said. Monitoring daily milk weights, he assesses how each group is performing; if fresh cows are getting off to a good start; and the effects of changing commodities in the ration.
A DairyComp 305 computer program was one of the few new purchases Vaill made this year. Current information helps him and his employees make better decisions.
“We want a weekly report so what we can monitor if we’re making our goal or slipping behind,” he said. Reports Vaill finds most useful include the number of cows pregnant; the number of heifers pregnant; cows lost in first 60 days in milk (DIM); cows open after 150 DIM; and mortality rates. “On Monday morning, bang, the report comes out,” he said. “In the last 30 days, are we doing better or worse? Everyone on the farm needs to know if they’re doing good or bad: not a yearly, but a current average. They need to be able to measure their success.”
That leads to the most important reason behind the dairy’s profitability, Vaill said:
• Employees. “The number one thing I have here is people,” Vaill said. “There are some who have been here a long time; some key people worked here as high school kids.”
The dairy employs about six full-timers. Vaill’s philosophy is to give them plenty of responsibility, encouraging team effort. It takes good management skills to do that. When he took over the dairy 30 years ago, he immediately began attending labor management classes.
“You have to try to figure out what they need and want; they are the people who are making it happen,” Vaill said. “Any efficiencies or success has to do with people who work together well. When they can work things out themselves, that’s just magic.”
Vaill doesn’t skimp on labor. Low feed costs help him pay more for labor – nearly 15% of his milk check goes to pay employees, compared to about 12% for the benchmark.
• Low debt per cow. The dairy carries a debt of less than $700/cow, one-quarter of the benchmark, the result of long-held frugality.
“You borrow money to buy cows, but you don’t borrow money for machinery without a darn good reason,” said Vaill, who has a full-time mechanic and a good shop to keep machinery lasting a long time.
Vaill also said he’s always believed strongly in paying off principal when interest rates dip. “If you can deal with the income tax, hammer that principal,” he said.
Gradual growth has been a big key to low debt on the dairy. The 100-stall freestall barn Vaill moved into 30 years ago is still in use, although it has been expanded to about 500 stalls and upgraded with fans and mattresses. It includes maternity and close-up pens. Separate barns house calves, dry cows and bred heifers.
“If you have an old structure, you have to be willing to update it,” he said. “Every time we did that, we gained milk per cow.”
Building a new facility might have been a better idea, however. “The first time I added on to the barn, I should have built a new one,” Vaill said. “I never had a huge debt, but I have sacrificed some efficiencies.”
Vaill and his employees milk in double-12 parlor, which he calls “one of oldest, worst parlors in central new York.” But because of his employees, they milk 100 cows an hour.
Finally, Vaill doesn’t overestimate the price of milk, and he doesn’t plan to do much different if and when the price goes back up. It’s an approach that’s served him well.
Prepare now for better milk prices
Will you capture everything in the next price ‘up’ cycle?
By Steve Bulkley
It’s easy to to miss the highest milk revenues during a milk price “up” cycle, because they tend to appear early, declining sharply within just two to six months. Be prepared to make the most of the next upswing.
Are you positioned? Cash flow rules the day, especially during times of low milk prices. Will belt-tightening compromise your herd’s production and leave you unprepared to fully exploit the next opportunity? It shouldn’t, especially if you made critical business investments during the last “up” cycle.
Thanks to careful purchasing during the historic “up” cycle of 2007-2008, many farm businesses entered the 2009 “down” cycle in pretty good shape. They have a healthy, productive herd of cattle. They have a full staff of talented people. They have a full line of equipment and facilities in excellent repair. They also used record earnings during 2007-2008 to bring debt comfortably under control. Low milk prices are still painful, but these businesses are well positioned to ride out the economic storm.
Are you preparing? If there is an advantage to a “down” cycle, it may be that it forces a reality check of production costs. Farm Credit’s annual Northeast Dairy Farm Summary identifies a widening gap between the most profitable and the least profitable dairy farms in cost of production. The average cost of production for farms in the 2008 benchmark survey was $17.88/cwt. Clearly, improved cost control is a vital part of preparing to capture maximum profit during the next “up” cycle.
What you can do to prepare. Profit is maximized when production costs are minimized and the maximum volume of milk is sold. Total input cost divided by total sales volume yields net cost of production. There are two key points to rein in net cost of production: input pricing and conversion efficiencies. Focus on that interplay to decide when and how much to use any input.
Shopping for best price per ton, per gallon, per dose or per hour is an obvious cost control measure. But don’t stop there. Scrutinize results and efficiencies as closely as prices, and follow up to see if results are materializing as expected. Measuring results is absolutely necessary, even if it is not easy.
Smart input decisions are fundamental to riding out tight cash flow, and critical to preparing for an eventual, but sudden, brief upswing in milk prices. At that moment, you want to be shipping the greatest possible volume of milk and components at the lowest possible net cost of production. Even a two-month lag in ramping production back up could result in a significant missed opportunity in milk receipts.
To be prepared, take an active interest now in each of the inputs being used on your farm and how they are working out. Work with sales reps and consultants to fine-tune the blend of inputs you purchase, and make every reasonable effort to monitor results. Insist on achieving promised results. Success is about price and effectiveness.
• Steve Bulkley is a business consultant in Batavia, N.Y., with Farm Credit of Western New York. Phone: 800-929-1350.
Build employee equity
Now is the time to score some points with your employees.
By Steve Richards
This year’s Northeast Dairy Farm Summary looks back at 30 years of farm data. One of the most striking achievements is the advancement in labor efficiency.
In 2008, the average farm shipped more than 1 million lbs. of milk per worker, up 131% from the average farm in 1978. The most labor efficient herds in 2008 shipped more than 1.3 million lbs. per worker. And while labor efficiencies over the years have come through efficiencies of scale, new technology and higher milk production per cow, they have also come through better labor management practices.
This year, with low milk prices, there won’t be many opportunities to make capital investments to make things more efficient. This means you’ll be expecting more from your people to get through these low milk prices. While it is fair to expect more from your people, it is also fair to expect they may need more from you.
Invest in your people
Even if you don’t have a lot of money lying around, there are ways to invest in your people without spending your last dime. That investment consists of employee management and leadership principles:
• Be frugal but don’t be cheap. Try not to cut things that will end up hurting employee morale. For instance, if you usually keep refreshments in the barn fridge for your employees, keep doing it. The cost savings achieved by cutting out small perks won’t balance the budget anyway.
• Be available. During tough times, employees will want to interact with you more. This is the same with your family, as well.
• Be positive. Dwelling on the negatives gets everyone down, and takes away from the feeling that their job performance has any impact on making things better.
• Be confident. If you are pull together, it gives your employees confidence that your business will pull through.
Some of the most well-known businesses – GE, Microsoft and FedEx – were started during “down” cycles, by people with good ideas who seized opportunities. Your people will be the source for new ideas and cost-saving measures in the future. A manager who can invest in his or her people during the difficult times will be ready to launch the business forward when things turn around.
• Steve Richards is a farm business consultant with Farm Credit of Western New York. Phone: 800-929-7102. E-mail: Steven.Richards@farmcreditwny.com.