LIMBER UP: Is your dairy business ‘agile’?

You had to be an economic contortionist to survive 2009. Are there things you can do to be more “agile” in 2010 and beyond?

By Dave Natzke

In a recent BusinessWeek article, C.K. Prahalad, University of Michigan Ross School of Business professor, wrote a column titled, “In Volatile Times, Agility Rules.” While it was written for the general business world, it raised many questions – after all, has any industry been more “volatile” than dairy? Thus, must dairy producers become more “agile”?

I hear your doubts. In terms of time, how can a business that invests two years in a heifer calf, and then waits another couple of lactations before she pays you back, be agile? How can a business that locks large amounts of capital in animals, land, facilities and equipment be financially agile? Where does agility fit in a business that must follow the laws of economics and biology at multiple levels?

Obviously, “agile” is not the business model for dairy. Or is it? Or must it?

Before you close the door on the concept, consider this: Owning and managing a business in an ever-changing regulatory and environmental climate, evolving markets, fluctuations in the availability and quality of capital and labor, and accessibility and adoption of technology means you are already agile. Those rigid and brittle are already gone.

Getting started

To begin my exploration of dairy business agility, I turned to my computer database of dairy producers, consultants, academia and others. I e-mailed a comprehensive list of questions focussing on the concept of business agility as it pertains to dairy farming, and waited for them to hit the “reply” button.

I may have been a little overzealous. One respondent said my questions made his head hurt. Another called the questions overwhelming. Some started to respond, but let me know they gave up. Some didn’t want to be “on the record.”

But many did reply, and the depth and breadth of their insights are the impetus for what I envision will be a multi-part series on dairy business agility. If Prahalad is correct with his statement, “In volatile times, agility rules,” than probably no question is more important in dairy today: “Is your dairy business agile?” Nearly all production and business management processes must adapt to it.

Before we begin, however, we must take stock. For an athlete, being agile first requires “being in shape.” For many producers, the past 12-18 months have been devastating, destroying the muscle of equity and assets, eroding will and perseverance, and limiting vision. For some, it was worse.

“Short-term implications of these recent economic changes have included ‘not dealing with’ many difficult decisions and even, in the case of several California producers, suicides,” said John Ellsworth, Success Strategies Inc.

For many then, agility must be preceded by healing – of psyche and checkbooks.

According to Gary Sipiorski, dairy development manager for Vita-Plus, “The next 1-2 years will be a rebuilding of equity. Balance sheets have been devastated. With the current pricing system for milk, ‘volatility’ will continue to run with higher highs and low lows. Rebuilding the equity shock absorber will be a must.

“For the next 3+ years, lenders will have some tough decisions to make as they evaluate balance sheets, realistic cash flows and who has the money management skills, as well as overall management ability, to cope with the new economics of volatility,” he added. “Who will the lenders allow to continue in business?”

“These economic times have cut deeply into equity and caused managers to maximize capital efficiency (not necessarily production efficiency),” said Wayne Weiland, regional business manager, Standard Dairy Consulting.  “It will take 1 to 2 years just to get healthy on the balance sheet from an equity position.  Financially savvy dairymen will replenish their equity before expanding, so I expect little growth in the industry on the short term. Only the very high risk takers will expand before equity positions are healed.”

“Tough decisions will be made as to whether or not to continue in the dairy business,” said Ken Bolton, UW-Extension Center for Dairy Profitability. “When the answer is ‘yes,’ plans will be made to recover from the current situation by paying down debt.”

Digging out from accumulated debt won’t be accomplished in a vacuum. Some of the same economic factors which got dairy’s financial body out of shape will take time to reverse – if they do.

“We are not pulling out (of this economic period),” said Alvaro Garcia, associate professor in South Dakota State University’s Dairy Science Department. “This is just the beginning of a new economic order and, until we adjust to it, dairies are going to be at risk. Short term, a decrease of confidence in the system could lead to poor decisions. The problem is that the new system requires fast decisions.”

Longer term, Weiland expects post-recovery dairy management to take a familiar path – improving efficiencies and/or expansion.

“Since most people have wrung out the inefficiencies during the tough times, that means more aggressive expansions and further industry consolidation, in my mind,” he said.  “Certainly environment and legislative restrictions might slow or limit this, but I still see it happening at a ever more rapid pace.”

It could be a roller coaster ride.

“Many of the demand factors that drove milk prices sky high a couple years ago are dormant, but still with us,” said Ron Curran, manager, Market Development, AgSource Cooperative Services. “Third World economies are, in some cases, recovering faster than ours. As they do, their populations will want more dairy products. Dairy has entered a new era that grain farmers found in the early 1970s, when a significant amount of sales materialized in export markets. This brings market volatility that will make our heads spin. We’ll have years when profits will hit stratospheric levels, and other years like we are experiencing now.”

“Dairies will be struggling under tight lending requirements longer than they will suffer from low milk prices,” warned Scott Stewart, president and CEO, Stewart-Peterson. “As a result, producers will learn to take care of their lender, as well as the cows.”

“In both the short-term and long-term scenarios, we will be operating in a very different industry,” Ellsworth said. “As my business coach, Dan Sullivan, so accurately stated, ‘It is economic times like these that allow us to stop doing things that no longer make financial sense…’ In essence, we can limit ourselves to only those choices and tasks that have a genuine payback. This will be a plus for both the industry and its participants,” Ellsworth said.

Wisconsin dairy producer and Professional Dairy Producers of Wisconsin president Doug Knoepke agrees: “I think challenging times can sharpen your competitive edge. You look at every aspect of your dairy to save without costing pounds of milk or milk components. Do we learn from these boom or bust cycles and protect prices and bank money for the lows?”

“I believe the economic downturn will lead the most progressive dairy producers to adapt their management techniques and decisions to essentially become more agile,” Ellsworth said.

As I write this, there are glimmers of hope. Although there are fits and spurts, 2010 futures prices are moving closer to the cost of production than they’ve been for more than a year. Maybe we can start thinking about the future.

But what about all those questions? Will volatility remain, or grow? What’s an “agile” dairy business? How do you monitor, measure and manage agility? Are there any tools for an “agility toolbox?”

We’ll continue the discussion next month.

FYI

If you’d like to join the discussion, request a list of questions or offer your own opinion, e-mail dnatzke@dairybusiness.com. Include ‘Dairy Agility’ in the subject line.

Agility  is…

“Agility means being able to cash in the good times while minimizing the losses in the bad ones. In order to do this, dairies will have to review their approaches on the needed assets to operate efficiently. They will have to focus more on return on equity.”

Alvaro Garcia, Associate Professor

Dairy Science Department

South Dakota State University

“Agility means having the ability, fortitude and financial capability to swim upstream, so to speak. Agility also means being able to jump on new research that indicates large return on investment increases can be made.”

Ron Curran

Manager, Market Development

AgSource Cooperative Services

“Agility is the ability to plan for and adjust to business contingencies. Volatility seems to now be a given; our challenge is to learn to manage it.”

Ken Bolton

UW-Extension Center for Dairy Profitability

“Agility is the ability to adapt to changes quickly, realizing that we are never going to get 100% of the decisions correct. However, delaying until you think you have ‘perfect’ information is not feasible either.  Increased volatility will force producers to increase their agility. The dairy business is becoming more and more like the rest of the global business world. Thus, it needs to be run like a business. Dairying is a great way of life, if it is run as a business. However, it is a horrible business when it is run as a away of life.”

John F. Ellsworth

Success Strategies, Inc.

“Agility in a dairy business is the flexibility to shift resources and inventory to optimize economic results based on market and personal situations.”

Mike Hutjens

University of Illinois dairy specialist

“Agility is the ability to adapt to change.  Business agility would therefore be being able to adapt your management style to changes in the dairy business environment.”

Mark L. Kinsel, CEO

AgriMetrica LLC

“Agility is having the capability to pounce on opportunity. Market volatility can be seen as a negative, or it can be seen as the best opportunity for producers to demonstrate agility.”

Scott Stewart, President and CEO,

Stewart-Peterson


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