Stay loose: Decision agility requires strategy, open mind

Not all parts of the human body are agile. Agility is, however, critical at the joints, allowing us to move and, in the case of athletics, compete. In business, agility is needed at the junctions where management decisions are made. Having options – and acting on them – will help make your business agile.

By Dave Natzke

The current “buzzword” in almost all business magazines is “innovation.” The message: In a fast-paced, global environment, all businesses must be innovative.

But innovation just for the sake of being innovative really does little. The challenge is application. Innovation must be applied in the context of business strengths and weaknesses, production and management structures and capabilities, and markets.

The same is true for agility. Being agile for the sake of agility means little. And, in the case of dairy, production and management structures and capabilities (and markets) mean agility be much different than in other businesses.

Production agility limited

“For many in the dairy industry, ‘agility’ just flat out does not apply,” warned Geoff Benson, professor emeritus in North Carolina State University’s Department of Ag and Resource Economics. “Dairy farms are highly specialized and capital intensive.”

For example, one definition of business agility is the ability to “scale up” to meet demand or “scale down” rapidly as a means to reduce costs and limit production. Noting the life cycle of the dairy and the dairy animal, that’s not possible in a dairy business, noted Wayne Weiland, regional business manager, Standard Dairy Consulting.

“Unlike some manufacturing industries where you can shut down production for three months while inventories clear, and then gear back up to full capacity as the recovery comes, it’s tough to initiate such actions on a dairy. The cow keeps on demanding attention, and ‘shutdowns’ take months and years to reverse. Dairy does not lend itself as well to agility.”

Another factor applies, according to Weiland. Due to the “small business” environment of most dairies, owners and managers wear multiple hats, most laborers are cross-trained, and basic operational demands don’t stop and wait. Outsourcing many components of the operation aren’t practical or financially sustainable.

Gregg Hadley, University of Wisconsin-River Falls/Extension assistant professor and farm management specialist, concedes those points. However, he doesn’t believe the production side of the business is automatically immune from the need to be agile.

“Many management decisions are made based on traditional farming practices,” he explained. “Some dairy managers use these issues as a justification for never making changes. I had a conversation with a lender during a tough dairy market, and he said, ‘My biggest concern is that a lot of farmers don’t change anything in tough times. They just try to ride the storm out.’ The producer must keep an open mind with regard to production practices.” For example:

Approach feeding from the perspective that cows need nutrients, not ingredients.

“You can’t change ingredients too frequently, but that doesn’t mean you can’t change them at all,” Hadley said. “Dairy managers need to be certain that the ration they are feeding offers them the greatest return. Don’t get caught up feeding a particular ingredient just because it has been successful in the past. With today’s price volatility, it may be a good feed, but it may be too expensive to feed.”

Manage rations. When dairy margins are good, it is usually more profitable to feed fewer rations to the herd. But as margins shrink, fine-tuning feeding groups (based on milk production and body condition score) and feeding more rations becomes increasingly justified.

Check whether your cropping plan delivers the most profitable mix of forages and grain. The most profitable mix five years ago may not be the most profitable mix today.

Leasing facilities reduces investment in fixed assets, and may allow a producer to move to cheaper/smaller facilities when times are tough; or expand into larger facilities when times are better.

Owning your own milk hauling vehicles may provide more geographical freedom to pursue a better milk market when the current contract is up.

“Some production models are inherently more agile than others,” said Greg Squires, manager of Dairy Enterprise Services. For example, an intensive grazing dairy with no fixed housing can “pull stakes” much more easily in a sustained down market than its conventional-housing counterpart, because the fixed asset structure is significantly minimized.  “I recently spoke with a dairy producer from New Zealand who described himself as an ‘investor’ first and a ‘dairyman’ second. His business model focuses on (real estate) conditions.

“Agility may also shift some dairy producers’ growth models, from building greenfield sites to acquisition of troubled assets, especially with increasing market volatility,” Squires said.

Agility comes with its own demands – typically more management, Hadley said. “They just need to keep an open mind, be creative, and ‘push the pencil’ to analyze new ideas.”

Have a strategy

“A strategic vision, operational efficiency and financial management are the keys,” said Benson. “Many dairy farm families focus on production efficiency, which is important, but they too often ignore profitability as an overarching management goal and in decision making. In my experience, financial management is the weakest of the three. Part of this is the lack of focus on profitability; part is a lack of a cash-flow management strategy to cope with volatility; and net worth issues – building wealth, reducing debt as a goal, maintaining solvency and ensuring adequate collateral for credit – forming part of the cash-flow management strategy.”

Strategic clarity and consistency requires an evaluation process or system for dealing with change. “Have a crafted, proactive approach to dealing with changing conditions, not a reactive, ‘seat-of-the-pants’ response,” said Mark Kinsel, CEO, AgriMetrica LLC. “Have contingency plans for changing condition while being agile and resilient. 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.”

Producers must “embrace” and manage volatility as part of business, Squires concluded.

Building a case for agility: More volatility ahead

History tells us milk prices will remain volatile in the years ahead. In fact, volatility could increase, said Matt Mattke, market advisor with Stewart-Peterson.

Mattke said one reason volatility will reign is that the market follows a typical cycle of over-production followed by significant under-production. There’s really no middle ground of balanced production in line with demand, he said.

Not only is volatility on an upward trend, the degree to which prices rise and drop appears to be getting more dramatic.

Volatility in the milk price began in the late 1980s and early 1990s, before the advent of futures trading in 1996. “But now, we’re getting to the point where we could see 40%-50% year-over-year swings in price,” he said.

Mattke doesn’t see much that could prevent this trend from gaining more momentum. Managing the supply side through milk production caps or growth quotas are possible, but Mattke doesn’t believe such an effort would necessarily smooth the road ahead. OPEC, he said, is as an example of how attempts to control pricing can have limited effect on price volatility.

Input volatility

The price of milk isn’t the only market force with which dairy producers must contend. They also have to manage the changing price of feed inputs. Recent years have reminded everyone how difficult this can be. During the bull market that began in 2006, producers witnessed record high prices for grain. “Prices have since dropped significantly,” said Mattke, “and therefore we believe grain price volatility could diminish, in the short run, if the market follows historical patterns.”

Historically, grains tend to experience long bear market tails after raging bull markets, often resulting in extended periods of sideways trading action. This is especially true of corn and wheat. Mattke believes if this pattern takes hold, dairy producers may very well see less volatility in grains.

While the thought of reduced grain volatility may be somewhat comforting, nothing is certain – except the need to be prepared. During the late 1970s, grains bucked the post-bull market trend toward long bear market tails. After dropping from record highs, sideways trading never materialized. Large price swings continued. Weather was a key factor then, and could re-emerge as a key to volatility. More than 20 years have passed since the last major Midwestern drought. Crops are more drought-tolerant today, but demand is also greater, so a drought or drought scare could send crop prices to all-time high levels.

Significant volatility could persist for a number of years on the input side. Such a scenario of high milk and grain volatility could jeopardize the viability of any ill-prepared dairy operation.

Agility will require …

“The dairy producers of the future will have to know their numbers inside and out. They will have to spend more time making $500 decisions rather than the $5 decisions. Each part of the operation will have to be evaluated.”

Gary Sipiorski

Dairy Development Manager, Vita Plus

“Business agility in my mind is more a culture or mindset. Being able to adapt your management style, including asset management, is the important thing. It is more a question of where to invest limited resources. How sensitive is my decision to the current economics? What if the economic situation changes? These are the types of questions ‘agile’ managers ask themselves.”

Mark L. Kinsel, CEO

AgriMetrica LLC

“Lenders will require the capability to maximize opportunity as a prerequisite for doing business. Volatility will continue. Those who are not agile will miss market moves and leave opportunity on the table. The best producers will be agile enough to take every penny they can get from the market, so that when prices drop below profitable levels, they have something to absorb the shock.”

Scott Stewart, President and CEO,

Stewart-Peterson

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