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.”


One Comment on “Business harmony: New song needed in a volatile dairy business world”

  • Martin December 16th, 2009 5:27 am

    Knowing your break even point is invaluable regardless of what business you are in. Calculating it in the dairy industry is much less complex than in many other industries. Largely because the number of products is limited. However, complexity may be introduced by volatility in feed costs. The point about having someone on either the internal or external management team that can do this analysis, is a critical point. Even if you can’t or won’t do it yourself, get someone that can and will.

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