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Dairy Financial Times: A few small steps for dairy farmers

 

By Mike Converse

 

We are back again in what has become all too familiar territory for dairy farmers. With corn price growth outpacing class III futures, losses are mounting through the six months of operations this year. I’ve watched many of my clients deal with razor thin income over feed margins in a variety of ways in an effort to extract every available dollar from their dairy farm. 

 

Preserving equity

Whether losses are an unavoidable reality and to what extent those losses will amount to, may depend on a lot of factors outside your control, however there have been a few management steps I have seen, that are going to go a long way in preserving equity in what might otherwise be a repeat of 2009. 

With so many dollars being committed to the feed ration of your milking herd, close attention to the production data is critical. We now live in an environment where a portion of your milking herd could actually be consuming more dollars in feed than they produce in milk. Have you had a close look at the production data of the individual cows in your dairy herd? 

With corn prices driving your total daily ration per milk cow from possibly middle $6 range to middle $8 range, there is a definitive cutoff at which point a cow is just not pulling its weight.  If 20% of your dairy herd are in the later stages of their lactation and produce less than 55 pounds of milk a day, and you receive a milk price of $15 net of assessments, you are likely burning up capital here.  Sure, you might have an alternative ration for later stage milking animals…but what about low producing animals lost in the details of your herd reports. It could easily be over looked without a hands-on approach. 

Does your herdsman know the cutoff point were the milk production isn’t worth the feed, and are they instructed to keep a close eye on those details? There could be waste in any stage of lactation that might go undetected when looking at just averages. 

 

A debatable enterprise

Raising your own heifers has become a debatable enterprise these days. There are plenty of hard-to-quantify factors that may override the basic dollars and cents. Closing off your herd from outside elements, and controlling your own assets from start to finish are good examples, but some dairymen are finding cheaper alternatives than raising their own replacements. 

When you factor in all the costs, from heifer feed, death loss, and the opportunity cost of selling calves, you may have $1,700 invested in that heifer to bring it to first lactation. 

With feed costs this high, you can find cheaper replacement cattle in the auction markets or in private sales. Some clients are purchasing replacements rather than carry calves born from lesser producing cattle. It saves the investment in time and feed into what might become an underperforming cow in your herd.

 

Gaining some ground

It has been reported that the national beef cattle inventory has reached its lowest levels since 1952. Judging by the price paid for cull cows, it would seem safe to say that the dairy industry has gained some ground in providing for that lost inventory. 

Are you beefing cows at an accelerated rate to make room for incoming heifers? It may seem like a reasonable solution with beef prices at these levels, but despite the high beef prices, it could be costing you more than you realize. If a cow costs you $1,700 from calf to first lactation, and is sold for beef at $900, the cow will have to produce $800 over its milking lifetime to cover the difference. Judging by the average herd turnover rate of our clients, that lifetime is about three years. 

 

Herd replacement costs

According to our cost studies, over the three-year period of 2009 through 2011, our average dairy client made $1,306 dollars of operating revenue per cow before herd replacement cost. Shorten that holding period to an average of two years and the cattle barely generated enough income to pay for themselves, let alone the principal debt they are collateral for. Consider selling younger replacement animals to manage growth there by eliminating the capital costs to raise the nonproducing animals, and give your producing animals a chance to pay for themselves…

 

Alternative income streams

Another development I am seeing more often, is finding alternative income sources.  In a few cases, I have clients who have even turned an expense into an income stream. A dairy used to pay large sums of money to have their manure hauled away. Now there is a market for it. Crop growers will pay money for this product and even other dairy farmers may purchase processed compost for bedding.  

Do you have pasture ground available, or rejected feed? Let your bull calves have at it. Three months of growth on a bull calf can add up to a considerable return on a small investment in time money. A bull calf may fetch $100 to $150 the day it is born, but with a few months of starter feed, the weight gain of that bull calf can translate into a decent sized profit without committing labor and capital needed elsewhere.

 

Small improvements add up

Finding the small improvements in your dairy operation can add up to large dollars over time and at a time like this, every dollar is going to count.  It’s time to get creative, and wherever your dairy may be located, it is bound to present you with its own unique opportunities and challenges, but milking cows isn’t going to be enough to make it work… not anymore. 

 

FYI

Mike Converse, CPA, and managing partner with, Genske, Mulder & Co., LLP, a certified public accounting firm in Costa Mesa, Calif., representing clients who produce 12% of the nation’s milk in 30 states. Mike can be reached at 949-650-9580 or mike@genskemulderco.com.

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