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Should I expand my organic dairy operation?

stefbennett/Getty Images Herd of cows on pasture
EXPANSION: Whatever the question asker ends up doing, the Profit Planners suggest careful planning and preparation first.
The Profit Planner panelists dig into a dairy farmer's proposed expansion.

I farm organic.

I’m in the process of buying my family’s home farm from my mother with a Farm Service Agency loan. I also rent another 300 acres, milk 40 cows, and own all my equipment and cattle.

Of the rented land, about 70 acres has been available to me for sale. To cash flow the purchase, I’ve put together several expansion budgets, including buying cattle to max out my current facilities, hiring two workers and rebuilding the four-row free-stall barn. All the budgets, based on low price and production, point me to an additional $70,000 per year net income after all debt service and expenses, based on acres or per head.

Should I go through with it?

George Mueller: It's risky, but go for it
The problem is the expense to carry out your plans is coming all at once: Buying the family farm, purchasing the neighbor's land, tearing down the barns and building the modern dairy setup to suit your needs.

This will be a huge investment per cow on your part and will result in some very serious borrowing. All at a time when interest rates are on the rise.
I am tempted to tell you to "go for it!" Your advisers say you can make it with $70,000 per year to spare. I must warn you that $70,000 per year is not much with a farm your size. There will not be much room for mistakes or
misfortunes. There is a lot of hard work ahead for you, your family and your staff.
You say you have the blessing from your milk buyer for additional expanded organic milk production. How financially solid is your milk buyer? Some of the demand for certified organic milk is slowing down in certain areas. An unlimited sale for all your organic milk is essential to your success.

If you and your family are willing to work hard and do with less family vacations until you get your debt under control, my advice is to "go for it!” As I look back, I realize that I took similar risks to get a good start as a dairy farmer. Some thought I was foolish at the time. Hard work, tight family budgets and some luck proved them wrong. Here's wishing you the best of luck and success.

Glenn Rogers: Plan, prepare and think far ahead
I have found that expansion goes better if one can take advantage of the following ideas:

1. Get better before you get bigger. While most organic operations have a lower rolling herd average, not all of them do. Some have very high herd averages and do quite well with those high averages. Typically, higher milk yields will yield higher profits, on both traditional herds and organic herds. Those higher profits come from higher milk yield and components, and other management factors

I would suggest really looking at the feed program, the pasture rotation program, the breeding program and other things to see if there are efficiencies to be gained. 

2. Stack the heifers off the ceiling before building the barn. Expansion is always a difficult time with the herd, and with management. Generally, the cows adjust better than humans do with the expansion. We tend to have a tough time when doubling the herd size and adding several employees to the operation. 

I like to see internal growth rather than buying in outside cows. There's the debt issue, but there's also the outside herd health and other issues associated with bringing in an outside herd. Internal herd growth takes some planning and years of work, but it helps to keep debt under control, and you already know the herd. 

3. Think about some alternatives, including robots. Labor is a big issue right now. Robots are a great way to increase the management success factor. It's a lot of money, but so is another one or two people on the payroll. 

A five- to seven-year payback is possible with a robot but remember that you will also have maintenance costs. Maintenance contracts need to be considered and factored into the budget. 

There is also the management factor. All the information gained is great, but you must analyze and utilize that information. Also, think about doing this in steps rather than expanding the herd and building a new barn all at once. That's quite a bit to undertake in one step. Is a two-step or three-step process possible?       

4. Plans need to include a "worst case scenario.” We all know what the organic milk price and market are right now. Prices have gone down, and costs have gone up. While it doesn't seem like the price can get any worse, what happens if it truly does?

The drought in the Northeast and wildfires in the West may cause grain prices to increase, and who knows what will happen with interest rates? Murphy's law tends to rear up when we least expect it, so build it into your budget. 

5. Address waste and nutrient management. These are things that must be thought out, and water quality rules and expectations tell us that you need a quality plan. Make sure all those aspects of the operation are "cleared" with the proper agencies, and make sure all obstacles are addressed. 

6. Don't lose sight of that marketing contract. It’s obvious that we will need firm marketing commitments in the future. Belonging to a co-op is essential, even if you have a marketing contract with an outside market. I've seen too many problems over the years with individuals who did not belong to a co-op even with a sound contract.

7. Keep that family time open and stay healthy. While it looks like you can devote more time to the operation, family time is essential.

The next generation is coming along. You need to devote some time there as well, and they will return the favor. Also, remember that we all get older. Once you hit those "older years," your physical ability will become less. However, utilize that mental expertise you have gained over the years.

A positive attitude, planning, preparation and always thinking far ahead will yield positive dividends. Success is when opportunity meets preparation. Keep going, you're doing great.  

Dale Johnson: Sign the papers and get on with it
If this is your idea of a dilemma, count yourself lucky. Many conventional dairy farmers have taken a financial beating selling off their herds, and many more are looking for an exit strategy to preserve some of that net worth on the balance sheet. Organic dairy farmers are not immune to these problems as organic prices inch downward. 

In contrast, you are looking to buy the adjacent farm, replace facilities, double your herd size and hire additional help, while also improving your profit and cash flow.

Are you making the right decision? Well, you have done your homework and analyzed this decision from every angle ­— crops, livestock, acreage, facilities, equipment, labor, marketing, profitability, liquidity and solvency. You have good experience. You have run “low price and production” scenarios. You have discussed your ideas with several knowledgeable people.

From your description, this is the surest thing that I have seen in a long time. Sign the papers and get on with it. You don’t want to lose that farm that is “vital” to your operation. 

I am unclear on your feed ration. Are you animals grass-fed? Can you get on that all-grass milk truck? Will the all-grass premiums offset the lower milk production? Just do the math. 

Got a question? Our experts await!
Our Profit Planner panel would like to hear your question. The panel consists of Dale Johnson, Extension farm management specialist at University of Maryland; George Mueller, dairy farmer from Clifton Springs, N.Y.; Glenn Rogers, University of Vermont Extension professor emeritus and ag consultant; and Michael Evanish, farm business consultant and business services manager of Pennsylvania Farm Bureau’s Members’ Service Corp (unavailable for this question).

Send your questions to “Profit Planners,” American Agriculturist, 5227 Baltimore Pike, Littlestown, PA 17340. Or email them to [email protected]. All are submitted to our panel without identification.

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