August 23, 2018
The economic challenges today faced by dairy farms of all sizes at times seem insurmountable.
Some factors affecting milk price, such as international trade, are beyond your control. Yet there are areas in farm management where you do have a say.
Bob Le Cocq, dairy specialist with Compeer Financial, offers the following 12-point checklist for farmers as they scrutinize their own operations and work to mitigate risk and maximize opportunities.
“This is a tool to help gauge how well you are doing on your own farm,” Le Cocq says. “It can serve as a guide to help you focus on what you can control to be more profitable, reduce risk and manage distractions.”
Consider these areas where you could refocus your management:
1. Managing with budgets. The key here, Le Cocq says, is to have a budget — period. At a minimum, there should be a budget written for the farm unit for the present year. Ideally, it would look farther into the future. Le Cocq says they pull together budgets looking four years ahead.
“The budget needs to contain all income and disbursements and debt payments in detail,” he says. “It is important to have a capital budget, too, for projected equipment, other capital needs, and certainly large projects. Even if capital items cannot realistically be paid for or financed at the immediate time, record them so they are on the agenda of the managers and anyone involved.” Doing so reduces surprises of what people are thinking. Plus, it may spur motion to refine plans for capital items or projects.
Having a comprehensive budget plan enhances the communication process within the family, business partners, the lender and others, he adds.
2. Operating with an effective production and labor team. Look at this from a labor cost perspective, such as labor costs per hundredweight or per acre.
“A low labor cost may not be good, nor a high labor cost,’ Le Cocq says. “You need to understand what is getting done by the worker, the team and the farm. This takes a bit of perspective. If production and financial performance are done well, with positive trends, take this into perspective.”
A farm that skimps by at the lowest cost may have no margin for error.
“This may not be a safe farm,” he adds. “It may be a farm unit that has crisis and untimely distractions.”
3. Maintaining a high-quality accounting system: cash plus accrual. “Keep in mind you are running a business: Thus, accrual accounting is crucial,” Le Cocq says. This system accounts for expenses as they are used, but not necessarily when they are paid for. It also accounts for inventory changes, so you can figure out how the business is actually performing.
“Accrual numbers are much more important to me as a lender than the cash numbers,” he adds. “The checkpoints for analysis can be monthly, quarterly, semiannual or annual, depending on the needs and desires of the owner-operator.”
Cash accounting, on the other hand, which is done by everyone, is necessary for filing and managing taxes, for balancing the checkbook and to facilitate when applying for financing.
4. Knowing cost of production, at least quarterly. “Knowing the cost of production is critical, as well as the trend,” Le Cocq says. In the dairy business, this is usually on a per-hundredweight of milk basis.
5. Having a defined marketing and/or cost management team. Le Cocq suggests having a written statement or goals that define what you are trying to accomplish with dairy futures and options, and who is executing the plan. Are you using tools, such as options or forward contracts of commodities, or are you relying on someone in charge of coordinating this?
“If this area is left vague, expect vague results,” he says.
6. Practicing margin management. “This starts with knowing your financial and production numbers, making good marketing decisions and sticking to a plan,” Le Cocq says. “It involves a mindset to be satisfied with a defined profitable outcome. It does not mean swinging for the fences.”
7. Striving to be an above-average milk production farmer. Sources for comparison numbers are available from your regional Farm Business Management system, your farm business consultant and university Extension.
8. Consistently managing feed records and inventories. “Since feed can be more than 40% of livestock costs of production, have your feed inventoried accurately,” Le Cocq says.
Develop a process where feed inventories are recorded on a regular, consistent basis. Verify purchased feeds received with invoices received. If possible, use a farm scale to record all feeds going to and away from the farm. Reconcile the numbers periodically with physical inspections of the feed with measurements. Include plenty of feed shrink of forage piles.
“These numbers are very important to the budget planning discussed earlier,” Le Cocq says. “You don’t want inaccurate numbers as you are doing milk marketing work, for example. Catch your errors sooner rather than later.”
9. Proactively relating with the lender and other vendors. “Accurate accounting records and regular communication with the lender and key vendors are important for all,” Le Cocq says. “They can only help you if things are accurate, and they know what your intentions and plans are for the farm unit.”
10. Managing the costs of major dairy inputs first. Feed, labor, interest, repairs and land cost can account for 60% to 65% of a dairy farm’s total costs. Le Cocq suggests managing these major cost areas individually for maximum impact.
“This takes time and focus,” he says. “However, if 5% is saved on overall expenses of a 750-cow dairy, for example, that 5% can be in the $150,000-per-year area. Again, the key is to manage each area with some individual focus.”
11. Having a family farm transition plan in place, and updating it as needed. “This is a huge, important area, even though it is not critical in day-to-day farm management,” Le Cocq says. A farm transition plan provides for an orderly, respectful retirement or transition of the older generation, as well as an orderly process for the next generation to manage the business.
Le Cocq congratulates those farm managers and owners who already have plans and revise them as needed. However, for those who don’t, he says you are adding unnecessary risk to your operation.
The risks include: the next generation getting frustrated and leaving the farm, major tax implications in the event of death or divorce, and not having good farm entities in place to properly manage and fund the business.
12. Executing well-defined decisions. “A lot of time is often wasted if execution is not taken on agreed-upon steps,” Le Cocq says. “If a time delay is necessary, then define it as such and for what length of time. Communicate with others the reason. This helps avoid future family collisions.”
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