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Serving: WI

Cutting expenses one way to help boost cash flow

Fran O’Leary Holstein dairy cows at feed bunk
IMPROVING EFFICIENCY: Are all your cows paying their way? Dairy producers should know which cows are profitable and which are not.
Agrivision: Improving efficiency is another way to boost income.

With low milk prices again, my wife and I have decided to trim our expenses as much as we can. We are in our late 50s and milk 100 cows, raise 50 heifers, and farm 260 tillable acres in central Wisconsin. We sell our beef-cross calves and bull calves when they are a few days old. We own 220 acres and rent 40 acres from the neighbor next door. Our $210,000 mortgage on the farm is our total debt. We have a 24,500-pound rolling herd average. We employ a 16-year-old neighbor eight to 16 hours on weekends and two hours each evening during the week. What should we consider doing in 2021 to help cut expenses or increase income?

Tom Kestell: At first glance, in my opinion, both your debt per cow and your debt per acre are in the comfortable range. In many cases, it is easier and more prudent to raise income than to try and cut expenses. One of the first things I would look at: Are all your cows paying their way? Or does a portion of your herd live off the profits of their herd mates? In many cases, the least profitable (20%) of a herd can not only lose money, but also use up the profits of the next tier of the next 20% to 30% of low-profit cows. I strongly feel that all dairy producers must know which cows are profitable and which are not.

Are you on some type of milk testing program such as DHIA? Are you testing for components? Somatic cell count? Do you keep records of the health status of individual cows, such as treatment status and veterinary costs of individual cows? As an example, a cow that gives 100 pounds of milk a day that spends 30% of its time in the sick bay is only shipping 70 pounds of milk per day on the average. Then you must deduct the treatment expense and the extra labor to care for this type of cow. The most profitable milk to produce is high component, low somatic cell count and low health costs per cow.

I do not think we all have to have a 30,000-pound rolling herd average to be successful. But if you could raise your production by 10% and raise your expenses by only 2% to 5%, this would give you a substantial boost in net income. Look at the little things, such as transition cow health, preventive hoof care, mastitis prevention, breeding efficiencies, proper feeding strategies, and preventive health care, etc. When you take care of the many little things, the big things tend to take care of themselves because they occur much less often!

I will leave you with one last thought: Take care of your wife and yourself. Attitude and a good working plan result in the best possible outcome. We can’t always control what happens to us, but we can control how we react to our ever-changing environment. Good luck!

Sam Miller: Start by having up-to-date financial records. Beginning with the income statement, examine all your sources of revenue and expenses. Start with the largest expense items — usually feed, and in your case, crop inputs. Determine if you can make any adjustments to lower expenses. If you do this across a number of items, it can add up to savings. One way to cut expenses is to take advantage of discounts for early pay. If your feed supplier, vet or repair service offer, you may be able to save 2% to 5% simply by paying bills early. If they don’t offer a discount, ask the vendor if they would.

On the revenue side, are you maximizing premiums for milk quality or components? Preparing a budget and tracking against the budget will also assist in managing the business. Finally, I assume you participate in the Dairy Margin Coverage program; you may also consider Dairy Revenue Protection insurance, and contracting or using futures or options to manage price risk. Good luck managing the business.

Katie Wantoch: Kevin Bernhardt, Extension farm management specialist, has developed a cash-flow budgeting spreadsheet that you may find useful as you work on your plan for 2021. The cash-flow budget is a plan of how cash comes into and leaves your operation. By working through such a budget, you can plan ahead and know or estimate what your income will be, as well as input costs, output prices, capital asset replacement, sales or purchases, and other factors that could provide for or take away from your farm operation.

It is hard to predict milk prices for this next year, but look to take advantage of the Dairy Margin Coverage program and other marketing actions to secure a favorable milk price and cash inflow. Feed loss, death loss, conception rates, timeliness of planting, variable-rate applications and many other factors might be an opportunity to improve production efficiency. You have reviewed your farm operating expenses, but have you considered your family living withdrawals? This includes compensation for labor and management, but also the “draws” on your operation that may need to be tightened, such as vacation needs, remodeling costs, entertainment like tractor pulling or other hobbies.

Finally, when all these options have been explored, you may need to consider new borrowing to cover negative cash flow. This is a normal part of business for operating needs or for capital purchases. Review your options to see what might be best for your farm operation.

Golden opportunity? 

My 32-year-old son and I farm 1,500 acres west of Eau Claire, Wis. We own 700 acres and rent 800 acres within 10 miles of our farm. Our total debt is $450,000. Half of our debt is on equipment and the other half is a mortgage on some land that we bought two years ago. Last week, I was talking to my 68-year-old brother-in-law, and he said due to health reasons, he has decided to retire and sell his equipment this spring and rent his 300-acre farm. He asked me if we wanted to rent it. He said we could rent it for $150 an acre, which is less than he could probably get from other farmers, but he says he knows we would take care of his land. His farm is 12 miles from our main farm, and it is good land. Do you think this is a good idea? What are your concerns?

Tom Kestell: My advice would be to make up a list of pros and cons to operating this new land. Over the years, I have found that all situations have their own unique pros and cons. The only time I found only pros was when I married my wife 47-plus years ago, and to my surprise, she has discovered a few cons over the years.

The first big pro in your situation is your brother-in-law has asked you to operate his farm. This is a compliment to both your and your son’s farming abilities. The next big pro is that you can spread your equipment and overhead over more acres, lowering your operating costs per acre. The third big pro is that you have a working knowledge of the land and, of course, will be working with someone who wants you to succeed with his land, and his advice will be valuable.

Now let’s look at some of the cons. It is 12 miles from your base farm. For every mile from your home base, it takes time and money to travel to and from. Nothing ever seems to break down until you are on the road. Con No. 2: How are the highways to and from the new land site? Are the roads safe? Is traffic light or heavy? Are roadsides safe for pulling off to let traffic pass? I once sold a farm because traveling to and from that farm was not safe; busy and congested roadways presented a safety hazard that I found unacceptable. Con No. 3: This will be more work for your son and you. Are you both up to the task? Can your equipment handle it? Involve your banker in this decision, especially if extra funds will be needed.

Pro or con: This is family you will be dealing with — keep the land lease on a professional and business-like transaction. In the long term, family is much more important than operating additional acres.

To summarize, always enter new ventures with eyes wide open, try to avoid surprises, and have a plan to handle different scenarios that can happen. I think the pros outweigh the cons, but only you and your son can make this final decision.

Sam Miller: An analysis of the pros and cons of taking on additional land should help guide your decision. Start by completing a partial budget of the expected revenue and expenses to determine incremental net income of taking on the additional land. In addition, you and your son should put together the nonfinancial factors pro and con list, such as: additional time for labor and management; do you need additional equipment to operate the land; can you swap this land for other higher-priced land currently rented; long-term goals of the business; etc. A review of current operations, future plans, incremental returns and risks should guide the two of you to make the appropriate decision. Good luck with your analysis.

Katie Wantoch: You and your son likely know the farmland rental rates for your area. Even in uncertain times, it’s important for you and your son to be talking about the future of your operation and whether that includes increasing your crop acres. Consider your options and if this is the right parcel(s) and the right move for your operation. Typically, a larger business is able to spread out fixed costs and maximize margins, but you’ll want to review your budgets before making a decision.

Even if you are renting from family, you want to build a great landlord-and-tenant relationship that is fair, equitable and long term. Create a strong relationship by discussing how you can best take care of his farmland. Chat about agronomics, till or no-till, use of cover crops, maintaining soil fertility, and other practices that will benefit both him as the landlord and you as the tenant. Take time to evaluate if this is the best decision for your farm operation before drafting a new written lease agreement.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension ag agent specializing in economic development, Dunn County, Wis. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].

TAGS: Dairy Crops
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