The path to increased profit part 2: specific strategies

Dairy producers need to be ever vigilant to increase dairy profitability.

Profitable dairy production is always a challenge. All dairy farmers can remember the terrible year of 2009. Data from the Michigan Dairy Farm Business Analysis Summary shows that from 1995 through 2010 gross cash margin on Michigan dairy farms averaged $0.82/cwt (Figure 1). The lowest gross cash margin during that time span was in 2009 (-$2.26/cwt). The data also shows that gross cash margins were below $0.30/cwt in six of the 16 years (2000, 2002, 2003, 2006, 2009, 2010). Every good businessperson knows that profit is a function of both revenues and expenses. Therefore, good managers focus their efforts on the factors that influence both sides of the profit equation.

How can your dairy operation find the path to increased profitability? First, there is no one magic bullet. Second, hopefully during profitable times you will exercise the discipline to pay down some debt and salt some profit into savings. Last month we discussed four over-arching principles dairy producers should always keep in mind.

  1. Know Where You Stand; Know Where You Are Going
  2. Marginal Costs Versus Marginal Returns
  3. Don’t Take Added Investment Off the Table
  4. Cutting Feed Costs Has Consequences

This month I’m offering a list of tips you may want to consider on your operation that can lead you to greater profits. The list is not exhaustive, but should provide you with a good start. Dairy market fundamentals and the futures market are both indicating much lower milk prices in 2012 than in 2011. At this point, I don’t see 2012 repeating the disaster of 2009, but dairy producer margins will definitely be much tighter this year than last.

Dairy Herd Management

  • Cull cows that are not bred back have chronic problems and are below breakeven production levels.
  • Evaluate your cost of raising heifers, and if it is too high, consider contract-raising programs with other producers.
  • Do not cut out management services like DHI and custom breeding services, but make sure you are utilizing these programs for maximum benefit.
  • Consider 3X milking: University of Maryland research (Erdman) suggests an advantage of about 8 lbs. milk /cow per day for 3X milked cows versus 2X. 3X milking may also more efficiently utilize your labor force and facilities and improve milk quality. For a spreadsheet to analyze whether 3X fits your farm send me an e-mail (.(JavaScript must be enabled to view this email address)).
  • Make sure you are capturing all possible milk quality premiums. Most changes needed to produce top quality milk require little outlay of cash.
  • If your milking cows are not exposed to light for at least 16 hours every day, consider adding supplemental lighting. Studies (Peters) have shown that supplemental lighting can increase milk production by 5-16%.
  • Be ready for warm weather by making sure your barn and holding pen are adequately ventilated and have fans for heat stress abatement.
  • Are your cows comfortable? Consider changing your cow’s bedding. Be sure you switch to a bedding type that increases cow comfort and does not drastically increase costs of manure handling. Many consider sand bedding as the gold standard. Many producers report as much as a 5 lbs./cow per day increase when switching from mattresses to sand. However, if switching always perform a thorough cost/benefit analysis.
  • Inventory your current feed supply, project your feed needs, and then determine if you may have surplus feed that could be marketed.
  • Review and re-balance all your feed rations and avoid over-feeding. Keep fresh feed pushed up to maximize feed intake and milk production.
  • Consider cheaper alternative feeds and removal of expensive feed additives, but don’t forget feeding advice given in last month’s article.
  • Save feed by keeping your silages covered and maintaining a well-managed face on all bunks. Properly covered silage gives an 8:1 return for the investment in covering.
  • Watch grain storage conditions. Rising air temperatures and solar radiation increase as the sun marches northward. This can create an environment detrimental to grain stored in bins. Therefore, make sure grain bins are properly aerated.
  • Inventory your calves, heifers, springers and fresh cows. Also, consider selling any surplus animals.
  • Monitor hired labor hours and manage to increase labor efficiency.
  • Don’t hide your financial crisis from your employees. In fact, your employees may be one of your best sources for providing cost cutting solutions and/or increasing efficiency.
  • Make sure excessive rain run-off and snow melt are diverted from your manure lagoon. Proper run-off management means less gallons of manure to haul. Custom Hire is in the top 10 dairy cash expenses and most of it is custom manure pumping. Savings can mount up quickly.
  • Consider using a higher percentage of less expensive young sires in your breeding program to reduce breeding costs.
  • Make sure all lights are turned off when not needed.

 Financial Management

  • Market your milk. Did you know that if you would have forward contracted your 2009 milk production in mid-June of 2008 your mailbox price average for 2009 would have exceeded $22/cwt. Hindsight is always 20/20, and it is impossible to predict when the market puts in a high. But, dairy producers that are savvy marketers forward contracted a significant portion of their 2009 milk production when prices were at record highs. On most Michigan dairy farms, milk income accounts for over 85% of total cash farm income. You cannot afford to be a price taker. Become a price maker by marketing your milk with such tools as forward contracts, futures contracts and options contracts. MSU Extension sponsors regular ag marketing education meetings. Send me an e-mail if you are interested in attending (.(JavaScript must be enabled to view this email address)).
  • Determine your cost of production and then forecast how much cash you will need until your operation reaches positive cash flow. Then present your plan and needs to your banker so you can secure operating money. Do it sooner rather than later.
  • Consider refinancing, rolling short term debt into longer term, locking in interest rates on adjustable rate loans and asking creditors to defer principal payments. Resist the temptation to charge operating expenses on credit cards. Be extremely careful with credit cards due to their high interest and huge impact they have on your credit rating if you miss a payment.
  • Question every expense. Is it necessary? How much can we do without?
  • Review your entire farm’s insurance needs and put out bids. Significant savings can be found, especially with companies offering new policy discounts. However, make sure you maintain adequate coverage and that new, cheaper policies are providing comparable coverage to current policies.
  • Offer landlords new options for land rental agreements to share some of the risk and rewards; consider arrangements, such as, cost share, flex rents and fixed crop share agreements.
  • Control capital purchases by delaying new equipment purchases where possible.
  • Consider selling unproductive assets that are not generating income; including unproductive land, unused or under-utilized equipment, timber and scrap metal.

Crop Management

  • Focus on producing high quality forages in 2012. Forage quality will always be the foundation of profitable dairy farming. Be sure to cut both alfalfa and corn silage at the proper stage of maturity and dry matter for maximum quality. Also, use tools like MSU’s Cornpicker computer program to aid you in selecting the best corn silage hybrids for your farm.
  • Reduce tillage operations where and when possible to lower machine and labor costs.
  • Re-evaluate your weed control program to make sure it makes economic sense.
  • Control deer damage with anti-deer varieties, block permits and leasing the farm to additional hunters.
  • Select corn grain and corn silage hybrids that give you the traits that work on your farm at the best price.
  • Perform soil tests to know your useable nutrient values and be sure to take advantage of manure nutrients instead of purchasing commercial fertilizer.
  • Perform side-dress soil sampling to take advantage of your organic nitrogen sources.
  • Do not be afraid to use up some of your surplus phosphorus and potassium that you have in the soil profile.

Things that are necessary to continue being successful:

  • Don’t hesitate to seek professional help. For example, MSU Extension dairy educators have a wealth of resources to help you analyze and optimize the management of your operation.
  • Be a stickler for details. Successful dairy farmers have always been, and will continue to be, those who pay attention to details.
  • Maintain a sound herd health program by meeting with and laying out a good herd health plan with your veterinarian.
  • Maintain a sound equipment maintenance schedule to keep things running in the best condition possible.
  • Consider leasing your farm land for oil and/or wind development and if you have high deer numbers lease land out to hunters.
Figure 1: Gross cash margin, 1995-2010 (from Michigan Dairy Farm Business Analysis Summary database).

Figure 1: Gross cash margin, 1995-2010 (from Michigan Dairy Farm Business Analysis Summary database).

References:

Erdman, R.A. and M. Varner. 1995. Fixed yield responses to increased milking frequency. J. Dairy Sci. 78(5):1199-1203.

Peters, R. R. 1994. Photoperiod and Management of Dairy Cows: A Practical Review; In Dairy Systems for the 21st Century; Proceedings of Third International Dairy Housing Conference, pp. 662-666.

This article is a part of a series of articles on increasing profits. To view the last article, part one four key principles, visit the Michigan State University Extension news website.

Related Events

Related Articles

Related Resources