Maintaining A Tight Ship: Management Considerations with Increasing Milk Price

 By Michael Cox

 After a prolonged period of low milk prices and often below breakeven cashflow months for many dairies, the milk market tides finally turned towards more positive prices in late 2019. While better prices will inevitably lift some of the financial strain and allow producers some breathing space, many industry leaders are noting a word of caution and advising producers to manage their positive cashflows carefully and spend judiciously this year. Jim Salfer, University of Minnesota Extension, presented at the 2019 Four-State Dairy Nutrition and Management Conference on ‘Management Strategies During Challenging Times’.

American Dairymen Magazine recently caught up with Mr Salfer to learn more about different strategies successful dairies are implementing to succeed. As Ray Dalio, founder of the Bridgewater Fund, the most successful hedge fund in history, often says, ‘almost nothing new ever happens, and everything that has and will happen is just a slight variation of historical cycles.’ Today’s better milk prices may feel like ‘new’ territory, but future price valleys and peaks are inevitable. Successful dairies are adopting specific management strategies to help make maximum benefit throughout these upcoming cycles.

All Shapes and Sizes
“The initial point Salfer made to the Four-State Conference audience was that herd size and scale of the dairy farm has limited effect on profitability, with both large and small herds being found in the top and bottom performers. In a review of records, the main commonality among the most profitable 20% of dairies was that their Cost of Production (COP) was the lowest across the  group. Maintaining cost control was the primary driver of profitability on these farms. While the top farms had slightly higher production per cow than lower tier dairies, Salfer believes that cow production isn’t as important a distinction as in the past, given the fact that almost all herds are now high producing. The top Midwest herds from 2015 to 2018  earned a gross margin of $4,500 per cow and retained a 15% operating profit margin, which allowed them to achieve a 6% return on assets. The bottom tier dairies paled in comparison and unfortunately lost cash per cow, which eroded assets and gave a negative 3% return on assets.

Cost Cutting
Focusing management efforts on cost of production is a key strategy of successful dairies. Given the fact that the ‘Big Three’ costs of feed (52%), labor (14%) and replacements (11%) account for a combined 78% of total costs, these areas are at the core of profit or loss making. Salfer stressed that forage quality, reducing shrink and refusals, maintaining fiber quality and rumen health, avoiding acidosis, feed timing and pushing up feed regularly etc. are all key elements of lowering feed costs and COP. The drive for cost cutting must not compromise production however, as Salfer outlined how any feed savings which result in lower milk components and yield almost always have a negative effect on the bottom line. One lb of dry matter feed intake above maintenance will typically give two 2lbs of extra milk, so savings made on feed intake cannot make up for lost milk production/income. Expensive additives don’t guarantee high production, often it is as simple as keeping highly palatable feed in front of cows at all times that pays the most dividends.
Replacement heifer rates have been lower than historical levels in recent years and Salfer believes that the best dairies stock their barns appropriately with good quality cows. Keeping culling rates below 8% for the first 60 days in milk is a good indicator that cows are not being broken by the system and that additional heifers don’t need to be reared to replace excessive culling. Salfer outlined that cull cows are never born, they are often made as the result of poor management. He suggested producers take a close look at their transition cow management and subsequent culling before 60 days in milk and identify where management is causing premature culling.

Investing
Cutting costs can only go so far without compromising animal health and production. Focusing spending on certain areas of the business will also improve the likelihood of profitability. Salfer’s research found that the best dairies spend money on ‘need to haves’ not ‘nice to haves’. ‘Need to haves’ often centered around things that directly touch the cows, for example, labor in transition pens, feed quality, cow comfort, reproduction etc. ‘Nice to haves’ are defined by Salfer as items that don’t directly impact the cow day to day, such as expensive semen,  and heavy metal disease- buying more machinery. Salfer’s analysis showed top performing dairies spent money to improve cow care and performance, and by doing so, improve overall efficiency and return on assets. In the future, Salfer predicts that farms that excel at investing in high return assets and are labor efficient will tend to be the most profitable. Having current asset to current liability ratios above 2:1 and having sufficient working capital available ($200-$600 per cow) are good targets to allow sufficient cash to fund day to day activities.

Communication
Salfer suggests that the best dairies are proactive when it comes to communication; good managers and owners are regularly in communication with bank lenders and merchants to keep them up to speed on their plans for managing their accounts. Maintaining open lines of communication is particularly important during poor milk price years when cashflow is restrained. The current higher milk prices offer an opportunity to build stronger relations with stakeholders and plan for the future together.