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Turn Economic Difficulty into Opportunity

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Greg Steele
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Those of us connected to the dairy industry can’t deny that we are facing challenging economic times. 2017 will be the third consecutive year of shrinking profit margins. We can all identify the reasons, including the loss of BST, a successful management tool; additionally, the oversupply of milk has led to the erosion of over order premiums and the federal order pay price for milk continues to reflect both a national and global supply glut. In many cases, the impact has been the slow erosion of equity on dairy farm balance sheets. However, the dairy industry is neither the first, nor will it be the last to experience a prolonged economic downturn.

It is easy to become discouraged when each report you hear or read talks about production, cow numbers and milk supply numbers being up, while a recovery in the milk price continues to be elusive. When morale and attitudes are challenged, tunnel vision can easily set in. This makes it an excellent time to commit yourself and your business to strive for the best in class performance. I encourage you to consider these factors as 2017 comes to a close, and you begin to prepare your 2018 budget.

Working capital management - During a time of economic downturn, now more than ever, dairy operations will recognize the value of having adequate working capital in their business. It is the precious lifeblood of any business going through times of downturn. A good level in a dairy business when measuring working capital is $400/cow, when you are able to achieve levels closer to $600/cow or greater, that is very good. However, if equity levels are solid, and working capital is weak, you should approach your lender to discuss how loans can be reset in order to lengthen the term of your loans or moving some debt down the balance sheet. This will allow to decrease your debt service requirement and improve working capital.

We are just now coming out of the longest period of low interest rates that anyone can remember. If real estate loans have not been covered by fixed rate products, there is still an opportunity to fix rates at attractive levels to manage interest rate risk well into the future. Other ways to manage capital debt is to deleverage if it doesn’t jeopardize the financial performance of the business. This strategy can be used to create cash reserves or reduce debt. In addition, limiting capital expenditures is another approach to preserve working capital.

Cost control - Dairy production is a commodity business and the practice of intense cost control can reap significant benefits, regardless of where the revenue falls. Solid levels of efficiency and productivity are more critical than ever. Knowing and understanding your cost in all expense areas on a per cwt basis is a must. Being able to evaluate cost on a per unit basis provides additional insights into where your business’s strength or weaknesses are. It will help highlight where the focus should be to result in the highest profit impact.

Margin management - Those in dairy production who have a deep understanding of their cost of production, are in the best position to identify and capture margins. Additionally, the earnings margin may be the most useful metric to track as it indicates profit levels of the business. This measurement will provide opportunity to protect margins with the creation of a risk management plan.

Implementation - A fundamental rule of business is to remove variation from a task to capture efficiency. For example, completing tasks and jobs on the dairy in a consistent manner that can be repeated easily, can help boost efficiency. Combining this with timely completion of tasks, along with an attention to detail will allow the economic benefits to flow to the bottom line.

Focus on buying right - You need to seek out the best offers, which can be accomplished with the use of bid sheets. A common practice for many businesses that assist them in managing purchased input costs. An example for this may be the purchased protein, vitamin and trace mineral mixes that all dairies need to obtain.

Managing production risks - Areas that can benefit from a laser sharp focus to maintain the highest levels of production performance possible include herd health, cow comfort, reproductive efficiency, high quality and high component milk.

Cost effective technology - By implementing proven technology systems that reduce costs, increase efficiency or improve production that have acceptable returns should be considered. One of the key benefits of technology is the potential to dramatically reduce the chance for human error and while achieving high levels of consistency, such is the case for robotic milking systems. However, during challenging economic periods, it is not a good time to experiment with new emerging systems that do not have a proven track record.

Intensify and amplify your economic scheme - Improve your operation by focusing your efforts on what your core business is and competencies are. Consider outsourcing to improve performance. There is no better example of this than producers who have come to the conclusion that it is better for their bottom line to have their replacements custom raised. Lower feed costs and overhead costs that western heifer operations offer have proven to be an attractive option for some producers when compared to building high cost facilities in the Midwest.

The bottom line - Don’t wait for things to get better or for the economy to improve. Act now to change what you can do to improve your situation, and embrace the things that you can control. Make the current economic challenges faced by the dairy industry an opportunity that makes a positive difference in your business. Adversity is neither pleasant nor enjoyable, but it is a fact of life. Don’t get bogged down with self-pity or placing blame. The success of your business depends on what tactics you can adopt to improve your operation and its’ financial returns.

This article was written by Greg Steele, a Senior Dairy Lending Specialist for Compeer Financial. Contributing to this article was Mary Elvekrog, a Senior Dairy Lending Specialist for Compeer Financial. For more insights from Greg, Mary and the rest of the Compeer Team, visit Compeer.com/Dairy
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