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Are You Managing Your Dairy Operation For Opportunities?

Greg Steele
Educational Opportunities: 
Home > Education & Events > May 2018 > Are You Managing Your Dairy Operation For Opportunities?

Since 2015 dairy producers have been operating in an environment of depressed milk prices. Processing capacity in the United States is constrained and an erosion in basis has been seen across the Midwest. Some of you may be asking, how does the start of this article fit with the title? For those of us that have been around the dairy industry, we are more than familiar with its cyclical nature. We have been through good margins and bad margins before. During a down cycle we get the opportunity to focus on two key factors, which ultimately makes our dairy operations more profitable. When talking with our clients about making improvements within their operations, we focus on two areas:

1. Managing your operation to improve revenue
2. Managing your operation to control costs

Prior to 2015, dairy producers in Minnesota, Wisconsin and across the United States received stronger premiums for their milk. Today, components play a much more critical role in the net price we receive in our milk checks. The first question when working to improve revenue should be, “Can I improve my Butter Fat, Protein and other solids to create more margin in my operation by receiving a higher pay price?” In today’s environment, increasing components and improving milk quality (SCC) is one of the best ways to increase your margin to achieve the highest pay price for your milk. Many times increasing total pounds of raw milk sold is considered the best alternative, however, if the additional output does not create the revenue needed, the additional milk income may not fix the problem.  

Another way to improve revenue is through risk management or a milk marketing plan. This can be achieved through resources such as MPP, LGM-Dairy, your processor or a marketing consultant, depending on the size of your operation and farm resources. Some producers shy away from addressing this area, which isn’t totally surprising. Two of the biggest objections we hear from clients are:

1. I tried that x number of years ago and it was the worst thing I ever did.
2.  If you average it out over time and what it costs, the average end price I receive for my milk really isn’t any different. 

If you can relate to item one, I would ask you to consider one thing: as your operation has evolved and changed over time, have all the management changes or business changes made worked from the first day you tried it? There was probably a learning curve associated with the change. Through adaption, education and perseverance what you changed got better and it became a reason for the ongoing success of your operation. Risk management should never be looked at as a one and done scenario, like any other management initiative it is ongoing and is comprehensive to the overall management philosophy for your dairy. While historically risk management or having a milk marketing plan has not received as much consideration, it has become a key component  for a larger percentage of dairy operations across the United States.
If you believe in item 2, there is a reasonable chance you are correct. One thing we’ve seen in the dairy industry the last 7-10 years is volatility. The upside can push higher and the downside can be just as bad as it ever has been. The question is, can we sustain extended periods of low prices and — even if we can — what is the cost to our long term goals? 
Understanding our costs and making good decisions to manage and control those costs are important. Evaluating feed rations, labor efficiency, sizing replacement herd to the milking herd, net herd replacement costs, uses of capital and borrowing are all critical aspects to understand and to be able to determine where opportunities exist,  which ultimately will improve revenue to create a profitable return for your dairy operation.
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