A financial perspective: Considerations for implementing robotics

Today, we are inundated with a lot of information about different types of milking systems. We have learned how new innovative systems can increase productivity and improve efficiencies. Whether you are considering implementing robotics, or updating your current parlor system with a new rotary, you’ll have a lot to consider.  

Considering that each system varies in terms of capital investment, it’s important to understand how the scope of project impacts your financial situation. Your balance sheet, (equity and liquidity), cash flow and cost of production (COP) can be affected, and this takes time to analyze. There is no one system that works for all operations, so as you evaluate your options, consider these five areas to determine if robots are the right fit for you.

Consideration #1: Capital cost. Rotaries and robots seem to be the two systems most often compared. Just comparing equipment capital cost, you are looking at about $3,200/cow for robots and $1,100/cow investment for a rotary. The additional capital required for structures to house milking equipment and extra storage rooms tend to be similar in comparison between the two. You will also need to consider any capital needed for more stalls, or improving and adding manure systems/storage or building new facilities.

Only considering cost of equipment may lead to an incomplete decision. Considering how the overall scope impacts cash flow is an important consideration. It will help you evaluate your return on investment (ROI).

Consideration #2: Projection and budget. Understand how expenses and revenue may be affected, and what you can realistically expect.

Expenses:

1. Labor: Be realistic. How will a transition to robotics change the way you manage your labor? Over time, a good target to shoot for is $1.50/cwt reduction of labor costs. However, keep in mind that it’s possible that savings recognized in labor may be re-allocated to other expense line items. 
2. Feed: Estimate $.08-$.01/cost/lb. more of dry matter compared to conventional diets. This can also vary depending on the type of flow system you have in your barn. 
3. Repairs/maintenance and supplies: Combined services can range from $16,000-$24,000/box/year. Using 63 cows average/box, cost is $253-$380/cow annually. **Comparing to conventional systems, repair costs range from $45-$55/cow annually and supplies of $75-$100/cows annually for a total combined cost of $120-$155/cow/annually. 
4. Utilities: Estimate 25%-50% increase depending on if you are transitioning from parlor or tie-stall to robotics. Consider the energy needed for the robots, as well as any improvements to ventilation in existing facilities.
5. Bedding, breeding and animal health: Will you be changing your bedding type? What is the cost associated with your bull selection? Consider changes to your breeding program, as it’s important to manage repro tightly.  Overall animal health should always be a priority, and we know robots gain you access to more data to earlier detect and better monitor your cows. However, understand how this will change the way you will manage your cows, when considering the type of flow system. 

Revenue: 

1. Milk production: 
   1. Consider retro-fit or new construction; ask yourself how do my current facilities impact overall animal health/cow comfort; how does this compare to post implementation? 
   2. Time constraints: There are limiting factors of the robots, what is your goal for # of cows per robot. Obtaining peak production requires time fetching and adapting new cows, does this fit into what I have budgeted for labor?
   3. What does 6,000lbs/robot/day really mean from a management perspective? Time is money, how do you maximize that time in the robots? 
2. Culling: This can go both ways. We know not all cows are robot cows, will you need to buy replacements to keep the barn full?
3. Milk Price: Look at long range averages, considering highs and lows. Do you protect any of your milk today, or do you need to make a change? 

Consideration #3: Balance sheet and equity position. As you understand what your current equity position is; as well as how it impacts your balance sheet post close, consider that appraised value on new construction tend to come in less than cost.

If working with your accountant, you may also consider leasing the robots, as there may be some tax advantages in doing so. Most importantly, determine how leveraged you feel comfortable with so it does not hinder future projects or investments down the road. Allow yourself to be ready to invest again, so keep in mind how much capital you want to tie up and for how long. 

Consideration #4: Debt repayment and structure. Considering what your balance sheet is able to support, structuring the debt appropriately and determining what is best for your overall operation is crucial. As a guideline, target your debt repayment/cwt to be at or below $2.50/cwt.**P&I/cwt: Total annual principle and interest /total amount cwts. produced 

Be sure you have a strong working capital position post close, ideally target 30% of adjusted gross income, or $450/cow. We can’t always anticipate potential hiccups during transition, nor do we have a lot of control over changes in the market, working capital provides you with more liquidity to get through those downturns. 

Consideration #5: Feasibility. Determine if your plan aligns with your business, personal and financial goals. If you need revisions to make it more financially viable, consider alternative options that change the overall impact. For example, evaluate if keeping your parlor operational for a period of time makes sense, this could be a good alternative when considering ROI.    

Remaining competitive and maximizing potential opportunities for growth is imperative. Consider these five areas when working through the decisioning process to position yourself for success.

For more insights regarding Dairy Robotics, watch our Dairy Robotics Series.