Multi-Site Dairy Management
More dairy producers are looking towards second dairy options to expand their dairy farming businesses. These progressive dairy farmers are evaluating the purchase of turn-key facilities, leasing to serve as a short-term step towards expansion, or realizing it’s not their next strategic move.
Our team has regular conversations with dairy farmers to determine if this is the most strategic move to grow their dairy business and increase their profitability. During these conversations, we guide producers through four crucial aspects to consider towards their decision-making process regarding a second dairy site.
As you begin these conversations with your team, we encourage you to discuss these key focus areas so you can make an informed decision:
Financial Feasibility
The most important question to ask is, “what does this mean for my bottom line”? Identify if your balance sheet can afford it – will this offset your balance sheet, or does your balance sheet support this purchase? Identify if your assets will outweigh your liabilities so that after you do this next step, you can continue making strategic moves to support your dairy farming operation.
You also need to assess your cash flow. Does this opportunity better your cost of production? If it doesn’t, then a second dairy site might not be the option for you. Understanding your numbers is crucial and will help you shine when it comes to your bottom line.
The Seller’s Perspective
If you’re on the flipside of the coin there are other considerations you need to make. As the farm operation debating to sell or lease their farm, you need to identify your motives. Are you looking to walk away and hand off your dairy operation? If that’s the case, you’ll need to understand tax consequences that may come with it.
If you don’t want to take a check right off the bat, you can rent out your dairy facility, selling your cattle, equipment and feed. This can be set up as a full lease, partial lease or other options. But, this option impacts both parties – you'll essentially have a partner in your dairy, even if it’s not as a financial partner. You’ll be relying on each other to move both businesses forward.
Here are some questions the seller and buyer should ask in this scenario:
- Who’s going to be responsible for facility repairs?
- Who will be responsible for taxes or utilities?
- What will be the day-to-day involvement of the seller?
- If a conflict arises, between the parties involved, what will be the process of resolving?
- What is my milk base worth, is this something I can sell or should be purchased?
- Is there an established market for the milk and what is that value?
Day to Day Management
Where there is cow capital, there is human capital. Successful dairy producers are often great day to day managers on their farm. When you add the second dairy site and have to duplicate it, the management success is really revealed. No two dairies are the same and your management will likely change as you add another dairy.
A key consideration will be travel between the two sites. Who will be traveling and will that have an impact on your bottom line? Who will be your key point people at each site and will they travel between the two? Middle management on multi-site dairy operations become key employees requiring skill sets to make informed day-to-day decisions as if they were part of the ownership structure of the dairy business.
The Big Picture
As a producer, you have to think of the long game when it comes to these decisions. What’s next? And what’s next after that? Answers may include another dairy acquisition, stepping out of the operation yourself, or adding the next generation. The question should also be pointed towards the farm itself – evaluate if updates are needed, to allow for improved efficiencies or if an expansion of the dairy is an opportunity to improve and grow your business model and goals.
When purchasing a second dairy site, you’re not only impacting your present but your future as well. This will impact your five-, ten-, fifteen- and twenty-year plan. Although it may be difficult, do your best to envision future plans to best understand your dairy’s path in the years ahead.
With consideration of these key points, establishing clear expectations and a developing strategic roadmap you can identify if adding a second dairy site is the best answer to dairy farm’s future growth. If this is an opportunity, you’d like to explore for your farm operation, contact our team of dairy financing experts to guide you through the decision-making process.
Senior Dairy Lending Specialist Curtis Gerrits, recently shared on the key considerations on the Up Level Dairy Podcast, which you can listen to here.