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Dairy business tactics for success

Worldwide milk production is slowing and, based on future prices, we should be moving to a period of profit for most dairy businesses.

The latest USDA heifer report showed lower national dairy heifer inventory levels. This may slow down the rate of expansion when milk prices improve dairy profitability.

After four years of operating in survival mode, now might be a good time to review your business strategies. Here are areas to address for enhancing business success. 

1. Reassess your risk management strategy

When it comes to risk management, the goal is all about protecting the business against downside risk, not just about maximizing prices. The new farm bill contains better dairy risk management options than any previous bills.

The dairy margin coverage program (DMC)

With the improved hay price formula and the $9.50 maximum margin over feed cost for the first 5 million pounds, the DMC is much better than the old margin protection program.

The indemnity for the first five months of 2019 is more than $1.00 cwt at the $9.50 coverage level. This year's payment will cover the premium for the length of the program for Minnesota farms that are eligible for the special Minnesota Dairy Assistance, Investment and Relief Initiative (DAIRI) premium subsidy (at least 10 cents/cwt) and sign up for all five years (25% premium reduction).

The dairy revenue protection program

This is another new insurance program that allows farmers to place a floor under their milk price for a very reasonable cost. An improved dairy livestock gross margin (LGM) program is also still available for farmers to use.

Another positive change is that farmers can participate in both the insurance programs and DMC program. These programs are not designed to guarantee farmers a large profit, but will help stabilize income during low prices.

2. Review your financial position

Many farmers have borrowed their operating lines of credit to the limit and have been paying interest only on some loans. Farmers also have refinanced accounts payable such as feed and veterinarian bills into longer-term debt that will need to be repaid.

Now is a good time to meet with your financial advisers and lender to review your financial position and develop a plan to get your finances back on track for success. 

3. Evaluate where to best invest profits

  • Catch up on equipment and facility maintenance first.
  • Review your list of potential new investments.
  • Focus on investments that are likely to have a rapid return.
  • Avoid purchasing equipment just to avoid taxes.
  • Work with your tax consultant on ways to minimize taxes without jeopardizing your long-term financial position.
  • For equipment such as choppers or combines, consider sharing with neighbors, having it custom done or renting equipment.

4. Review operational efficiencies

For a farm to be successful over a long period, it must be control costs and focus on keeping a higher percent of each dollar of income. Data for dairy farms in the University of Minnesota FinBin database shows that one of the biggest drivers for high profit farms is higher profit margins.

This is no surprise, but a good reminder to continue to focus on operational efficiencies. This includes practicing good cost control and focusing on all the little details that, when added together, make a big difference in profitability.

Operating profit margin of dairy farms in different profit cohorts.
Operating profit margin of dairy farms in different profit cohorts. UMN FinBin, 2019: 2015-2018, excluding organic. www.finbin.umn.edu.

5. Develop and use a trusted team of advisers

A good relationship with trusted advisers can be a major component in your business success. Having regular management meetings will help them understand your business to better meet your needs.

Don’t treat your advisers as people that are trying to take advantage of you. Most want you to succeed and, if they are not invested in your success, consider switching to someone that is.

6. Take time to smell the roses

It has been a long run of low prices. Many farms have minimized time off and worked overtime to try to keep the business afloat. If there is some extra money, don't be afraid to reward yourself with enjoyable activities.

We all need time off for our mental health and will come back refreshed and better able to deal with challenges as they come along.

 

 

Jim Salfer is an Extension dairy educator at the regional office in St. Cloud. 

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