Managing Through Turbulent Times- Geoff Benson
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Dr. Geoff Benson of North Carolina State University and Dr. Jack McAllister of the University of Kentucky collaborated to create this presentation. Dr. Benson presented this on November 10, 2008 as part of DAIReXNET's "Financial Outlook for the Dairy Industry" webinar. The webinar is archived at http://www.extension.org/pages/Archived_Dairy_Cattle_Webinars.
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Managing Through Turbulent Times- Geoff Benson
- 1. Managing through Turbulent Times Geoff Benson Dept. of Agricultural & Resource Economics North Carolina State University & Jack McAllister Department of Animal and Food Sciences University of Kentucky
- 2. GEOFF BENSON, ARE, NCSU
- 5. Financial Performance for Selected New York Dairies, 2005 & 2006 GEOFF BENSON, ARE, NCSU Source: 2005 & 2006 Dairy Farm Business Summary, Cornell University Items in each column are ranked independently Item 2005 2006 Low 10% Ave-rage High 10% Low 10% Ave-rage High 10% Total Cost, $/cwt $23.73 $15.45 $13.38 $24.96 $15.30 $12.93 Net Farm Income, $/cow -$132 $551 $1,268 -$653 $118 $811 Return on Assets, % (+ apprec.) -4% 10.7% 19% -11% 4.0% 12%
Hinweis der Redaktion
- I am Geoff Benson from North Carolina State University and I will be making this presentation on behalf of Jack McAllister from the University of Kentucky and myself.
- Scott Brown gave two scenarios for milk prices in 2009, a deeper drop with a quicker rebound or a less severe but more prolonged drop. The graph shows the monthly US All Milk price going back to 1989 and reminds us just how volatile milk prices have been. It also reminds us we have been where we are today several times before before – at least 7 times in the last 20 years
- Given this situation and the very durable trends in the dairy industry, every dairy farmer should be asking these two questions: “Can I make it?” and “Do I want to?” The sad fact is that not everyone can make it. Some who can may choose not to, for example, dairymen close to retirement who do not want to see their hard earned equity erode.
- This table shows selected financial data drawn from the 2005 and 2006 Dairy Farm Business Summary from Cornell University. Over 200 New York dairy farms contribute their farm data. There are a lot of numbers but I want to make two points. First, if you look at the average cost of production in 2005 and 2006 there is little change. If you look at the two profit measures, Net Farm Income per Cow and Rate of Return on Assets, you see a large change between the two years due to milk price variations – no surprise there. More importantly, you can see a huge variation between the Top 10% and the Bottom 10%. I could have presented many more numbers but it is clear from these few figures that individual dairy farms are coming into this down turn from very different places as far as financial performance is concerned and some are better placed to survive than others.
- Given that some producers are going to have to make some very difficult decisions and all producers are going to be making decisions to cope with a cash flow squeeze I thought I’d use this simple representation of the decision making process as a lead into the meat of my remarks.
- The R in the RADAR stands for recognition of the problem, so the first task is to get a handle on the financial health of the farm business. There are three distinct aspects to this; profitability, cash flow and solvency. Some farms may have problems in one area, some in another, some in more than one area. Economists usually hedge their bets but I will state categorically, based on 30 years of experience working with dairy farm records, that you absolutely cannot assess the financial health and performance of a dairy farm from information about herd and farm performance. You have to dig into the financial records to make the assessment. On a related note, there are relatively few production practices that are profitable or feasible under all farm circumstances, so it is seldom possible to say “if you do this you will make money.” If the farm situation calls for changes in production practices and methods, the financial impacts for that particular farm should be evaluated.
- Given the trends in the industry, each dairy farmer must look at his or her ability to compete financially when measured against other dairy farms. As we saw in the table of data from New York farms, there is wide variation among farms and there is no single reason that explains this range in performance. The first rule of management is to manage the things you can control and to manage around the things you cannot control. It is a waste of time and energy to worry too much about the price of milk. Focus on your cost of production because that is something you may be able to do something about. Depending on your particular farm operation this may include cows, heifers and crops and, if so, I recommend treating each of these as a separate cost center to make sure each is making a positive contribution to the total farm’s financial performance.
- If you don’t routinely measure your cost of production, now would be a really good time to get started. I recommend including three different types of cost. 1) operating or out-of-pocket costs. 2) the costs associated with investments in facilities and equipment, which may be called fixed, ownership or investment costs. These include depreciation, interest on investment, property taxes, and insurance. 3) the value of the unpaid contributions the family makes, including their labor and money invested. In addition, you need a second piece of information – benchmarks for comparison. The recent sharp increases in input prices means cost of production is a moving target and a figure that was good last year may not be appropriate this year. Several universities and organizations collect farm financial information so they can produce these types of benchmarks.
- My next question is “do you know where the money came from and where it went?” This is a particularly important question when cash gets tight in a period of falling milk prices and rising costs. There are four ways cash comes into and leaves your farm and these are listed in the slide. For each of these, I recommend tracking the cash coming in (inflows), the cash going out and the net amount. The net amount may be positive (net inflow) or negative (net outflow). The milk check and the feed bill are examples of operating inflows and outflows, respectively. In most months the inflows should be greater than the outgo, obviously. For all the other categories the outflows normally exceed the inflows so the net amounts normally are negative (net outflows). This is because we must replace worn out equipment and outdated facilities, because we want to pay down our farm debts (eventually), and because the farm should be contributing to meeting family living needs. The farming operations must generate enough of a cash surplus to allow for the replacement of equipment and facilities, to pay down the farm debt and to provide for family uses. Severe cash flow problems can, and usually do, have multiple causes. A drop in the price of milk may be one cause but it may not be the only one. If there are multiple causes, then action may be required in serveral areas.
- As I mentioned when I showed the graph, we have already been though 7 major price cycles, so there is not many new ideas for managing cash flow. All of these listed here are painful and few farms will have all of the options listed. But, hopefully, some of these can be employed on your farm to cope with the current cash flow squeeze. If not, the alternatives are dire.
- To this point I have talked about farm finances because that is the place to start any assessment. A carefully done financial analysis will provide information about the overall health of the farm business and problems areas. It can also point to some areas of the farming operation that need to be re-examined. Clearly, it makes sense to take a hard look at the practices you are using on your farm and the place to begin is with those parts of the farm that contribute most to income and/or most to cost of production. Milk pays the bills and feed cost is the biggest single cost, so this is a logical place to start. However, cows need to be properly fed if they are to remain productive, so the herd rations must be as nutritionally sound when milk prices are low as when milk prices are high. That does not mean ration formulations will not be adjusted in response to changes in herd status or to take advantage of changes in feed ingredient prices of course. A key performance measure is income over feed cost to make sure each ingredient is contributing positively to profitability. Similarly, recommended transition cow management practices, cow comfort and cow health practices must be maintained in order to support milk production.
- It is worth re-evaluating all practices on the farm because lower milk prices and/or higher input prices may make some current practices unprofitable. For example, low end cows may no longer pay their way , tail end cows may need to be dried off a little earlier, crop choices and crop production practices may need to be modified in light of higher fertilizer and fuel costs. Everything should be on the table. However, in a well run farm, most changes are likely to be “fine tuning” and the financial impact won’t be enough to offset the effects of a cost-price squeeze.
- I can think of few things a well run farm can do differently in the face of a price downturn and higher costs. Managing farm finances to cope with reduced income and higher expenses is essential. This means taking time to understand and monitor what is going on with the farm finances. It may be helpful to bring in outside advisors to get a fresh perspective on the farm and it’s performance. This may include extension educators, veterinarians, nutritionists, financial advisors and other dairy farmers. I like the Profit Team approach used in Pennsylvania, where you bring all your advisers in at once and share full information with all of them together so they can bounce ideas of each other and to make sure all aspects of a problem and it’s solution are considered.