By now, the potential benefits of robotic milking systems are clear. Less obvious are the financial impacts. That leads to an important question: Should you dive headfirst into a fully automated facility, or is it better to invest incrementally?
Part of the issue is that certain assumptions have not held true. A few years ago, we (that is robot manufacturers, farmers, bankers) believed robots would produce significant savings in labor costs. As we’ve mentioned in these pages, those savings haven’t been quite so dramatic.
On top of that, investing in robotic milking systems is a drain on working capital. One operator we work with – a 240-cow dairy – started with four robots with the ultimate goal of having eight. But the initial expansion tightened his balance sheet to the point where he couldn’t expand any further. Before the expansion, his operation had 97 percent equity on its balance sheet. That dropped to 47 percent equity post-expansion.
It’s not just the initial capital expenditure that takes a bite out of your working capital; it’s also the startup and management costs. The transition from parlor milking to robotic milkers comes with a fairly steep learning curve. If you don’t start executing quickly enough, you’ll likely end up draining working capital or risk taking significant equity out of the operation.
Today’s robots can attach to a cow significantly faster than robots from five years ago, which means you can milk more cows each day. And that translates to a higher gross income per robot for the same price you paid for a robot five years ago. Five years from now, we’ll probably see similar advances.
But if you already have older robots in your dairy, you don’t necessarily need to upgrade your entire roster. You might be better off adding one or two new systems for your problem cows. The easy-to-attach cows are probably doing just fine on the older robots, so moving problem cows to newer systems will make the entire barn more efficient. Ideally, you’ll have paid off the older robots after about seven years, putting you in a financial position to replace one or two robots with new systems as you need them.
Don’t forget the fundamentals
Execution and follow-through are the biggest risks dairy operators face when it comes to robotic milking systems. It’s easy to get so consumed with the startup and construction process that you lose track of what’s happening with the operation as a whole.
Stall maintenance can be challenging, but it’s critical. Even with robots installed, you still need to follow the same management fundamentals as any other operation. Operators who skip the details are the ones who will likely have issues with cow health problems. And when that happens, your cows aren’t being milked, you get a smaller milk check and you have to rely on your equity to cover the losses.
It’s also easy to get so bogged down in the implementation that you forget about managing your risk for the rest of the operation. Milk hedging is still crucial, and you don’t want to leave yourself exposed to a drop in milk prices because you were too fixated on getting your robots up to speed.
The same goes for financial reporting. If you fall behind, you won’t know where your money is going and whether you’re overspending in certain areas of your operation. Keeping on top of your overall financial picture will also help when your banker requests updated financial information. It’s hard to make financial decisions if you don’t know where your financials are.
Also, robots collect a lot of data, much of which can be a distraction (such as milk weights per quarter compared to receiving milk weights per cow). It’s a matter of knowing which information is important to your farm. Understanding the relevant information the dairy robotic software provides is essential to managing your execution risk.
The key is to stay focused. That, and plan for Murphy’s Law. Make sure you have a short-term cushion in working capital and a long-term cushion on the balance sheet to make sure you can weather any storm. Make projections and shock test those projections to see what happens if your income decreases 5 percent or expenses rise 5 percent. Multiple check-ins along the process of installing robots can help make sure you’re tracking toward your benchmarks, including milk per robot.
The successful operators are proactive. Even before they implement the technology, they’re selecting which cows will get milked by the robots. Essentially, they’re making sure they’re set up for success once they adopt the technology. That’s the ideal scenario however many robots you decide to implement at first. 
Craig Rogan is a vice president of business banking at BMO Harris Bank. Email Craig Rogan or call him at (715) 342-3270.
Brad Guse is BMO Harris Bank’s senior vice president of agricultural banking. Email Brad Guse or call him at (715) 486-3043. For more agriculture industry insights, visit the BMO Harris Bank website.
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Craig Rogan
- Vice President of Business Banking
- BMO Harris Bank
- Email Craig Rogan
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Brad Guse
- Senior Vice President of Agricultural Banking
- BMO Harris Bank
- Email Brad Guse
