Dairy truly is a global industry, as economist Dr. David Kohl explained during the 2015 Professional Dairy Producers of Wisconsin (PDPW) Business Conference, where he moderated a panel featuring dairymen Michael Murphy and Eckhard Meiners and shared his economic outlook for the coming year.
Irish dairyman Michael Murphy and German dairyman Eckhard Meiners operate dairies an ocean away, yet as milk quotas disappear in the European Union, they look toward the future facing many of the same challenges as their American counterparts.
Optimize, not maximize
The competitive edge in dairy lies in optimization, not maximization. As Murphy explained, his strategy is to leverage the strengths of his environment while growing his herd at a reasonable rate. In his case, that means planning for a moderate expansion from 115 to 210 cows over two years and taking advantage of his island’s temperate climate and 50 inches of annual rainfall to supply grasses as the primary feed source.
On Meiners’ 620-cow commercial dairy, he is striving to optimize his work flow and energy inputs, such as electricity, heating and water, while growing steadily. He plans to increase cow numbers and milk production by 10 percent each year over the next several years.
In the U.S., Kohl added that the previous trend was to expand and specialize; however, he cautioned against putting all of your eggs in one basket.
“Now, we are coming into the period of the cycle for moderation and incremental growth and looking at ways to diversify income,” he said.
While the temptation is there to push for growth, Kohl added that gains in efficiency should trump greater production.
“Get efficient before you get bigger,” he said. “A lot of dairymen try to grow profits before they get efficient, and that puts them in a bigger hole.”
‘You’ve got to havea business plan’
Kohl could not emphasize enough the importance of writing out a farm business plan. He foresees a tightening of credit in the coming year, and as the pressure comes down on banks, lenders are going to need to see the numbers. “You are going to have to get your financials in ship-shape,” he added.
Both Meiners and Murphy have business plans designed to guide them through the ups and downs of post-quota milk production, and they also use them as tools to educate their lenders.
Meiners stated, “The bank gets good plans from me, and I have to explain them. The worth of the land is growing so that is good insurance for the money they gave me.”
A lending relationship must be about more than the lowest interest rate, Kohl added. Look for a lender who really understands the cycles of the industry and your business, and who will be “consistent” and “courageous” through the good times and the bad.
Volatility management
“Volatility can be your friend or it can be your foe,” Kohl warned dairy producers. “There will be more opportunity in agriculture in the next five to seven years than there has been in the last 30 years, but there is also going to be more opportunity to fail.”
The European dairymen acknowledged that they anticipate peaks and valleys in milk pricing on the open market, and they realize it’s going to take adequate working capital, marketing and management.
“Cash is king,” Kohl proclaimed, citing four cornerstones: a reasonable debt level while focusing on liquidity, profitability and efficiency.
He advised keeping an eye on international affairs as the global economy slows down and we enter into deflation mode.
“Trade risk is your biggest risk,” Kohl told both U.S. and European dairy producers. The emerging nations are in a recession – Brazil, Russia, India, China and South Africa – which is driving commodity prices down. He further warned against relying on trade partners like China, who has a habit of manipulating trade agreements for its own convenience. He cited China’s sudden rejection of American-grown GMO crops last year.
“It wasn’t our GMO crops. They had sufficient supply, so they will use that as negotiation,” Kohl said. “They will giveth the market, and they will taketh away.”
Land availability
While caps will no longer limit milk production, the expansion of Irish dairies is contingent upon adequate land base for nutrient application.
“Land is the new quota,” Murphy stated. In Ireland, land is typically passed from one generation to the next, but when the rare occasion arises that land is for sale, Murphy sees prices around $12,000 per acre.
Securing land is top on Meiners’ priority list as well. In fact, that has become one of his major responsibilities as he seeks to acquire adjoining and nearby parcels in order to make crop production and manure application more efficient and to keep pace with his goals for growing his dairy. “We need more land,” he added. “That is my main work.”
Their reasons for gaining ownership of arable acres are not all that different than those of U.S. dairy producers. However, Kohl brought up some staggering statistics. As the average American farmer ages, 60 percent of the farmland is on pace to change hands by 2030. Add to that the fact that roughly one out of every five farms does not have a “next generation” to come back.
Labor
As many U.S. dairy producers can relate, finding and retaining good help can be a challenge. Murphy recognizes that this will be a major learning curve as he grows his dairy and becomes more dependent on hired labor, along with the transition from managing cows to managing people. “It’s going to be a big change going forward for the family farm in Ireland,” noted his wife, Geraldine.
The work-life balance is something American dairy families are striving to find as well. As Kohl pointed out, the “old days of never missing a milking” is not the lifestyle that appeals to the next generation.
In fact, he foresees a growing trend of young people living in urban and suburban areas and commuting to the farm for work, thus allowing them to enjoy the amenities of good educational systems, health care, shopping and Internet access.
These social shifts may provide the next generation with the best of both worlds. Kohl closed on this note: “A lot of farm families will tell me the best crop they will ever raise will be their children, grandchildren or neighbor kids, and never forget that – because that is really connecting the dots and balancing the business with lifestyle.”PD
Dr. David Kohl presented his economic outlook and moderated a panel of European dairy producers during the 2015 Professional Dairy Producers of Wisconsin (PDPW) Business Conference in March.
Peggy Coffeen
Editor
Progressive Dairyman
