Many recent high school and college graduates are questioning if there is a future in the dairy industry due to the depressed economic outlook. In the past two years, I have worked with a number of dairy and crop producers in Zambia and Uganda teaching agribusiness principles to improve the profitability of their farms.

There are numerous factors which contribute to the profitability of producers worldwide.

Why does a person want to enter the dairy industry? Lifestyle? Enjoy working outside and with animals? Folks who milk cows because they enjoy the lifestyle may not be in business in the long run. Profits must be generated to pay variable costs (e.g. labor, feed, fuel etc.), family living expenses, service debt and to replace worn equipment. What is the bottom line? Businesses need to meet all financial obligations to ensure the long-term viability of the business.

Does the individual consider himself a businessman first and dairyman second? Is profit one of your primary motives for entering this cyclical industry? Do you want to generate profits to build equity in a business? Businessmen understand their costs of production. Producers need to determine how they can maximize their returns to land, labor and capital. Every farm is different.

Developing a budget will help a producer determine the profitability of investing in a dairy farm. Are the income and expense projections realistic? Is a five-year average used for a milk price in the budget? Are industry benchmarks being used to project expenses (e.g., feed, veterinary, supplies, utilities, etc.)? What are projected production levels during the first three years of operation? What are the breakeven costs for your farm? It may take several years for the cows and producer to adapt to the newly established operation and grow heifers to replace culled cows. Will the farm be able to generate a positive cash flow in the first three years?

Budgets help producers determine what assets will generate the highest rates of return. What are the returns for investing in cattle, equipment, facilities and land? Should the producer purchase forages or raise forages, raise youngstock or have them custom-raised, implement rotational grazing or maximize milk sold per cow? What are your costs of production and returns on investment for the previously mentioned activities? Can a custom operator perform these operations cheaper than your production costs? Can higher returns be generated by specializing and only milking cows? Budgets help producers make these decisions. The bottom line is maximizing net income per unit of production (e.g., cow or acre).

Each year in January producers should re-evaluate their operations. Has their cost structure changed in the past year? If the answer is yes, then the producer should consider his options. Based on an analysis of previous and the prior years' records, current and projected industry trends, should the producer consider purchasing or growing forages, raising or using commercial operations to grow youngstock, transitioning from conventional dairying to grass-based systems? Before making a major change in their operation, the producer should seek advice. Extension agents, lenders and veterinarians are excellent resources to discuss potential changes in your operation. They will provide additional perspectives based on their experiences.

One of the major mistakes that new producers make is trying to keep up with the neighbors. They should not be distracted by their neighbors' high herd averages and newly purchased equipment. High milk production per cow and operating new equipment are not always indicators of profitability! It is unfortunate that net profit per cow is not listed next to herd averages when the county DHIA summaries are published. This would be an eye-opener. You cannot judge a book by its cover. The IRS and your neighbors' lenders are the only outside parties who have an accurate picture of these families' financial positions.

Are you keeping abreast of industry trends? Are you considering adapting the following management programs: breeding for protein, using sexed semen, mating your cows to increase production and longevity? Will these practices increase your bottom line? As a former dairy farmer, I feel that strictly following the recommendations generated by a mating program can significantly improve profits in the long term. Do you want to milk cows that have difficulty walking to the feedbunk and weak udder attachments that are difficult to keep the milker units attached to in the parlor? Producers must constantly evaluate new management practices which will increase their profits.

Do you have a passion for the dairy industry? Do you enjoy working with cows? Are you willing to work the long hours required to successfully operate your business? Are you, your spouse and children committed to operating a dairy farm? Are you willing to change and adapt new management practices to maximize profitability? Current management schemes may not maximize profits in the future.

The dairy industry needs young individuals who bring "new blood" into the dairy business. Many of them have the ability to "think out of the box," which will enable them to generate profits in today's economy. Individuals who answered "yes" to many of the previously mentioned questions and are able to generate a profit under the current economic situation, have an excellent chance of becoming financially successful. Remember, if our ancestors were not willing to pursue their dreams, adapt new technology and management techniques, we would still be going to the West Coast in covered wagons! PD

Peter Callan
Business Management
Virginia Tech
peter.callan@vt.edu