On a regular basis, we meet with clients to review financial and statistical information. Through these meetings, we have the opportunity to analyze many different dairy operations. Although there are several different operating philosophies, there are also common factors we observe in profitable operations.
During the course of these conversations, we frequently discuss commodity markets and how market changes can affect operations. Although these topics are very important and need to be considered, dairy producers have very little control over market activity and how that will influence what they are paid for their production.
The most profitable operations we have observed focus their efforts on the efficiency of the dairy operation.
As we discuss operational efficiency, one topic that surfaces frequently is whether a dairy should operate as a single-site or a multiple-site operation. Unfortunately, there isn’t a straightforward answer to this question, and each scenario needs to be considered carefully. Below are several factors to consider in your analysis:
1. Capacity – Are we maximizing the number of cows we can milk in our current facility? If the answer to this question is no, the first focus should be to increase the number of animals milked daily.
To maximize efficiency, a producer needs to maximize production and minimize downtime. The goal for any producer should be to get as many cows through the barn as possible. The last cows to go through the barn have the most profit potential.
2. Proximity – How close will my operations be to each other? One of the factors that needs to be considered is the utilization of equipment (a loader, for example).
If the facilities are close to each other, the loader used routinely on the dairy may be shared between facilities. If the facilities are far apart, the owner may be required to purchase two loaders. Those loaders may be under-utilized, which will increase operating costs.
3. Markets – Can I diversify my risk by expanding or moving to another market? Some dairymen have decided to expand operations into other geographic markets. This is generally done because the operator believes other markets may have competitive advantages such as labor costs, commodity access or reduced competition in the market.
4. Ability to grow – Do I have the land base and permit to grow my operation? For the dairy expanding its operation, this is a driving factor in this decision. A dairy limited by its CAFO permit or land base will need to consider moving operations to another facility with a higher capacity or operating multiple locations.
5. Consolidation – Are there operational efficiencies I can gain by consolidating my operations under one roof? Dairy operators need to consider several factors when considering consolidation: ability to install and leverage new technology, increased labor efficiency, reduction of management personnel, equipment redundancy, etc.
6. Benchmarking – Do you have access to benchmarking data that will assist you in making management decisions? Dairies today are a complicated business proposition, and operators need information to make decisions. Information to consider in your decision-making process can be financial or statistical and should involve a team of people, including nutritionists, bankers and business advisers.
In order to see how these factors affect the decision-making process, let’s consider some sample scenarios that help frame the discussion about efficiency and the pros and cons of expanding, consolidating, modernizing or building.
Scenario one
Dairy A is operating close to optimal capacity. The owners would like to continue growing, but there are no opportunities to expand the facility at its current location. The dairy has a higher breakeven hundredweight cost and is producing fewer pounds per cow per day in comparison to benchmark data.
Option one
Take on another site and run multiple sites to expand the operation to increase capacity and grow the operation. This does not address operational issues that put the operation at risk in economic downturns.
Option two
The operation can increase cull rates to remove animals that are under-performing and maximize production at its current location. This should help to increase the pounds per cow per day. This will lower the breakeven hundredweight cost for the dairy, positioning the dairy for positive future growth and mitigating risk.
Scenario two
Dairy B operates at three separate sites. Each site has the capacity to milk 300 additional animals.
Option one
If the herd size is growing, the additional capacity will allow for growth. The operations will likely experience higher per-hundredweight costs than benchmark data until the facilities are at capacity. The owners could consider purchasing additional animals to fill the capacity at each location.
Option two
If the herd size is stable, or the operation is shrinking, it may be time to evaluate which sites are most efficient and move operations to consolidate at the most efficient sites and sell off the third site. The operation may need to sell animals to fit on two facilities.
Scenario three
A multiple-site dairy is operating at or near capacity at all its sites.
Option one
They run analysis on operating costs of the multiple sites and find they are losing a significant amount of money in duplicate machinery, infrastructure and labor. They choose to purchase new ground, obtain a permit and construct one large state-of-the-art operation designed specifically to consolidate their operation and maximize efficiencies.
Option two
They run an analysis on operating costs and find their multiple sites are doing well and would not be significantly better as a consolidated operation.
Finally, there can also be other factors that may affect your decision-making process that have very little to do with operational efficiency. An example of this would be senior owners who want to transition ownership to the next generation. Often times, the next generation of owners are siblings.
The relationship among the siblings and their ability to work together may have an effect on the number of sites the senior generation will operate. How well those two siblings work with each other may have an effect on the decision.
Multiple sites do not force siblings to operate the dairy together, providing options to the exiting generation. It is hard to identify some of these factors, but you should always consult with your management team and transition consultant when making these decisions.
In the end, dairy operations are similar to any other investment. A best practice is to keep a close eye on what is happening day-to-day so you can find opportunities to maximize the return on investment. As margins grow thinner and the market becomes more volatile, operators have to maximize efficiencies and position themselves to anticipate market changes.
The efficient operator knows 5 or 10 cents per hundredweight can add up to large dollars over the course of a month or year. Successful operators make it a priority to review financial and statistical information regularly so they have adequate information to make informed management decisions. 
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Lance Fenton
- Cooper Norman
- CPAs and Business Advisors
- Email Lance Fenton
