Whether the market is good or bad, the cost-of-production planning process can help dairy producers control their costs and stay knowledgeable, on track and moving in a positive direction.
During the 2020 Pennsylvania Dairy Summit, three experts collaborated for a breakout session centered around cost of production: Mike Hosterman, a business consultant with AgChoice Farm Credit; Greg Squires, a dairy consultant at Dairy Enterprise Services; and Tim Beck, a dairy business management educator at Penn State Extension.
“You’re setting the mission, vision and budgets for your business. That’s what’s going to give you the framework for controlling your costs,” Hosterman said.
By understanding their cost of production, producers have a better chance of achieving profitability and consistency over the long term.
Controlling the controllables
While there is no magic solution to maintaining profitability in the dairy industry, Hosterman began the breakout session by reminding producers they cannot manage their dairy without truly understanding the cost of doing business.
Producers first need to understand their net cost of production versus the breakeven milk price. These two numbers will help dairy professionals better understand profit and cash flow. As they work to manage costs though the down cycle, Hosterman urged them to focus on the breakeven, otherwise known as their cash flow, to achieve success.
“I define success as being profitable and having a positive cash flow,” Hosterman said. “Successful business owners control the controllables. They have positive attitudes and surround themselves with people who have positive attitudes.”
Goal setting is an important part of ensuring positive cash flow and managing cost of production. Hosterman relies on the “SMART” goal philosophy: goals should be specific, measurable, attainable, realistic and timely. Working with industry leaders or advisory teams throughout the goal-setting process can help dairy producers solidify their goals, learn from specialists with different areas of expertise, monitor key performance indicators, and stay focused and moving in the same direction.
Compare against yourself. When you’re setting goals and managing your costs, look at how you compare to previous years,” Hosterman added. “What are your trends? Are you making progress?”
These types of comparisons and benchmarks allow producers to analyze their progress and manage their cost of production. To guide them through the benchmarking process, Hosterman shared multiple resources available through AgChoice Farm Credit, including a dairy profit analyzer, budgeting tools and a benchmark program. He also shared resources provided through the Center for Dairy Excellence, including profit teams and professional consulting resources, to help producers monitor their costs and regularly track their key performance indicators.
Perfecting the planning process
In addition to goal setting and benchmarking, Squires went on to describe the importance of effective strategic planning. A lack of business planning is one of the most limiting success factors in many dairy operations in the U.S.
“If we don’t engage in steady and consistent planning somewhere along the way to build a forward-thinking culture, we never set our target. In too many cases, we don’t even know what the target is,” Squires said.
According to Squires, business planning is all about perfecting the planning process. The process includes a wide range of factors, such as forage quality, cow comfort, milk quality, capital efficiency and employee management. Squires reminded the audience that it is difficult to manage and coach employees toward consistent execution of correct standard operating procedures when nobody is monitoring results and reinforcing expectations. Effective middle management is essential tokeeping everyone aligned toward the same goals.
Fostering a culture of information through “big data” can also help producers create greater profitability. Squires explained that highly sustainable business models identify the areas of greatest inefficiency and use data to draw relevant correlations.
“Let the numbers churn together to draw even more precise information. This is the next layer of competitiveness,” he said. “Dairy farming is a never-ending process of trying to decide which stave in the barrel is currently the lowest and how to improve it. You’re not only challenged with trying to fill the barrel with more profits, but it’s constantly changing. One month, udder health might be low, while forage quality might be lower another month. Big data helps us better identify cause and effect and make correlations.”
Despite having a strong business plan, market dynamics can always impact profitability. Weather, demand, U.S. exchange rate, speculators, supply, feed prices, interest rates and volatility are all factors that are often outside our control. Squires reminded producers that risk management strategies can help them reduce the impact of these market factors.
“My challenge to you is to spend 15 minutes every single week learning and talking to people about risk management,” he shared. “Use the knowledge you gain to be more proactive in preventing market factors that could have a severe impact on profitability and cash flow.”
Even though the market in 2020 appears better than what the dairy industry faced a year ago, risk management is a necessary part of managing cash flow and cost of production in good and bad times.
Identifying problems and solutions
Beck concluded the session by helping dairy producers consider the big picture by identifying macro and micro problems. He encouraged producers to calculate their costs and determine the basic amount of dollars they need to break even on their farm. For some operations, they may require an aggressive solution and a large investment to improve profitability. For others, they may only identify micro problems such as tweaking their feed cost to improve profitability.
Ultimately, Beck says the total amount of milk you sell per year makes the biggest impact on cost of production and breakeven costs. To help producers make detailed calculations, Beck shared breakeven cost tools and crop benchmark data available through Penn State Extension.
When producers take the time to benchmark their progress, fix strategic planning issues and calculate their cost of production on a regular basis, they can find pathways for maintaining profitability, even when the market is out of their control.
