What is real and current is the change in the average milk pricing for components from 2014 to 2015. It represents a significant lowering of the blended milk price, which in turn represents lower milk revenue at the farm gate.

That price decrease means a loss in farm revenue for that same milk of approximately 6.0 to 6.6 percent depending on your milk components and the province you’re in.

A more real interpretation is a loss of 6.0 to 6.6 percent in farm profit margin in an industry where many struggle to get year-end profit margins of 6 percent in the best of times.

There is only process and discipline to guide you through this difficult period. Depending on what province I’m in, I hear a wide range of metrics used to measure success at the farm level.

Common terms include, return over feed, cost/hl or price/hl, kg of fat/cow, all of which have their place but are not a true representation of the financial health of the business. More common than not, dairy farms will wait until year-end books are back from the accountant to see where they stand.

When business decisions are based on end-of-year tax accounting, there are missed opportunities to create profit margins. A major challenge with that approach is waiting 12 or more months before discovering an area of your business is bleeding or realizing an opportunity for more profit was missed.

Another challenge with year-end accounting is it’s often done for tax reasons, which can sometimes send you down a rabbit hole when trying to correct profit issues. For example, I recently worked with clients to review all aspects of their dairy operation.

Preliminary review of the accounting numbers indicated the veal operation was a profitable business while the lactating cows’ feed costs were too high.

The missing piece of the puzzle was the milk from the dairy to feed the veal calves wasn’t accounted for in making the feed bill for lactating cows appear high. In reality, the feed bill wasn’t at issue, the veal operation was!

A better way for our dairy farms to measure and control profit margins is by introducing financial indicators commonly used in other business sectors and by surrounding themselves with a knowledgeable management team made up of farm advisers.

When I ask business owners or senior managers from well-run, profitable companies in other sectors, “What is a key element to running a profitable business?” there is a common theme that I paraphrase as, “We need to know where we are if we want to know where we’re going.”

Through the use of monthly reporting structures that monitor key metrics, these companies know at all times what percent of their revenue each area of their business costs them, allowing them to react and see trends well ahead of the curve.

In times of financial crisis, not all, but many dairy producers take a knee-jerk approach to cutting costs, focusing on the largest or most obvious costs. All too often the focus is misplaced, incurring long-term negative effects when the global financial well-being of the dairy is not considered.

In this example, the dairy operation was advised to cut its purchased feed costs. Animals were housed in an older six-row facility that was at 100 percent stocking density. The metric used at the time was $/hl of purchased feed to make the decision to cut feed costs.

Months later, I was invited to audit the farm’s operations from both the production and financial side of things. They went from 100 percent stocking density in 2014 to 114 percent in eight months and lost milk production as well as reproductive performance in that period.

After standardizing the milk price and purchased feed costs as a percent of the milk revenue, they went from 14.7 percent of the milk cheque spent on purchased feed to 17.4 percent in that eight-month period.

The strategy ended up costing the producers 2.7 percent of their profit margin or on a $1 million milk cheque, $27,000. The mistake was they did not account for the downturn in milk production per cow, caused by the lesser quality feed sources that were fed to reduce cost.

It created a knock-on effect requiring them to increase cow numbers to fill quota holdings. It also created a longer-term negative impact on reproduction well into the year after corrective measures were taken.

The burden for most when switching to this type of reporting is creating line items in their accounting software and identifying invoices properly. When completed it should allow for easy interpretation and meaningful reporting on a monthly basis.

Let’s take veterinarian-related costs as an example. It was best said by one of the producers I work with, “The 1.1 percent cost to my milk cheque that was higher than the average was well worth the money, when I broke it out!”

He quickly noted the percent of the bill going to management outweighed the portion for emergency vet calls and continued on, “My animals are healthy and my higher-than-normal reproductive performance helps me generate low variable costs as a percent of my milk cheque due in part to high production.”

This type of analyses allows business owners and their management team to review and understand the cause and effect of costs. Finally, something that may seem counter-intuitive is my belief that producing every kilo of quota available may not be the most profitable decision. Many producers feel that producing every kilo of overproduction credits available to them is important to the bottom line.

It can be advantageous, but more often than not they are not high-margin kilos of fat produced and should be scrutinized. For example, one common error is the last kilos of fat produced are often with low-production animals late in lactation and still open.

This approach will dilute your profit margin on each kilo produced. There may be an opportunity for higher margins through the use of herd inventory projections, culling some of those animals even if it means paying back some of those overproduction credits.

Use your management team to help you make a strategic plan. It might mean a short-term reduction in revenue but higher profit margin on every kilo of quota produced thereafter.

Today’s dairy farm is a business, and as such you need to be a facilitator, learn to lead others and create a management team with key advisers.

By listening and pulling ideas from your team, you will create a financial-monitoring system based on percent profit margin, enhancing your ability to find performance improvements that improve margins.

Knowing where you are makes it easier to know where you’re going, especially when there is no certainty when it comes to the Canadian dairy producer’s future milk pricing.

Much of the discipline may involve tuning out the noise of the media that is constantly focused on short-term themes or sensationalist headlines.

The focus needs to be how to run our dairies to create sustainable profit margins. It is good to learn from traditions and history, but we can’t be a slave to it; we need to manage differently.  PD

 Devin Brennan is a President and Co-Owner with the Ocresco & Associates Inc. Email Devin Brennan.