What sets successful dairies apart from the rest of the industry?
According to agricultural economist Bruce Dehm, president of Dehm Associates LLC, there are four key indicators of success: efficient milk production, low or profitable cost per hundredweight, effective management, and financial stability/sufficient cash flow and equity.
Dehm spoke with dairy producers and conference attendees during a breakout session at the 2023 Indiana Dairy Forum in February and said that the secret to successful dairy farms is not a numbers-based answer.
“Everyone has a different idea of what success is,” he said. “For some people, it’s that our employees are happy; for others, it’s that the cows are productive or there is adequate cash flow. I consider a successful dairy one that operates consistently and profitably, producing high-quality milk. Of course, you also need to meet the needs of your cows, your employees and the environment. When I look at all [the] successful farms [that I work with] and consider what they have in common, it’s not the financial indicators [that really make the difference]; it’s efficient milk production, low or profitable cost per hundredweight, effective management, and financial stability/sufficient cash flow and equity.”
Effective management is the indicator that is most influential to the other three and is what dairy producers should be concentrating on to improve their farms, Dehm said. It includes planning, goal setting, financial management, herd management, labor management and regulatory compliance. Many of these areas will utilize the expertise of industry professionals and subject matter experts, such as veterinarians, nutritionists, accountants and others.
Effective leadership
Dehm shared some of the common characteristics of dairy managers from the most profitable dairy farms he works with – the first being strong leadership.
“On the best farms I work with, there’s one leader and that leader is paying attention to detail and has a willingness to continually improve,” he said. “It’s true that many farms have multiple partners. Still, every successful organization I’m familiar with has an effective leader at the top, whether it’s an executive director who answers to a board of directors or a president elected to represent the organization. You can’t have a farm with two or more leaders with different goals and ambitions and expect the organization to excel.”
Skills necessary for strong leadership include:
- Communication: Effectively communicate vision, goals and expectations.
- Decision-making: Make difficult decisions quickly and effectively.
- Emotional intelligence: Understand and manage their own emotions and those of others.
- Strategic thinking: Think critically and creatively to develop and implement strategies to achieve goals.
- Adaptability: Adapt to changing circumstances and new challenges.
- Motivation: Inspire and motivate others to work together.
- Technical expertise: Understand all management elements, such as planning, finances, herd management, labor management and regulations
Dehm encouraged dairy producers to invest in themselves and strengthen their leadership skills by identifying weaker areas and seeking out training, webinars and other resources – both inside and outside of agriculture.
Bookkeeping, budgets and benchmarks
From a financial standpoint, regularly using a budget, maintaining an effective bookkeeping system and utilizing benchmarks can help track a farm’s progress toward its goals.
“The financial numbers that show up in your set of books are the result of how you do things on the farm – how you feed cows, how you breed cows, how you maintain herd health, how you grow crops. Eventually, there’s a bill or an income that’s related to all of those things,” he said.
Dehm added that there is a “very high correlation” between farms with excellent bookkeeping systems and profitability, as well as a strong correlation between farms that struggle with it and those with low profitability.
When setting up your chart of accounts, he suggested breaking larger categories into smaller ones to help track expenses and identify areas for improvement.
“Instead of a line item that says ‘breeding,’ we’re going to break that down into specific categories – [such as] hormones, semen, breeding services, supplies, ET [embryo transfer] and embryo work, and genomic testing. Same thing for areas like feed costs. Is that feed for calves, heifers, milk cows, dry cows? Which commodities we are buying? And that’s the kind of information we are going to need if you’re going to start managing a business more effectively from a set of books. Same thing with labor. You should track all of this so we can say that there’s an area here or there that we need to change, and we have the data right here to prove it.”
In addition to accurate and timely bookkeeping entries, Dehm also recommended using accrual accounting.
“Accrual accounting records an expense when it is incurred, not when the bill is paid, which is used to calculate your cost of production accurately,” he said. “For example, many farms pre-paid two or three months of purchased feed at the end of 2022 to show a lower taxable income. A cash analysis would show 2022 with 14 or 15 months of feed expense and 2023 with nine or 10 months of feed expenses. Analyzing your feed costs on a cash basis would provide an inaccurate number.”
A budget is a plan of action and must be updated and revisited regularly to be effective. Dehm cautioned producers that having a budget but not using it after giving it to their lender is like “planning a cross-country road trip, leaving the maps at home and hoping you reach your destination.” He also called budgets a psychological tool for financial management.
“If you put together a budget for the year and know you’re going to be in a cash flow deficit, you’re probably going to do some things differently,” he said. “You’re going to work on feed costs, you might see what your break-even milk production is going to be, and you are going to do things differently than if it shows you are going to make a million dollars profit. It doesn’t mean you stop managing your budget if you are making a million dollars, but it’s a great tool to measure your progress from where you thought you would be to where you actually are. It also allows us to be responsible for financial performance. You can compare your performance and adjust in real-time if you are using your budget.”
Comparing your farm’s performance to other farms using industry benchmarks can help identify areas for improvement. Benchmarks can also serve as motivation for owners, employees and industry professionals to work toward the farm’s goals. Independent consultants, accountants and land-grant universities can provide dairy producers with benchmarks for the dairy industry.
Advisory teams
When another set of eyes is needed, advisory teams can help dairy producers meet their goals by looking at a problem or challenge and helping to develop a plan to address it, as well as assisting with implementation. Advisory team members can vary based on a dairy farm’s goals and can include owners of the dairy, herd manager(s), veterinarian, crop consultant, nutritionist, lender and/or other important stakeholders and professionals working with the farm.
“Sometimes producers want to get to a certain goal but don’t know how, so that’s where advisory teams come in,” Dehm said.
Steve Obert, owner of Obert Legacy Dairy in Fort Branch, Indiana, started an advisory team on his farm within the past year.
“The farm advisory team in our case is made up of our nutritionist, our banker and our feed dealer,” Obert explained. “There’s three things that come to mind [about the advisory team] that are impactful.
“First, it helps develop an attitude of continuous improvement. We know we’re not perfect, but we want to get better. So, if we approach our business from a standpoint of ‘stepping stones’ to a better future to elevate our farm, these farm advisory teams are really good because as we go through our barn and the data with our advisers, we start a list each month on the whiteboard and assign owners [to those tasks]. The next month, when we are back together, [the people responsible for each task] better have a report on what they have done since the last meeting. If they don’t, it’s an uncomfortable situation because the whole team is counting on it.
“The second thing is transparency and open communication. The partners that are impactful on our farm, like our banker and nutritionist, get a better idea of what’s going on. Transparency and open communication are what build trust, and if you don’t have trust with your banker or your veterinarian or your nutritionist or your accountant, you’ve got some issues going on.
“Third, as I’ve taken a step back from the day-to-day responsibilities and my sons have stepped forward, these discussions help bridge the communication gaps that might exist between family members and generations. We’re just now beginning to see the benefits of it, and my only regret is that we should have started this a long time ago.”
To answer the question posed in the first sentence of this article: Strong leadership and effective management set successful dairies apart from others in the industry.
“What works on one farm doesn’t always work on another, so it’s going to come down to your situation, what you’re good at and what needs improving on your farm. That’s what’s going to make you successful,” Dehm said.
