We meet regularly with our dairy clients and prospects, and compared to what we heard not long ago, the conversation has changed regarding what high-functioning farms are focused on today. Yes, we’re still hearing the usual about:
- Production management strategies
- Cost-control strategies to lower the breakeven milk price
- Labor management
- Bottom-line financial management
- Risk management
- Outsourcing and custom versus doing it yourself
Lately though, some recurring themes have come up that weren’t on the forefront of previous conversations.
Risk management
What once was a conversation about pricing strategy has become a discussion about strategies to preserve capital. Everyone who lived through the tight margins after the high milk prices of 2014 used 2022’s high market prices to build a strong cash position for their operation while improving their balance sheet. The talk among high-functioning operations over the last several months has been around how to preserve that position with a focus on risk management tools to accomplish it.
These operations have always had a consistent and well-thought-out strategy regarding margin management, though it was typically focused on the current year’s profit and loss. The new discussion for high-functioning farms is different. That is, they discuss how to preserve and protect the balance sheet and what has been invested into the operation. Specifically, there’s a keen focus on preserving their cash position. That approach lets them take a longer view, makes them more proactive and more decisive in their use of available tools. These operations understand the long game: When you are out of cash, you are out of business. Their focus is on capital preservation, not necessarily just annual profits, though the two are tied closely together. The understanding of that relationship is key to their risk management strategies and fuels their consistent deployment of margin management strategies.
Labor
The conversation around labor continues to evolve. With a tight labor market, every operation has seen an increase in the cost of labor per hundredweight. That number will continue to climb with competition for the existing workforce as the driver. Consequently, we are hearing a lot more interest in technology and automation.
High-functioning farms continue to look at labor as a return-on-investment (ROI) discussion. That is, will the investment in technology add to the bottom line as profits and grow the balance sheet? Or is it just another widget that promises labor savings but results in higher expenses? In response, the high-functioning operation has become fully invested in creating a culture that fosters and rewards high-performing employees. That investment in culture pays dividends in improved employee retention and reduced turnover. While they agree technology has a place, the best-performing operations consider it from an ROI perspective, not just a way to reduce their employee headcount. The high-functioning operator has a keen awareness of their strengths and weaknesses, using either outsourcing or key employees to support their management functions as they build out a culture supportive of the operation's success.
ESG
Today’s high-functioning farms are leveraging environmental, social and governance (ESG) concerns and carbon emissions reduction as tools to keep and expand market access. These operations have seized market share by making changes to their operations that meet the needs of their buyers and the end consumer. They continue to evolve their strategies to take advantage of the market access a specific protocol allows. They’re also proactively seeking ways to develop their strategies to meet consumer demands. This approach has allowed them to expand into those markets and ensure their future. They fully understand that without market access, their business is done.
Water access has also been at the forefront of these conversations, and they’re not just confined to the western states anymore. This is a topic that impacts the entire dairy landscape. Specifically, who holds the water rights, who controls them and who governs them.
Forward-thinking operations have been talking more and more about water conservation and recycling. Some of these discussions have been taking place for a long time, but it’s evolved to consider the cost of storing and moving water on farms. From manure lagoon sizing, to condensing milk on the farm for transport, to manure hauling and pumping costs, it’s about improving bottom lines and reducing costs, not just water conservation. While the conversation still includes what can be done to reduce the amount of water the operation pumps from the ground and water recycling options, this new focus on ROI around water movement costs is very interesting. Technology evolution and cost of implementation will continue to be a part of this discussion. Some are already talking about water being the next measurable, similar to carbon emissions. Those discussions are centered around what is your farm’s water footprint and how will it drive market access in the future.
What constitutes a high-functioning farm today has changed from what it was a few years ago, and what works today won’t necessarily apply in the future. But it is hard to predict what’s next, as the market remains volatile and the consumer fickle. Your best bet is to pay attention to the old standbys while continuing to look for where new opportunities lie. The best producers are turning challenges into opportunities with an attitude of continual improvement and a focus on the long term.
This article is provided for information purposes only. Readers should consult their own professional advisers for specific advice tailored to their needs. Information contained in this article may be subject to change without notice.
