Dairy Today: Fiscal Fitness
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2013’s Volatility Should Spur a Fourth-Quarter Checkup on Your Dairy
Aug 30, 2013
It’s a good time to analyze your operation’s performance and planning for 2014.
By Lori Teigen, AgStar Financial Services
2013 has proven to be another volatile year for the dairy industry. In fact, volatility is the new normal it would seem. Producers have been left wondering what Class III milk prices will do, which margin and risk management strategies will work best for their operation, and how best to manage feed inventories and quality for milk production.
All of these factors not only affect your farm’s profitability for 2013 but will play an important a factor in 2014. With the fourth quarter right around the corner, it is a good time to take a step back and do a checkup on where your farm is performing and planning for the 2014. These are just a few things you may want to consider.
Feed Quality and Inventories
Crop conditions throughout the country are extremely varied. Areas will have some of their best crops, while some producers may have one of their worst. The lack of rainfall could be too late for some crops while it will help alleviate further yield loss for others. Therefore, now is a good time to double check your feed inventories and make sure you have the inventory on hand that your balance sheet is reflecting.
Clearly, this is important for herd performance to ensure you have adequate feed inventories but also financially. Having to correct feed inventories at the end of the year can negatively affect your equity and earnings. If you find you will need to purchase feed, do you have control of the feed and at what price? Lastly, there may be corn silage to purchase if there is any early frost. Have you talked with your neighbors that may have acres to sell? If it is feasible for your operation, consider feeding forage alternatives.
Risk management on dairies is a crucial key for success. There are many things to consider for a comprehensive risk management strategy ranging from life insurance, crop insurance, LGM (Livestock Gross Margin) Insurance and interest rate risk, to contracting milk and feed.
One of the key factors to managing your risk is margin management. Margin management will be vital to long-term success of your operation. Simply cutting costs today to reduce expenses can be a short term fix; however, it may not be a long-term solution. Remember that margin management requires discipline and consistency as markets are constantly changing. Key for margin management is knowing both your cost of production and cash flow requirements but also understanding the markets to be able to take advantage of margins at the right times. Utilize your team of advisors to help with marketing decisions.
How is your dairy performing not only year to date but compared to budget? It can be very easy to get caught up in day-to-day activities and fail to stop and see how your farm is performing. Things to consider when evaluating financial performance can be the following:
• IOFC (Income Over Feed Costs) and evaluating feed efficiency
• Managing net herd replacement cost. Net herd replacement cost per cwt. is the difference between the cost of a replacement heifer and the value of the replaced cull cow.
• How strong is your working capital position? Working capital is king. Working capital will give you the flexibility to manage your cash flow and be proactive rather than reactive when faced with potential adversity.
• Know your cost of production with the biggest drivers being feed and labor.
• Evaluate capital expenditures. With the end of the year quickly approaching, evaluate if the capital expenditure is a need vs. a want, and make sure it is a realistic capital expenditure you can handle for the next 12-18 months.
• Look for improved efficiencies and competitive advantages. Benchmarking not only against your own performance but others as well will allow you to look for additional ways to increase your profitability.
Fall crop production is a very busy time for farmers. Taking a time out to evaluate feed inventories, risk and margin management and financial performance will help set your operation up for continued success and long-term profitability.
Lori Teigen is a Dairy Industry Specialist with AgStar Financial Services in Baldwin, Wis. She has been with AgStar since December 2003. Email her at email@example.com.