In frank but admiring observations, a lender reflects on the strengths and weaknesses of the dairy business.
By Greg Steele, AgStar Financial Services
As we close the books on another year in the dairy industry and look back at 2013, I offer my thoughts on what I consider key and indisputable points about this essential and complicated agricultural sector:
• Dairy is by far the most complicated production model in agriculture. This fact cannot be disputed. To be able to coordinate all the housing, environmental, nutrition, feeding, and labor systems in a fashion that leads to the production of what has been is said is nature’s most perfect food is amazing accomplishment.
• The dairy industry has a lot of fragmentation that has led to a lack of unity with consumers, regulators, politicians or even us. There are many reasons for this that includes individual beliefs, policy, and geographic location, to name a few. The industry is open to threats because of this who will continue to seek to divide the industry.
• A modern dairy operation is a capital-intensive investment which requires careful management to allow the business to achieve solid financial returns.
• Having a reliable, well-trained labor force is a threat to the industry as it is with all of agriculture. However, the lack of immigration reform and inability to attract a reliable and compensate labor force continue to be a concern for dairy.
• Specialized dairy farms that purchased their feed have suffered in recent years while those who controlled their feed source did better. Which structure will work in the future? The prospect of $4 corn will likely change the economics of dairy once again.
• Risk management still has limited adoption by the industry as a whole. Given the tremendous influence the global markets have on U.S. milk prices, this fact has made the industry extremely vulnerable to volatility. Risk management is essential component to long-term success.
• Accounting systems are inadequate in relation to the risk present in many operations. Accrual accounting is a must to understand your cost of production. Enterprising dairy, feed and replacement is also critical to provide you with the ability to make the best management decision with the most reliable information. Use of scales and feed inventory software is a requirement to reliable accounting records.
• Benchmarking is a very popular exercise by many. It can be a very slippery slope, however, because how data is collected, valued and analyzed can skew the results. Consultants worth their salt will always recommend that the most valuable step in benchmarking is to compare your actual results to your budget. This will provide the insight that is needed to improve performance. Down the road there may be value comparing your business results to your peers if you have consistency in accounting systems.
• Credit is a tool that enhances profitability when deployed correctly. However; we know that the proper levels of equity and working capital play a critical role of having a backstop for unforeseen financial adversity.
• There are three undeniable characteristics that are evident in dairy operations that experience high levels of financial success:
1. They produce high quality forages because they know it is the single best way they can influence profitability.
2. They exhaust themselves on how to maximize income over feed costs as they know this leads to the best possible economics for their business.
3. Their herd’s reproductive performance is world class. They understand that pregnant cows and heifers are the leading indicator for future profitability.
• Dairy owners, operators, vendors, suppliers and consultants are some of the most passionate folks in the agriculture sector. No doubt there is a reason for this. Maybe it is the work ethic it takes to dairy, or the deep understanding of how to treat animals with great care and respect that provide us a living. This too makes dairy special.
Greg Steele is vice president, dairy industry, for AgStar Financial Services. He can be reached