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March 2013 Archive for Fiscal Fitness

RSS By: Dairy Today: Fiscal Fitness, Dairy Today

Financial management experts, lenders and accountants share ways for dairy producers to improve money and credit management. Look for help on budgets, taxes, loans, financial performance and even bankruptcy.

Growing More Heifer Replacements May Not Always Be the Answer

Mar 29, 2013

Several factors can bridge the gap in value between owning your replacements and purchasing them from the open market.

Tim Swenson photo 3 13By Tim Swenson, AgStar Financial Services, ACA

As producers continue to improve calf facilities and calf-raising protocols, calf survival rates (including DOAs) of 90%+ are being achieved. Producers are now faced with answering the question, "Does every heifer born on my operation get raised and freshened into the milking herd?"

Many operations, if they freshen every heifer they currently are growing, are looking at replacement rates (cows culled + death loss) in the upper 40%, some over 50%.

In the past, producers could raise their heifers, and then sell the excess as springers. This age-old strategy does not appear economically feasible in today’s marketplace. Analysis of our latest benchmark data shows that the cost of raising replacement heifers across Minnesota and Wisconsin dairies falls between $1,400 and $1,700. Adding $300 for the value of the calf pushes total replacement values upwards of $1,700 per head. With springing heifers averaging $1,250-$1,300 throughout Minnesota and Wisconsin, should producers be raising their own replacements?

There are a number of factors that can bridge the gap in value between owning your replacements and purchasing replacements from the open market. Knowledge can be an offsetting factor in evaluating the additional costs of raising the replacements versus purchasing them from the marketplace.

By owning your replacements, you have first-hand knowledge of:

• The genetic base of your heifers;
• The nutrition program the animals have been on throughout their growing phase;
• The service date;
• The service sire (calving ease sire or not);
• Whether or not vaccination and parasite control protocols have been followed.

On the other hand, many producers choosing to raise their own replacements are raising more than they need. Instead of targeting a healthy turnover rate and growing the number of replacements necessary, producers are choosing to grow every heifer and let the number of replacements calving drive their dairies’ turnover rate. Based on the economics listed above, waiting until heifers are ready to calve to decide whether to keep her or not, unnecessarily wastes the operation’s resources (feed, labor, facilities, and CASH!).

In order to make these decisions sooner rather than later, there are numerous decision criteria a producer can employ to manage the number of heifers in his or her inventory. A few tactics to consider are:

• Tracking heifer growth rates (both height and weight) and culling animals that are falling behind herdmates;
• Evaluating the genetic base of the milking herd, and breeding the bottom tier of cows to beef sires. The resulting crossbred calves are sold to market, with no temptation to keep a heifer calf;
• Evaluating the genetic potential of the heifer inventory (based on pedigree or preferably genomic testing), and culling the bottom tier of growing heifers;
• Removing heifers that don’t conceive by the third service;
• In all cases, this identifies the heifers used for replacements earlier in the growing phase. The producer can then reallocate the resources associated with growing those unneeded animals to other enterprises of his or her operation.

There are numerous factors that must be considered when weighing the decision to grow your own heifers, either at your current operation or a custom grower. The best choice may be a different answer for each operation, but with objective reasoning, the right decision can be determined. After deciding to grow or purchase replacements, the hardest choice may require a philosophical change. Are you going to grow every heifer born at your operation, or are you going to grow only what are needed for your dairy herd’s replacement needs?

Swenson is Senior Business Consultant with AgStar Financial Services, ACA, which he joined in 2006. He consults with family dairy businesses and large producer operations across the upper Midwest. Contact him at: Office: 715-688-6362; Cell: 715-491-8161 or tim.swenson@agstar.com.

Know Your Own Dairy’s Numbers

Mar 18, 2013

In benchmarking, evaluate and challenge each category – reproduction, nutrition, finance, feed shrink – and seek the unvarnished truth.

p7 Fiscally Fit Bob MatlickBy Robert Matlick, partner, Frazer, LLP

Being a partner in a dairy niche accounting firm, I am often asked, "What makes one dairy more profitable than another?"

Many dairy operators want to look at benchmarking or peer-group statistics to indentify weak spots in their own operations. Ten years ago, I was a huge proponent of benchmarking and embarked on the gathering and standardizing of financial and production information from clients. Then reality set in. After scouring through stacks of data, I realized benchmarking is great in stimulating discussion within peer groups, but chasing the ideal income and cost structure through benchmarking will most likely end in failure.

One may ask, "Why does benchmarking leave so much to be desired?" The answers are numerous. To begin with, no two facilities are identical. There are nuances with every facility (for example, cow flow, acres farmed, cow comfort, the age of the facility, various depreciation calculations, etc.).

Secondly, no two herds are exactly the same because of variables such as the herd’s age, genetic make-up, milking frequency, nutrition philosophy, milk components, and so forth. A third major issue is debt structure: Is it long term or short term? What are the interest rates on the various pieces of debt?

While these issues may just be the tip of the iceberg, it quickly becomes apparent that it is impossible to standardize all the raw data enough to provide statistically sound information on which to make management decisions.

So does this mean a dairy operator should not benchmark? My answer is no. A dairy owner/operator should diligently benchmark against his/her own operation monthly, annually, and further into the future. In other words, understand your individual operation as it currently stands and then attempt to make improvements in efficiencies, cost structure, and overall profitability on a monthly basis. Develop a monthly budget/cash flow for your operation and then track the actual performance.

There will be variances. Take the time to identify what those variances are. For example, is milk income less than projected because of number of cows milking, production per cow, milk price (basis)? Is feed expense higher than projected? Research the root cause (e.g., building up of inventory, shrink, change in dry matter intake, etc.). Evaluate and challenge each category with the appropriate personnel or professionals.

One of the greatest assets to a dairy’s operations is a team of experienced, knowledgeable and involved consultants. Dairy consulting professionals should be asked to be blatantly candid in their assessment of the individual operation. If there is a reproductive issue in the herd, the owner needs to be counseled in the matter, and a discussion should be had to determine the cause and the cost to remediate the issue. The same would hold true in regard to nutrition and finance.

Often, while working through a cash-flow projection with a client, I find there are problem areas on the dairy that were not addressed or even communicated to the operator. Consultants, nutritionists, veterinarians and the like should feel comfortable bringing up the issues they see. By bringing the issue to light, the matter can be addressed and remedied, and the herd (and production) will benefit.

Pay careful attention to the income-over-feed cost projections. In preparing cash flow projections for clients, I find dry matter intakes and shrink can wreak havoc on monthly cash flow. On a 5,000-cow dairy, a 2% point fluctuation in shrink can affect the monthly cash flow by as much as $300,000 per year.

Close attention should be given to components and how they affect your overall pay price. Just as you understand every other aspect of your operations, you should understand what drives your milk price. If you are farming a large portion of roughages, understand the monthly outflows and how it will affect the monthly cash flows of the dairy (for example, large harvesting bills incurred at harvest time). I encourage clients to sell the harvested crops to the dairy at fair market value in order to evaluate the overall farming operation.

With tight margins and large operations, all income and expense items need to be continually scrutinized. I know from experience that each month presents a different cash-flow challenge to an individual operation, so it is imperative to understand and plan for those variances. Gone are the days of preparing an annual cash flow in order to renew the bank loan.

As mentioned above, benchmarking can provide for stimulating conversation within peer groups, but a dairy manager must benchmark against his/her operation to make continual improvements.

Robert A. Matlick is a partner in the accounting firm of Frazer LLP. Based in Visalia, Calif., Matlick is a management advisory specialist and provides business consulting services to the agriculture industry, with an emphasis in the Western U.S. dairy industry. Contact him at bmatlick@frazerllp.com or 559-732-4135 Ext. 107. 

Dairy Nightmares

Mar 10, 2013

Dairies can learn a few business turnaround lessons from Chef Ramsey and his "Kitchen Nightmares" TV show.

By Dave Sousa, CPA

I have enjoyed watching the "Kitchen Nightmares" television episodes with Chef Gordon Ramsey walking into an established restaurant and finding a real mess.

It is always amazing to watch the restaurant owners who are in a financial bind still wanting to do things exactly as they have always done them. The entertainment value is fun with Chef Ramsey yelling profanely at the owners until they finally agree to try it Ramsey’s way. On the outside looking in, it is easy for me to see where the problems are and what needs to be done to fix their financial mess. The business owners seem to be blinded by what they cannot see that is so obvious to everyone else.

The day-to-day mundane tasks seem to take on a life of their own. We hear things like, "That is the way we have always done it," or "I don’t know why we do it this way, we just do." Often the real problem is with the owners themselves who are not accustomed to having someone else tell them how to run their business more profitably and pointing out the real problems. The owners seem content to keep doing the same thing over and over and they keep getting the same unsuccessful results.

After watching the Kitchen Nightmares show now for several years, I have come to the conclusion that restaurant owners and dairy owners are similar. I know several restaurants with amazing great food that could not survive financially in the restaurant business. I’m sure that we can all remember our favorite restaurant that went out of business. We always wonder how such a wonderful restaurant couldn’t survive while others that do not seem to appeal as much to us continue on with success. I can relate the problems in the kitchen of a restaurant directly to the problems experienced by dairy farmers. Maybe these two businesses are not all that dissimilar.

Comparing the two business models, we can focus upon three things that are similar between a restaurant and a dairy farm.

The first is the employees. Are they doing the best job possible every day? If we think of the restaurant cook as our dairy feeder, we know that they have the training and talent to do the job, but are they consistently doing everything correctly every day? I have seen feeders who go unmonitored and develop their own recipe for feeding the cows on their own schedule and feeding time. I can see Chef Ramsey yelling profusely at a feeder telling him just how do a better job feeding the herd.

The second is really the overall cleanliness of the restaurant or dairy farm. A clean and organized operation will usually be more profitable than a disorganized dirty mess. Think about feed spoilage, mastitis, etc.

The last one is the hardest to correct: the owner’s lack of commitment to positive changes in the business. If you think that you do everything perfectly, you are most certainly not going to survive in the restaurant or dairy business. To be a successful, profitable business, you must embrace change and be always looking for a better and more profitable way of doing things.

Sometimes we need a fresh set of eyes focused upon our operation. You really cannot see your own daily operational deficiencies. It can be a friend or a professional who can take a second look at the way you run your business and help you to make changes to increase the profitability of your operations.

With so much financial distress that the dairy industry has incurred over the last several years, you too might have slipped a little too far into disaster mode. Now it is time to look at recovering and running at maximum profitability. Gordon Ramsey would be proud of the changes that you have made.

David Sousa, a CPA, is the owner of Sousa and Company, an accounting firm based in Visalia, Calif. His firm works with more than 80 dairies in multiple states, preparing financial statements and income tax returns. Sousa also consults with dairies on cash-flow forecasting, financing, estate planning and bankruptcy. Contact him at dave@sousa-and-company.com or (559) 733-0544, est. 108.

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