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 11 key points about this essential and complicated agricultural sector:
• Dairy is by far the most complicated production model in agriculture. 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 an amazing accomplishment.
• The fragmentation within the dairy industry has led to a lack of unity with consumers, regulators, politicians and even those of us within the industry. Individual beliefs, policy, and geographic location are just a few of the reasons behind these inconsistent philosophies. Our inability to present a unified front puts the industry at risk and makes us is vulnerable to threats by those who continue to seek to divide the industry.
• A modern dairy operation is a capital-intensive investment, requiring careful management to allow the business to achieve solid financial returns.
• Having a reliable, well-trained labor force is vital to our industry, as it is with all of agriculture. However, lack of immigration reform and the challenge of attracting and fairly compensating a reliable labor force continue to be a concern for dairy producers.
• 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.
• Accrual accounting is a must to understand cost of production. Accounting systems are inadequate in relation to the risk present in many operations. Enterprising dairy, feed and replacement is also critical to give producers the ability to make the best management decisions using the most reliable information. Scales and feed inventory software are essential for generating reliable accounting records.
• Benchmarking is a very popular exercise by many. It can be a very slippery slope, however, because the way in which data is collected, valued and analyzed can skew the results. Consultants worth their salt will always recommend comparing actual results to budget. This provides the insight needed to improve performance. Comparing individual business results to peers is also very helpful and can identify any consistencies n 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. Every operation needs a backstop for unforeseen financial adversity.
• There are three undeniable characteristics that are evident in successful dairy operations:
- They produce high quality forages, knowing it is the single best way to influence profitability.
- They continually work on ways to maximize income over feed costs because they understand this leads to the best possible economics for their business.
- Their herd’s reproductive performance is world-class. They realize 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 agriculture. Maybe it’s the work ethic it takes to dairy, or the deep understanding of how to treat the animals providing our living with great care and respect.. These qualities, along with unparalleled dedication, commitment to family values and adoption of technology and new ideas, are what make the people of the dairy industry so special.
Greg Steele is vice president, dairy industry, for AgStar Financial Services. He can be reached