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On May 14, 2018

Our thought life is one of the most significant controllable in our lives! When we identify and focus our mind on positive things, we can move from sentiments of anxiety and dread to gratitude and thanksgiving. There are always things for which to be grateful. Faith is the best remedy for fear. Think about that!

SMALL CHANGES CAN MAKE A BIG DIFFERENCE
By Lisa Graybeal, Graywood Farms
Chairman, Lancaster Ag Council

LANCASTER – The bills are piling up on your desk faster than the milk check can keep up with them. Some real doozies come this time of year – the corn seed bill, fertilizer costs and the quickly approaching spring harvest expenses.

With milk prices at their lowest level in nearly a decade, dairy farmers everywhere are scrambling to find ways to cinch the belt a little tighter. But financial planners in the industry caution farmers about cutting costs at the expense of production. There may be some simple management decisions that can be implemented on your farm to get the maximum bang for the buck.

While it may seem counter-productive to produce more milk in an already-saturated industry, most financial experts advise farmers to get every drop of milk as possible out of your cows. The stalls should be full, there should be good production, and the milk produced should be high quality.

“We are our own worst enemy,” said Mike Hosterman, ag business consultant with AgChoice Farm Credit, about the industry advice to keep producing as much as you can even in times of over-production and declining milk consumption.

But the theme of looking for ways to maximize gross profit is consistent all around. Some financial planners are even telling farmers to add cows to their herds and to make a clear determination if an animal is generating gross profit before culling.

Cutting your feed ration may seem like an obvious cost-saving tactic, but Chad Fox, manager of ag and agri-business services for Acuity Advisors and CPAs of Lancaster, is cautious with that mindset. Instead, he advised, ensure that the decrease in feed costs doesn’t outweigh the sales that are generated with more pounds of production and components. A list created by researchers at Cornell University’s College of Agriculture and Life Sciences puts ‘maximizing milk component production’ and ‘relentlessly seeking marginal milk opportunities’ as its top two key herd management opportunities during low margin times.

Look for opportunities in either ration formulation or implementation. Even how it is fed can make a difference in fat and protein content, Cornell’s report suggests. Maximizing your feeding management program is another key component on the list which includes advice like decreasing shrink at the silo by better face management in bunks and bags.

Cornell’s report continues to propose changing milking frequency – from 2X to 3X or milking fresh cows 4X; shortening dry period length on higher producing cows down to 40 days dry; and improving cow comfort.

They might be hard to find, but there are likely opportunities for improvements on most farms in terms of expenses. The common idea among financial experts in the field is to know your cost of production and then challenge all of those costs.

“Knowing their numbers is the most important step in order to take educated financial decisions,” said Mauricio Rosales, dairy educator at Penn State Extension in Lancaster, adding that his office has a program that helps producers to determine their breakeven costs, income over feed costs, margins and other important financial standards.

Dairy farmers, like any business owners, must take into account even the smallest details to run efficiently and economically.

“What are the essentials? What can you get rid of?” are some of the first questions to ask, advised Hosterman.

Farm labor is one place to start, he said. Perhaps there are areas where jobs can be consolidated to one position instead of two. It may be more cost effective to get field work done with custom operators rather than try to do it yourself.

Consider liquidating non-essential assets, advised Fox. Selling marginal or non-producing land could put cash in your pockets, as would getting rid of unused or infrequently used equipment. Fox also suggested taking a hard look at the number of heifers on your farm.

“Excess heifers are a drag on cost of production,” he said. Farmers should determine what percentage of heifers to mature cows you need to retain to maintain a steady cow flow, given your cull rate.

Though nobody has a crystal ball, most financial planners believe the dairy industry will come back around. But how and when are the key questions, and many are advising their clients to use this extremely depressed market as an opportunity to dig deep into their accounting and business practices and position themselves for any future dips.

But none of this financial advice will do any good for those who don’t enjoy what they’re doing or who are in it just for the sake of keeping the farm in the family. Hosterman suggests asking yourself, “am I in the right industry?”

Even after making some changes and the numbers still don’t work, there’s no shame in liquidation. Hosterman said he has had clients who, after making the tough call to sell their cows, felt a surge of relief. “Liquidation isn’t a bad business decision,” he said. “Sometimes it is the right decision.”

 

YOUR MILK PRICE & WHAT YOU CAN CONTROL
By Alan Zepp, Risk Management Program Manager
Center for Dairy Excellence

LANCASTER- It is hard to believe that what happens in Europe or Australia or China affects the price you receive for the milk you produce in Lancaster or Lebanon County, Pennsylvania. But it does. Nearly 14 percent of the milk we produce in the US is exported to other countries, and our domestic milk prices are influenced by what happens across the world. Powder stocks in Europe, a drought in New Zealand, or more dairy cows in Texas can all significantly impact the price you receive in Pennsylvania. All of these factors play out on the Global Dairy Trade auction and on the Chicago Mercantile Exchange. If prices go up on the Global Dairy Trade auction in New Zealand, you will often see corresponding increases on the Chicago Mercantile Exchange. If it goes down on the CME, the same thing may happen on the GTD. These market-based prices relate directly back to the Class prices that USDA announces each month and the mailbox price that you receive in your milk check.

So, as you look at the global and domestic factors influencing the milk market right now, much of your milk check is out of the dairy farmer’s control. However, there are a few things within your control. They are your components, your milk quality, and price risk management.

Under Federal Order pricing, dairy farms are paid on the pounds of components that they sell each month. The average Pennsylvania DHIA herd produced 1,555 pounds of total components per cow over the past year, which converts to 5.09 pounds per cow per day, up 1.2 percent from a year ago. Some farms are even achieving 6 pounds of components per cow per day.

This added extra dollars to some farms’ milk checks. For example, a 100-cow herd selling 75 pounds per cow per day of 4.0 percent fat and 3.1 percent protein will yield $1,650 more per month than a similar herd with similar production but 3.7 percent fat and 3.0 percent protein. No matter where you are starting from, consider working with your nutritionist to increase the butterfat and protein percentage of milk sold, while maintaining milk production and minimizing additional feed cost.

Another area of the milk check you can control is milk quality. Many markets pay a premium for excellent quality milk. It can mean as much as $1 difference in your price per hundredweight, depending on your market. Paying close attention to subclinical and clinical incidences of mastitis in the herd and to your equipment cleanliness and wash cycles can make all the difference.

Finally, risk management is within your control. Last August, dairy farms could have locked in an average Class III milk price of $17 per hundredweight for 2018. That price has now eroded to $15 per hundredweight. Some farms took advantage of the $17 price through risk management and are in a better position to work through the downturn. Unfortunately, now is not the time to consider contracting milk, but recent changes in the Dairy Margin Protection Program do offer a minimum level of protection. Farms have until June 30 to sign up for the Dairy MPP program at their local FSA Office.

Based on current prices, indemnity payments could be generated from February through August, depending on the level of coverage you buy.

Dairy markets are cyclical. While the cycle may never be predictable, don’t forget that this valley will eventually lead to the next peak. In the meantime, make sureyou are maximizing everything you can control within your milk check by focusing on components, maximizing milk quality, and evaluating your risk management options.

Don’t forget the Center is here to be a resource. Contact us at 717-346-0849.

 

GET THE MOST OUT OF YOUR DAIRY:

1. Know your cost of production: Do you know how much it costs you to produce 100 pounds of milk? Profit = (price/cwt.milk – costs/cwt.milk) x volume sold +/- other farm income and expenses

2. Look for opportunities to maximize gross profit (income less variable costs): Can you add additional cows to your barn without compromising space?, are there marginal animals taking up space that could be culled?, are cuts in the feed ration going to cost you in lost production or components?

3. Consider liquidating non-essential assets: Liquidate excess heifers, marginal or non-strategic real estate, and marginal equipment.

4. Make sure your components are where they should be: The value of milk fat has been and likely will continue to be an important driver of the milk check. The general timeline for the impact of ration changes on milk components is 10 to 14 days after implementation of the change.

5. Get those cows milking! Consider increasing milking frequency, reducing dry period on highly productive cows, and improving cow comfort. Also, don’t lose those fresh cows.

*Information contained in this list provided by:
Cornell College of Agriculture and Life Sciences; Acuity Advisors and CPAs; Maryland Cooperative Extension