Production + Financials = Cash Flow Mechanics

By Virginia A. Ishler

A common mistake when working with dairy producers is focusing solely on production management or finances. It is the combination of the two that determines if an operation will be successful. Over the years the trend has been for advisors to become specialized. However, it is the interactions of the whole farm system that is critical, especially when working in an industry with extreme market volatility. Communication amongst advisors is essential if dairies are to remain in business.
Production Perspective

Currently the dairy industry is dealing with very low milk prices with feed prices trending lower. Producers feel helpless when milk price plummets. There has been the misconception that milk price cannot be significantly altered. Based on a three year study conducted by the Extension Dairy Business Management Team, that is not completely true. For 2013, 2014 and 2015, fifty farms on the project observed an average $5/cwt spread on their gross milk price. There was no regional effect and only a handful utilized risk management. In 2014 the average milk price ranged from $20.83/cwt to $27.48/cwt.  Herds focusing on milk fat, milk protein and quality premiums have the opportunity to make a substantial impact on their milk price. However, the best milk price will be meaningless if the total pounds of milk shipped are not high enough to sustain the dairy operation with adequate milk income.

The production connection is to have the planned cow numbers and average milk production to achieve the total pounds of milk shipped to ensure a positive cash flow. There are several management practices that influence cow numbers such as reproduction, culling rate and the heifer program. If the total cows for the year fall short of expectations then conduct a detailed evaluation to find the underlying cause.

When planning a cash flow realistic expectations have to be followed for average milk production. If the total cow numbers are correct but the average milk production is inaccurate, so will the annual pounds of milk produced. If cows have historically averaged 75 pounds, don’t base a plan on 80 pounds. Many factors affect milk production including forage quality and quantity, cropping program, feeding management, cow comfort, and ration formulation. If milk production is suffering because of problems with forage quality and quantity, adjusting rations typically will provide minimal compensation. Also, if cow comfort is a real concern, the best ration and forage quality may not be adequate to achieve the cows’ maximum potential.

There are rarely easy or quick fixes to an underlying production problem. Correcting the issue may take several months before positive results are observed. This is true for reproduction (i.e. pregnancy rate), forage quality and quantity and the heifer program. Monitoring key metrics routinely is important so problem areas can be corrected sooner versus later and minimize the effect to cash flow.

The biggest hurdle with financials is finding the balance between income and expenses. The dairy team is observing producers having very good control on their expenses. The problem area is on the income side. It is not due to the milk price per se, but the unexpected drop in cow numbers and/or milk production. This has the greatest influence on a farm’s breakeven cost of production. Both production and financials should be discussed, evaluated and monitored so that the whole farm is properly assessed for any potential bottlenecks.

 Action plan for achieving annual pounds of milk needed to maintain a positive cash flow.

Goals: Develop a projected cash flow plan for the current year.

Steps

• Step 1: Enter actual income and expenses from the previous year into a cash flow program.
• Step 2: Develop a projected cash flow plan utilizing expected income and expenses based from the previous year's numbers.
• Step 3: Utilizing the appropriate data herd analysis program (i.e. Dairy Comp 305, PCDART) examine current cow numbers throughout the year to ensure reproduction and the heifer program will provide the total cows needed to sustain the milk pounds required.
• Step 4: Evaluate forage inventory and quality to assess if ration consistency can be maintained throughout the year.
• Step 5: Meet with the advisory team at least quarterly to review metrics related to financial and herd performance.

Economic perspective

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows income over feed costs is a good way to check that feed costs are in line for the level of milk production. Starting with July's milk price, income over feed costs was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen (Alltech product) and a mineral vitamin mix. All market prices were used.

Also included are the feed costs for dry cows, springing heifers, pregnant heifers and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.

Income over feed cost using standardized rations and production data from the Penn State dairy herd.

Source:psu.edu