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10 keys to manage downturn in dairy prices

August 25, 2009|By JEFF SEMLER

On Aug. 21, a group of local dairy producers gathered to hear Brad Hilty from the Penn State Dairy Alliance give a presentation titled "Surviving the Downturn in Milk Prices: A lesson in Crisis Management."

While many of Brad's bullet points were directly related to the dairy business, the principles are universal and can be used in other sectors of agriculture and even other types of businesses.

To put the dairy situation in perspective for those of you that don't milk cows, the price received by dairymen for their milk has dropped by $10 per hundredweight (approximately 12 gallons) from last year. That is a 46 percent reduction in farm income. There are very few businesses that could sustain such a dramatic drop in income and dairy farmers would not be able to sustain these losses much longer unless they want to completely erode all of their equity.

So what wisdom did Hilti share with the group?

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First, he identified the three major challenges facing dairy producers: 1. Managing Cash Flow, 2. Managing Cash Flow and 3. Managing Cash Flow.

In these trying times, you need to shift your management priorities. It is all about cash flow right now so manage accordingly. Remember, a decision that might improve your long-term profitability is not an option right now if it does not improve cash flow.

He went on to share his 10 keys to survival in 2009:

No. 1 -- assess, plan and communicate. Assess the situation, know your numbers, plan accordingly and communicate with everyone from your spouse to your banker.

One of the most important of these points is know your numbers. Whether you are a dairy farmer or a blacksmith, do you know your cost of production? You need to know it. Develop a balance sheet and a monthly cash flow budget. These are things that many agriculture producers do not like to do but it must be done. It is not as fun as plowing or milking, but just as important. The old saying goes, if you don't know where you are going, any road will get you there.

Key No. 2, understand and manage cash flow. Cutting costs does not always equal improved cash flow. If you are spending $1 and making $2, then don't cut that practice. But if the practice isn't paying its way, it's time to stop. There are lots of places to look to improve cash flow and reducing costs and increasing revenue is always the first place to look, but what about liquidating non-productive assets or restricting your debt?

Farmers typically are the best at accelerating debt repayment. It might be time to slow debt retirement until prices turn upward.

His third key is managing information such as your accounting system and your production records.

No. 4, analyze cost centers. Where is your money being spent?

No. 5, implement a profit-target team by bringing together your key advisers, including your lender. This team can help you establish strategies and monitor performance.

No. 6, control the things you can control. This includes milk production, udder health and a balanced ration. Optimize production while controlling costs. Notice, I did not say maximize production. Often times, maximum production comes at too high of a cost.

The seventh key is manage costs, don't blindly cut expenses. Evaluate the cost-benefit ratio of every practice. Labor is usually a place to look. Get the extra people out of the parlor. Most of our dairies do not need more than one person in the parlor. Note, I said need. Having more than one person might be convenient, but it can be an expensive luxury.

Key No. 8 is high quality forage. High quality forages help increase milk production and reduces purchased feed costs. With harvest upon us, optimize the harvest window by harvesting, packing and cover your crop as quickly as possible. Then, get your cover crops planted for additional high quality forages for next spring.

The ninth key should be obvious, but is often overlooked: cow comfort. Comfortable cows produce more milk and cow comfort reduces cull rates. Fresh air, water and feed make for contented cows. In seasons other than during the heat of a summer day or a blustery winter day, turn your cows out for exercise and lounging. Overcrowding is counterproductive.

Another place to reduce overcrowding, especially on a hot summer day is in the holding area. Too much time in the holding area reduces eating and resting time. Eating drinking and resting equal milk production; standing too long in a crowded holding area does not.

Lastly, key No. 10 is investing wisely. Control capital spending; if it does not improve cash flow, do not buy it.

Milk prices will turn around, but you will need to follow these tips to weather the storm. If you have questions or would like assistance, please feel free to contact the extension office and we will be glad to sit down with you and help you plot your course.

Jeff Semler is an Extension educator, specializing in agriculture and natural resources, for the University of Maryland Cooperative Extension. He is based in Washington County. He can be reached weekdays by telephone at 301-791-1404, ext. 25, or by e-mail at jsemler@umd.edu

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