826-Lancaster Farming, Saturday, May 8, 1993
-v
F
A
R
MANAGEMENT
EXPAND THE
DAIRY HERD?
Roland P. Freund
Farm Management Agent
Out here in Pennsylvania Dutch dairy country, there
appears to be a strong interest in dairy herd expansion.
We hear of expansion from 60 to 120 cows, 100 to 200,
and even 200 to 1,600 as common occurrences.
If wc examine history, we see that this is just a continua
tion of a trend in the industry. But, before wc conclude that
the only way to survive in the dairy business is to call in
the contractor tomorrow and double the herd, it might be
advisable to “push the pencil” and examine the
alternatives.
This past winter my colleague, agricultural engineer
Dan McFarland, and I did just that. Wc made presenta
tions of our findings at a limited number of county dairy
meetings in the region. We hope that this information will
be helpful if wc share it with you.
Are You Ready
To Expand?
The normal advice of getting belter before you gel big
ger applies here. An unprofitable small dairy will not
become a profitable one when it doubles its problems.
Analysis would suggest that unless a dairy is in the top
25 percent in terms of profitability, it is unlikely to gain
from expansion. Pre-existing debt must be manageable,
and some surplus cash flow should be available from the
present operation before expansion has a chance of
success.
Dairies with a beginning debt load in excess of $1,500
per cow are likely to have greater problems. Some older
owners should consider continuing to operate with a ter
minal operation, unless there is an enthusiastic heir to
shoulder the new burdens.
The obligations of an expansion decision could outlive
present management. Expansion will increase risk, and
could force the owners to scrimp and scrape even harder
for the rest of their lives. Budgets can help us to avoid
mistakes.
The Long-Range
Picture
Each management team needs to examine their resour
ces and then set some objectives for the operation. Budget
ing alternative strategics can help decide which
combinations of cows, heifers, crop acres, and crop enter
prises have the best potential for profit.
It is relatively simple to demonstrate that, for example,
doubling the herd will pay for new facilities and increase
net farm income. Bankers may even be quite willing to
finance the expansion on the strength of the long-range
picture. So farmers are tempted to rush out and hire the
contractor.
The most important step in the process is to determine
exactly how we can get to the long-range situation from
here. Different expansion processes could be the differ
ence between success and failure.
One Giant Leap
There is a strong desire to get where we want to be and
get there right away. This may be technically feasible, but
it could be economically disasterous. Let’s look at a model
of a doubling dairy herd which we constructed.
If we bring in a new herd and move into new facilities,
we have a good chance that we will experience a drop in
production of maybe 10 percent for at least the first year or
two. The bank wants the new cows’ debt to be retired with
in four years. Herd culling rate could run at 30 percent. But
there will be no raised heifers from the new herd freshen
ing for two years, so replacements have to be purchased.
Meanwhile, the cost of rearing the additional new heifer
calves also has to be borne. Labor requirements may dou
ble, so family living/labor costs will increase.
All these factors taken together result in the newly
expanded herd, in the first two years, being unable to pay
any more on debt for new facilities than could the original
stable herd. If, in year three, production returns to prior
levels, the operation will have a cash-flow deficit equiva
lent to any pre-expansion debt payments. In year four, the
new operation could break even.
If the business began the expansion with zero prior debt
load, and (/labor costs and family draws were to remain at
original levels for the first three years, then the “giant
leap” expansion program might maintain cash-flow
When heifer rearing is well managed, it should be possi
ble to increase the herd by 10 percent per year and still
maintain an effective culling rate. This would result in
doubling of the herd in a little over seven years, without
bringing in outside problems, and with a good chance of
maintaining prior production levels. We could have a sta
bilized doubled herd in year eight instead of year five with
the “giant leap” alternative.
The slower expansion process enables the herd to grow
into new facilities which are added as they are required.
No new debt is incurred for cows or replacements. This
reduces risks, but it is not without inconveniences. The
new bams can be built and financed as required. There is a
major problem if the parlor has to be built early in the pro
cess unless there are no pre-existing debt payments. If
existing milking facilities (or a makeshift, low-cost mod
ification of them) can be made to handle milking for six
more years, then the expansion can cash-flow even with
moderate pre-existing debt payments.
Our model suggests that the closed herd expansion is far
less risky than the giant leap alternative. If you want to see
the assumptions and computations upon which this is
based, please write Penn State Extension York County,
112 Pleasant Acres Road, York PA 17402-9041, or call
(717) 757-9657 and request a copy of “Expand the Dairy
Herd?”
Every farm situation is distinct, and all its unique cir
cumstances must be considered before an expansion deci
sion is made. Plan on making your own long-range
budgets, and then preparing a careful and detailed cash
flow for every year of the expansion process. This should
enable you to see potential mistakes on paper before you
make them with concrete.
Next time we will look at economic considerations of
dairy facilities.
ADAMSTOWN
EQUIPMENT INC.
Mohnlon, PA
(mar Adamitawn)
218-484-4301
BARTRON
SUPPLY, INC.
Tunkhanneck, PA
717-838-4011
CARLYLE &
MARTIN, INC.
Hagerstown, MD
301-733-1873
■ 8-foot 2-inch, 1350 and
9-foot 9-inch 1360 Rotary
Mo/Cos zip through wet
grass, anthills and mounds.
A
cioseu-nera
Expansion
Conclusion
CLUGSTON FARM
EQUIPMENT
NMdmom, PA
717-573-221 S
Bueici ■% KERMfT K.
CLUGSTONAG „„„ lur KISTLER INC. i
A TURF, MC. A.B.C. GROFF, INC. Lynnpeit, PA
Chamberaburg, PA “P Nsw Holland, PA 218-2 M-2011
717-283-4103 * 301-482-8282 717-384-4191
DEERFIELD AG A EVERGREEN LANDIS BROS INC:
TURF CENTER, INC. TRACTOR CO., INC. GUTSHALL'S INC. u nC a« °PA
Wataontown, PA Lebanon, PA RD #2 lex 74-A 717401-1048
717-838-3557 717-272-4841 Leysvllle, PA nrwnooß I
CUT AT UP TO 8 MPH
Notebook
jJ
H. t v ** ✓ * '3
H >
K< 1 *& & '*'s * *
Recently, I took a tour of Lan
caster Laboratories with a group
of “Church Women United” of
Lancaster County. We toured their
facilities in small groups. Our
guide explained their work in
improving the environment We
also observed their testing of phar
maceutical and food products.
Many farmers are familiar with
their work due to the fact that they
have their water tested for purity
at Lancaster Laboratories. Here
they also test ingredients in food
products and check for shelf life.
Sludge is checked for heavy met
als like copper and lead.
However, one part of our tour
was entirely different You see,
Lancaster Laboratories instituted
sssa "hussb?' h&
GRIEB INC. HANOVER INC. C arilai# PA
Mill Hall, PA Hanovar, PA 717-249-2313
717-726-3115 717-632-2345
■ Impeller conditioning
system gives fast drydown
without rolls.
Ida’s
Ida Risser
a Chid Care Center in 1986. It v
a pioneer effort to keep employ*
who had young children. Tti
started with 20 children and noi
care for 150 each day. The facilnj
is just two minutes away from tli
workplace and parents can so
their youngsters at lunchtime
Most of the women return to wod
when the baby is three months old
They even have a separate areaii
provide care for mildly i|
children.
An Adult Day Care Center ij
linked by a corridor and Id
dependent family members ai|
cared for. This way they do ml
need to be put in a nursing homo
Another place that we toured wij
their Fitness Center that enew
I
From Your
Nearest
Dealer
AGFA