To Expand Or Not, What Are The Risks?
Peter Tozer
Dairy and Animal
Science Extension
Dairy producers are continually confronted with nu
merous decisions. These decisions involve different levels
of risk, depending on the types of decisions and the po
tential outcomes and consequences of the choices avail
able.
Day to day production decisions carry with them the
risks of variable responses. For example, what is the milk
response with a change in feed ration formulation or
what is the impact of varying price on the profitability of
the farm enterprise?
Longer-term decisions also have built in uncertainty
and risks. Risk and uncertainty are areas of critical anal
ysis for dairy farmers considering whether to expand or
not.
Dairy farmers who choose to expand face a different
set of risks than those who choose an alternative means
of increasing the viability and sustainability of the dairy
farm business.
Those who choose to expand must consider, for exam
ple: the risks of borrowed capital; the social risks of a
larger agricultural enterprise within a community; the
personal and psychological risks associated with manag
ing a large multi-person workforce; or the financial risks
of generating sufficient and stable returns to maintain the
economic viability and sustainability of the dairy busi
ness.
For those who choose not to expand the risks may in
clude: generating sufficient income to sustain a reasona
ble standard of living; or the risks associated with the se
lection of an alternative means of dairy production that
enhances economic viability.
Dairy farmers may choose not to expand for several
reasons. These reasons can include: constraints on the
availability of resources, such as land, labor, or
capital; the lack of adequate management skills
required for a relatively large business operation;
production problems, such as low milk yields or
low reproductive rates, that would require the
farmer to remedy the problem before expansion
is a viable option; the lack of a proven financial
or production record necessary for a large loan,
or simply a lack of desire to expand.
Despite what some may think, farmers who
choose to maintain their current herd size and
milk production level are still faced with risks in
many facets of their business.
The principal risk associated with not ex
panding is a relatively narrow profit margin.
The profit margin is the difference between the
milk price and the variable costs of production
on a unit basis
The margin reflects the funds available for
fixed expenses, debt reduction, capital replace
ment, and family living. The risk is that over
time, both input and output prices could change,
resulting in reduced margins.
This is particularly true when one considers
the impact of inflation over time in eroding
“real” margins. The impact of reduced margins
on farm profit and family living expenses may
be severe.
A producer may choose to expand the dairy
business to take advantage of economies of scale
that arise with larger operations. Other reasons
for expansions include the requirement that the
business generate increased income to support a
larger farm family, or so that the dairy business
can remain competitive with other units that
have expanded.
Compared to the risks of not expanding, the
risks of expansion, particularly in the early
stages of expansion, are numerous and potenti
ally disastrous to the dairy business. However,
Mexican
Antidumping
Debated
By BiU Henning
Penn State
On a trip to west Texas last fall, we heard
complaints about exorbitant duties being im
posed on ground beef to be shipped to Mexico.
The North American Free Trade Agreement
(NAFTA), was exposed to eliminate tariffs of
product being shipped to Mexico.
One packer reported that the tariff for ground
beef shipped from Texas to Mexico would be 40
percent, yet product from IBP, Con Agra, or
Excel had little or no tariff.
This packer had Mexican customers who
wanted to buy his product, but could not afford
to pay that much tax. Yet, those companies that
had trade status, did not have product to ship
there.
Recently, Mexico’s Secretariat of Commerce
and Industrial Development (SECOFI) an
nounced the first request for a panel review of its
final decision on the beef antidumping claim.
IBP had asked NAFTA panel to review the
antidumping duties.
with proper planning and management, these risks can
be reduced to ensure the survival and growth of the new
operation.
The management of any risk will depend on the type
of risk and the tools available to reduce the impact of the
risk on the viability of the dairy business.
Day to day price risk can be reduced using futures and
options, or forward contracting. Input and output price
variability can be lowered by knowing the potential prob
lems that could occur and to plan accordingly to reduce
the impact of these problems on the business.
Longer-term financial risks can be managed by using
different combinations of leveraging, borrowing types
and alternative resource acquisition, such as leasing, rent
ing, contracting, or partnering.
When making the decision to expand or not, the dairy
business management team needs to consider all the risks
that may arise and develop plans to counter or reduce the
Junior Simmental Board Elected
BOZEMAN, MT In balloting held at the American
Junior Simmental Association’s (AJSA) National Classic
XX in Stillwater, Oklahoma, the AJSA elected six new
members to serve on the organization’s 16 member
Board of Trustees. Each trustee is elected to serve a two
year term.
Emily Koch, Wichita, Kansas was elected president,
representing over 5,000 members of the AJSA. Four area
vice-presidents are: Matt Beck, Mt. Gilead, OH, Eastern
region; Mike Behrhorst, lowa Falls, IA, North-Central
region; Denise Demoin, LaVernia, TX, South-Central re
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gion.
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From the Department of Dairy and Animal Science
This regular column from Penn Slate's Department of Dales and
Animal Science features the research findings, student opportunities, and
resporls on other important topics generated in the Department. Ihe
back issues of the column are archised on /.micmli'r liinnim/' s
Internet hhh- lancaslerjarming com home page. l,ook for them.
impacts these risks may have on the survival of the busi
ness.
Choosing whether or not to expand, should be made
based on which choice reduces the whole set of risks, and
not a sublet of the risks, to a level acceptable to the dairy
business owners.
Over the next several months, 1 will continue the dis
cussion of the types of risks a dairy business may face,
whether the business expands or not.
Newly elected board members are as follows: Chanda
Hoppe, Winters, TX; Cari Rincker, Shelbyville, IL;
Amber Richman, Tooele, UT; Jonathan Sant, Pollack,
LA; Paul Allen, Versailles, KY; and Megan Zimmerman,
Stevensville, MT. Hold-over board members are: Shan
non Jensen, Salem, OR; Kit Rennison, Braymer, MO;
Ben Brown, Petersburg, TN; and Trish Cunningham,
Prospect, OH.
Formed in 1975, the AJSA is the youth organization of
the American Simmental Association (ASA). ASA main
tains headquarters in Bozeman, MT, and has a total
adult and junior membership of more than 11,000.
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