A32-Lancaster Farming, Saturday, December 2, 2000
Top Ten Keys To Building A
Profitable Dairy Business
Bradley J. Hilty
Sr. Ext Associate
Penn State Dairy Alliance
Dairy businesses are affected
by both local and global events,
many of which cannot be con
trolled. Future prices indicate a
severe challenge to dairy profits
in the year to come.
By focusing on ten key man
agement practices dairymen can
build a profitable business and
insure they will survive the
tough times and prosper when
times are good. Those ten keys
are listed below, in reverse
order.
10. Manage Your Expenses
Some experts may argue that
managing expenses should be at
the top of the list. However, in
most instances the costs of
inputs are beyond our control, as
is the price of milk. A good
benchmark to follow is to
manage expenses (less interest
and depreciation) to 65 percent
of income.
If an operation is not achiev-.
ing this benchmark, evaluate the
areas where improvement is
needed to attain this bench
mark. Evaluate the cost-benefit
ratio of each purchase. Spend
money on productive expenses
and minimize non-productive
expenses. Manage inventories to
minimize carrying charges and
control overhead expenses.
9. Emphasize Your Strengths
Dairy producers don’t have to
be a jack-of-all-trades to
manage a profitable dairy. In
fact, the challenge for producers
is to identify and emphasize
their strengths. Labor and/or
capital constraints often lead to
the “do-it-all” approach to
managing a business.
Identifying the jobs that the
dairy producer enjoys doing
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and, therefore, will do well, can
lighten the workload and enable
the dairyman to focus on the as
pects of the business that will
make the most money.
8. Enterprise Analysis
Identify the various profit
centers of the business. Deter
mine which eure profitable and to
what degree. What changes
should be made to improve the
profitability of the money losers
and what investment would
those changes require?
Would that money, if invested
in the more profitable enter
prises of the business, generate a
higher return? Are there alter
natives that would allow the
producer to out-source those en
terprises that are not making
money or are providing minimal
returns for the resources re
quired by those enterprises?
7. Make Wise Investments
Evaluate each investment and
why it is important to the busi
ness. Analyze every investment
made to determine the return it
will generate for the business.
What is the payback period?
Prioritize investments on the
basis of their perspective pay
back periods; one to two years
first, then three to five years.
Larger investments (major ex
pansions) should have a pay
back period of less than 10 years
(seven-eight years preferably).
Implement A
Management Team
Consider implementing a
management team, consisting of
the key advisors of the dairy op
eration. This team can help to
develop strategies that will help
improve the profitability of the
business. They can help monitor
trends in key production indica
tors and help to prevent small
problems from turning into
major catastrophes.
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Team members may include:
the veterinarian, nutritionist,
agronomist, dairy consultant,
lender, accountant or financial
advisor, dairy field person
and/or extension personnel.
5. Information Management:
Know Your Cost of Production
Use the records that are avail
able to make management deci
sions. Evaluate the accounting
system. If it does not allow the
producer to easily calculate the
cost of production, and perform
enterprise analysis, consider
changing to a system that does.
A good accounting system will
help spot weaknesses in the pro
duction system.
Compare production costs
and figures for other key indica
tors to those of the top ten per
cent of profitable dairies. The
business should also have a good
production record system in
place. Production records, if
used correctly, will indicate
where efforts should be focused
to improve profitability.
4. Cow Comfort
Evaluate the facilities in
terms of cow comfort. Are the
majority of animals lying down
when not eating? Do animals
have trouble getting in and out
of stalls? Are bedding levels ade
quate? Are cows waiting in the
holding area too long? Is the
ventilation system providing a
good source of high quality air?
Do the cows walk around com
fortably without slipping?
Poor cow comfort levels can
lead to poor profitability,
through reduced production,
poor reproductive performance,
higher cull rates and higher feed
costs. Blood flow to the udder
increases significantly when
cows are lying down. This pro-
motes more efficient utilization
of the nutrients the cow has in
gested. Higher cull rates will sig
nificantly reduce profitability,
by increasing overhead costs.
'3. Maximize Forage Quali
ty/Feed A Balanced Ration
From the field to the feed
bunk, this is a key area where
many dairies can make im
provements to their bottom line.
Poor forage quality can cost a
100-cow dairy from $20,000 to
over $lOO,OOO per year in in
creased feed costs and lost pro
duction. Manage forage supplies
to minimize drastic changes in
the forage makeup of the ani
mal’s ration. Constantly chang
ing forages or feeding forage
that has not completely fer
mented will lead to reduced pro
duction and lower profits.
Latest research is indicating
com silage may not reach a
stable state until two-three
months after harvest. If storage
facilities prevent the producer
from feeding fully fermented
forage throughout the year, he
should consider putting up a bag
or two for use during next years’
harvest period. Forage quality
should be monitored frequently
and the ration balanced to
ensure the cows are getting ade
quate nutrients to match their
production level, without over
feeding nutrients.
Control The Controllables:
(Production, Efficiency
And Marketing)
There are many factors of the
dairy industry that producers
cannot control. Concentrating
on those areas will only drain a
producer of the energy needed
to address the areas they can
control. Although producers
have little control over the price
they receive for their product,
controlling some key items can
contribute to higher prices. Con
trolling rtiastitis in the herd re
duces somatic cell counts, which
can lead to considerable bonuses
with some of the milk quality in
centives now offered.
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Ensuring that the ration is
properly balanced not only leads
to better production and a more
cost-effective feeding program,
it helps to maintain milk compo
nents (fat and protein), which
contribute to higher prices. Ad
dressing many of the items pre
viously discussed can lead to
higher production levels, which
improve profitability.
Make an effort to become
more informed about the mar
keting side of the business. De
veloping a good marketing
strategy, using the risk manage
ment tools available, is another
way to build a profitable opera
tion. In doing so you begin to
take more control of your opera
tion.
1. Develop A Strategic
Business Plan
The topic of this discussion is
“Building A Profitable Dairy.”
No dairy producer would build a
new dairy facility without
having a set of blueprints. Yet
many may not have taken the
time to develop a set of blue
prints for building a profitable
dairv business.
Developing a plan forces the
producer to look into the future
and visualize where they would
like to be in five to 10 years. A
plan will help producers deter
mine where their business is
today and what they must do to
reach the goals they have set for
the business.
This is a time-consuming pro
cess, but the effort put into it
will pay big dividends in the
future. Enlisting the help of a
professional can expedite the
process, and will provide addi
tional insight as to where the op
eration is now and how to
achieve the goals.
In conclusion, dairymen will
always be faced with adversities
of one sort or another. However,
by addressing the key items
listed above, dairymen can take
major steps to building profita
ble dairy businesses and ensure
that they will survive and thrive
well into the future.
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