Techniques to follow to keep your dairy farm in business in 2019 and beyond

VALDERS – “We're going to get out of this. But it's going to take some time,” VitaPlus dairy development manager Gary Sipiorski tried to assure attendees at the Manitowoc County Forage Council's annual dairy feeding and management day held at Zutz Farms.

Sipiorski was referring to the dairy sector's economic crisis which has left many producers facing operating costs that are greater than their income. “I think it stinks,” he said of the situation which has prevailed for the past four years.

Those low milk prices have contributed to the shutdown of more than 700 dairy farms in Wisconsin alone during 2018 – a loss of more 8 percent during the year, leaving the state with just over 8,000 dairy farm operations at the end of the year – a decline of 50 percent in 15 years. Sipiorski expects the losses to continue well into 2019 in Wisconsin and other states.

Set of 8 rules

Speaking to a crowd of farmers, agricultural lenders, and agribusiness representatives, Sipiorski listed a set of eight rules which milk producers “can't break” if they want to remain in business. He cited 2016 statistics from Wisconsin which indicated that herd size alone is not an overriding factor in determining one's future in the business.

Ideally, Sipiorski proposes a 2 to 1 ratio liquidity (assets to liabilities), devoting less than 20 percent of one's milk check to the payment of principal and interest, an 85 percent operating expense rate, a debt of no more than $3,000 to $5,000 per cow or $20 per hundred of milk shipped in a year, a minimum of 30 percent equity, a complete asset turnover in three years (not four or five), an 8 percent return on assets (profit), and knowing one's cost of production.

“How do you stack up?” on those eight items, Sipiorski asked. He conceded that some of those rules could “be bent” rather than broken and agreed that during 2018 no more than 10 to 20 percent of dairy producers were likely to have achieved at least an 8 percent return on assets.

Outlook for change

For 2019, Sipiorski sees the possibility of at least a modest upturn in all-milk prices to the $17s per hundred by the third quarter. By then, it's likely that many more dairy farmers will have departed from the business, he observed.

As is often the case in the agriculture sector, Sipiorski pointed out that it takes only one incident or situation that can quickly boost or depress prices, such as the outbreak of African swine flu on three continents during 2018.

While indicating that he did not want to delve into politics, Sipiorski said it is fair for the agriculture sector to ask “why it gets caught in the middle of politics” that play out around the world. One example is how the U.S. tariffs on steel are gnawing at the country's dairy exports.

On how to get out of the continuing milk price valley, other than waiting or hoping for some event that “could change” the outlook “tomorrow or any day,” Sipiorski said it would be helpful for everyone in general if the United States alone would reduce dairy cow numbers by 100,000 to 200,000.

To the question of what individual producers should do to resolve the “too much milk” dilemma, Sipiorski advised “taking care of what's in your barnyard.” In other words, that means taking care of oneself and producing more milk in order to do so, he indicated.

Striving for top one-third

On that point, Sipiorski urged producers to do what's necessary to place themselves in the top one-third in terms of economic performance. He cited farm management data from the fourth quarter of 2017 and the second quarter of 2018 to illustrate his recommendation for being in the top one-third.

Those statistics compared the operating net for all dairy herds in the survey, those with less and more than 1,500 cows, and those in the top one-third. All categories had net returns of more than $1 per hundred of milk for the fourth quarter of 2017 but the top one-third enjoyed a 60-cent per hundred advantage. For the second quarter of 2018, the top one-third had a net return of 94 cents per hundred while other three groupings posted negatives of 68 to 98 cents per hundred, Sipiorski reported.

Based on those numbers, Sipiorski asked “Is 60 cents a big deal?” and “Is 94 cents a big deal?” Converted to dairy herds with an annual per cow milk production averages of 24,000 pounds, he calculated pluses of $7,200 for 50 cows, $14,400 for 100 cows, and $144,000 for 1,000 cows at 60 cents and $11,280, $22,560, and $225,600 respectively for a 94-cent net on 100 pounds of milk.

How to get into the top one-third can be achieved by “shaving a nickel here, a dime there,” by taking advantage of dairy plant premiums, by careful planning on futures contracts, and by using the existing federal price protection programs, Sipiorski advised.

Even now, “dairy processors are picking you” on the basis of somatic cell count, milk components, and daily milk volume,” Sipiorski stated. He said Walmart is seeking only farm-originated tanker loads of milk for its new fluid milk bottling plant at Fort Wayne, Ind. He also urged dairy farmers to aim for a minimum of 7 pounds of solids (combined butterfat and protein) per hundred pounds of milk shipped.

Financial factors

If they didn't do so in 2018, dairy farmers ought to brush up on their business and financial practices in 2019, Sipiorski stressed. In working with lenders in today's economic climate, having good financial records for the past three years along with a projection for future needs is “a sign that you know your business,” he remarked.

That recommendation holds whether “the numbers are positive or negative,” Sipiorski emphasized. Before the end of every tax year, an accountant should check for tax implications, he added.

For the “crucial conversations” with lenders such as banks, private sector suppliers, or federal agencies, Sipiorski advised farmers to “prepare for the discussion” by identifying “what will be different for the next year,” recognize strengths and weaknesses, consider debt restructuring, look at risk management choices, and be aware of future interest rates and the bank's financial standing.

Numbers that the producer should provide include the cash flow for the past three years, a balance sheet, an income statement (accrual accounting method), cost of production, an enterprise accounting system, and marketing, business, and transition plans, Sipiorski advised.

Herd health factors

Sipiorski also addressed dairy herd health as a crucial item for the bottom line. The losses incurred with health problems are “dollars you never see but they are real numbers,” he stated.

To be in the top one-third in the dairy herd health category, the annual case rates would be 12 percent for mastitis, 10 percent for lameness, 2 percent for metritis, 5 percent for retained placenta, 3 percent for displaced abomasum, and 5 percent for ketosis, Sipiorski pointed out. He noted how those health concerns contribute greatly to culling rates.

Past and future

Change and volatility are likely to persist in the dairy sector, Sipiorski observed. He cited the average increase in annual milk production per cow from 5,000 pounds in the late 1940s to more than 23,000 pounds today, the reduction in the nation's dairy cow inventory from 25 million to 9.4 million during that time period and the inflation adjusted Wisconsin all-milk price from a high of $24 per hundred in 1950 to today's record low of just over $5 per hundred.

Another significant change during those years is how “the cheese plant a few miles down the road” no longer determines milk prices, Sipiorski noted. Today, those prices are the result of a combination of national and international factors, he indicated.

By 2028, Sipioriski reported that the U.S. Department of Agriculture's chief economist expects annual milk per cow to rise to an average of 26,530 pounds, the nation's milk production to increase by 33 billion pounds to a total of 251 billion, cow numbers to remain the same at 9.465 million, and dairy exports to account for more than 20 percent of the nation's milk production compared to about 15 percent today.

But Sipiorski cautioned that such predictions are risky. For instance, he noted how a similar but much more recent USDA forecast for 2018 that milk production would be down for the year proved to be wrong.