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Dairy producers find their ‘Pathways to Profit’

PD Editor Karen Lee Published on 07 April 2011

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In today’s volatile marketplace, profit remains, but finding a way to it can be much more difficult than before. At its annual business conference this March, the Professional Dairy Producers of Wisconsin paved a course to set its members on their own “Pathways to Profit.”

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In a pre-conference breakout session, a business coach and two dairy producers joined forces to help others find their own path during difficult economic times.

Dr. David Kohl, business coach and president of AgriVisions LLC, said the key to finding profit is to manage revenues, inputs and interest rates and to find a balance amongst all three.

To do this, he recommended following six elements:

1. Find or maintain a good relationship with your vendor. “Don’t get caught in a low interest rate trap,” he cautioned.

2. Know your cost of production and know it for each enterprise.

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3. Bring objectivity by having advisory teams.

4. Have modest amounts of financial leverage with strong liquidity as it relates to cash.

5. Have a profit plan for the times you experience profit.

6. Build a business plan and allow it to evolve over time.

A partner in Koepke Farms Inc., John Koepke milks 330 cows with his father and two uncles in Oconomowoc, Wisconsin. This diversified farm also raises 275 replacement heifers, marketing more than 30 of them each year, and sells approximately 15 breeding age bulls per year to other farmers.

In addition to the animals, the Koepkes farm 1,000 acres of cropland for feed and sale of commodities, manage two rental homes on the farm and market landscape stone.

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The last venture started when they cleared a fenceline in 2006 and has since added an additional $60,000 to the operation, Koepke said.

He and his family operate the dairy and its other entities with three guiding economic principles:

1. Make sure all enterprises make money. If they don’t, find how they complement another so that it makes more money or reduces risk.

2. Understand where breakeven is and actively market above that point to guarantee profit on a portion of production. Koepke mentioned about half of the farm’s milk is forward sold at any given time.

3. Be open-minded to the fact that another 100 cows or 100 acres won’t solve problems if you are not profitable where you are now.

The Koepkes maximize their use of capital by investing in items that appreciate or depreciate slowly and then utilize those depreciable assets to the fullest.

“The best tools on the farm are a computer, grease gun and MIG welder,” he said, noting they usually buy used equipment, maintain it to a fault and run it until it’s dead.

He added they also believe that managing risk is more than just forward contracting. The partners track parlor information to minimize milk production risk and use irrigation to reduce the risk found in the field.

Surviving in 2009 began in 2008, Koepke said. The partners took advantage of the exceptional pricing opportunities in late 2008 and locked in a high milk price and low purchased feed costs.

They rented more land and, based on a stipulation from the landlord, began grazing their dry cows. Surplus grain from a bumper crop was later sold at a high price.

When the markets tightened in 2009, so did the Koepkes. They put most new capital purchases on hold and took advantage of dealer financing opportunities that reduced their risk in a pre-paid fertilizer purchase.

Crops for the year were poor, and they managed to raise some very nice-looking heifers on corn stalks and the cheapest distillers grains they could find, he said.

Because cattle sales remained strong through the year, they were fortunate to sell out of breeding bulls that year. This helped them meet their goal of paying every last bill on time – an endeavor that really paid off the next year, Koepke said.

When vendors started turning customers away in 2010, they usually stuck with this family because of their payment track record.

As they worked their way through 2010, the Koepkes invested in irrigation equipment, culled more heavily and shopped for bargains on feed. If homegrown feed was more expensive, they sold it and purchased a cheaper alternative, he said.

“2011 looks like fun,” Koepke said. The farm had purchased most of its feed in the fall of last year and has milk sold on minimum price contracts. The Koepkes are also gearing up to launch a project that has been 10 years in the making, with plans to locally sell their own brand of cheese made of milk from their cows.

Noblehurst Farms in New York also found success in diversification. It is the parent company to six enterprises that include dairies, a management group, a turf company and commodity brokering, reported co-owner John Noble. It has 25 family and non-family owners and 35 to 40 employees,

Noble works with three business goals in mind:
1. Don’t screw it up so it succeeds to the next generation.
2. Attract and retain the best and brightest in production agriculture.
3. Become a market maker, not a market taker.

In 2009 and 2010, the dairies reviewed their operational risks. They identified weaknesses in the animal system – DOA rate, non-completion rate and utilization of employees.

They also took a hard look at the feed system and didn’t just pick from the low-hanging fruits. “You get a bigger bang for your buck when you focus on the big things,” Noble said.

Noblehurst Farms pushed higher-forage diets, found better use for weighbacks, double-cropped rye/triticale with corn for forage, added snaplage instead of corn meal and swapped canola for soy when it made economic sense.

In terms of profitability, the farms increased the deductibles on insurance coverage, cut back on capital purchases, pulled the use of rBST in herds where it could garner a premium, did a better job of distributing manure to control fertilizer costs and focused on energy conservation when making capital purchases.

They also reduced the use of sexed semen. “We found we can buy heifers as cheap as it takes to raise them,” Noble said.

Each of the dairies he works with uses some form of risk management. “This is important when the rules are changing and we don’t know what the new ones are going to be,” he said.

Noble suggested the following drivers to 2009, 2010 and beyond – having access to working capital, at least 30 to 60 days of expenses, evolving best practices for animal husbandry, cost control starts from the top down, diversification, a continued focus on communication in and around the business and, lastly, continue to have a positive mindset.

As they wrapped up the session, each speaker had a take-away message. Koepke said producers must continue to manage volatility – while there is great risk, there is also tremendous opportunity. Noble suggested everyone get a good night’s sleep to allow them to make better decisions each day.

Kohl warned, “Don’t get caught in the undisciplined pursuit of more.” He asked everyone to employ the HUT principle – hear, understand, take action. PD

PHOTO
Dairy producers John Noble and John Koepke, and business coach Dr. David Kohl outlined their profit strategies in a tough economic time. Photo by Karen Lee.

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