CEO Corner: How dairy farmers can ‘roar’ out of recessions

Staff Writer Diantha Leavitt and Editor Walt Cooley Published on 09 August 2017

Editor's note: The CEO Corner contains editors' compilations of business news from top publications, which they have tailored for the dairy industry.

It’s fair time, but that doesn’t mean you need to pay for a ride to get your stomach to do some remarkable acrobatics. You’re already a farmer braving a volatile milk market because dairying is what you love to do.

As dairy farmers, you’ve learned some strategies over the years to “keep your guts in,” so to speak. However, what works today might not work tomorrow. Like the fair, the rides keep getting more and more edgy. Learning from your peers could be the ticket to set you up for success.

Dairy farmers in the Northeast have a few good lessons to teach, according to Farm Credit East and Yankee Farm Credit, which analyzed financial results from more than 450 dairy farms in that region. The strategies the farmers employed were similar to companies who positioned themselves to thrive after various recessions from the 1980s to 2002, according to an article in the Harvard Business Review.

While the 2017 milk market offers a little more hope, studying strategies used recently in 2015-2016 will help in positioning for the future.

Northeast milk prices fell for a second straight year from an average of $25.58 per hundredweight (cwt) in 2014 to $18.24 in 2015 and to $16.85 in 2016, Chris Laughton, Farm Credit East director of Knowledge Exchange, explained earlier this year.

Despite the low milk price and cash crunch endured by farmers in this region, farmers were able to make ends meet. How?

“The answer is basically by lowering costs: a combination of lower commodity prices, belt tightening and economizing, as well as increasing productivity,” Laughton said.

Businesses that managed recessions well and positioned themselves to grow exponentially coming out of depressed times use similar strategies, according to the Harvard Business Review article, “Roaring out of recession.”

The authors studied corporate performance during three recession periods: 1980 to 1982, 1990 to 1991 and 2000 to 2002. They analyzed 4,700 companies, gathering data for the three years prior to each recession, the three years after it and the recession itself. They focused on the “generals,” or the CEOs, and their strategies to ride through the recessions.

They found that CEOs who focused on prevention strategies (i.e., cutting costs, minimizing risks and avoiding losses) had the lowest probability of pulling ahead of their competition (21 percent) when times got better. Because they cut too much and did not invest in efficiencies, they weren’t in a position to grow after a recession and struggled for years following one.

However, it’s folly, the authors found, to invest too much during a recession. Those businesses only have a 26 percent chance of “becoming leaders after a downturn.”

So if the answer isn’t cutting all costs possible and it isn’t investing widely, what is it?

It’s what farmers in the Northeast did. They cut costs to feed and general supplies, deferred repairs and brought other expenses down 9 percent by economizing.

“We started seeing this at midyear – dairies lost less money last year than they did in 2015,” said John Lehr, Farm Credit East business consultant who works with 60 producers with about 50,000 cows. “With the milk price decline, that’s counterintuitive, but they were able to cut discretionary costs and cut costs in general more than the milk price drop was. The dairies that did the best were the ones who reacted the quickest, as opposed to those that took a wait-and-see approach.”

However, the top farms also invested in efficiently increasing productivity.

“The top-profit farms were not necessarily the ones who spent the least on feed or paid their employees the lowest,” Laughton said. “It was more about productivity and the margin generated, rather than the absolute amount of spending.”

That’s the secret sauce companies in the HBR article employed: Cut costs, but also invest in being more efficient.

“Companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession,” the authors explained. “Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability – 37 percent – of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do.”

An efficient way to keep cows comfortable is key to success, according to Lehr.

“The smart money being spent right now is on cow comfort – cow cooling, fans, rubber, stalls – those type of investments are being looked at closely. That’s driving overall efficiency,” Lehr said.

As are all farmers throughout the country, Northeast dairy farmers still have some challenging times ahead, a rise in debt being one. However, by focusing on efficiencies and cutting costs intelligently, their stomachs may be able to handle a ride or two more at the fair this year.  end mark

Progressive Dairyman Editor Dave Natzke contributed to this report.

Diantha Leavitt
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Walt Cooley
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