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Thinking in partial budgets

Daniel Kohls and Brant Groen Published on 30 August 2010

Many dairy producers think through their business decisions using some kind of “what if” scenario. For example, “what if I change the ration, and then hot weather hits?” It’s a type of thinking that helps to remove the emotional bias. This method weighs the pros and cons of a decision by projecting a real dollars-and-cents outcome.

Partial budgets are a handy tool that can help you make specific decisions about your dairy. They can be performed on a multitude of decisions, including feed program changes, reproduction programs, cropping operation’s enterprise effects on the dairy and so on. The economic power these that spreadsheets (or handwritten budgets) have on a dairy can be a very useful, and sometimes eye-opening, event.

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Partial budget basics
Whether they’re very complicated or very simple, partial budgets offer a plan for whatever decision is being considered. Some folks call them “projections” or “project budgets.” But no matter what you call them, they lay out three key pieces of information necessary to make the simplest of economic decisions. First, the cost of a management decision. Second, the potential revenue of the given management decision. And third, the net return (or loss) of that decision.

This kind of deductive reasoning can become a real mindset with profit-minded producers. That’s the real challenge in times of economic tightness, as we have witnessed in recent months: Do our decisions as dairy advisers and producers, make really good short- and long-term business sense? In other words, if you cut this cost or add this gadget, what is the real net return? Or do you actually lose more?

There is one weakness of partial budgets, and that is that they are, indeed, “partial.” They don’t take into account overhead or capital budgets or other enterprises affected by the change. They simply figure the inputs and outputs of a specific decision. So, you need to be mindful of the “big picture” and step back to analyze how a single decision may or may not affect other areas of the operation. Those then become part of a greater enterprise analysis.

A great example of this is how changing a feed program can affect a cropping operation, or vice versa. Recently, one of my clients wanted to explore adding earlage to his rations for the next crop year. It required two partial budgets – one for his feeding program and one for his corn crop. In the end, they became part of a greater enterprise analysis that affected cash flows and the like – because he found the potential to change his entire cropping rotation to enhance whole-farm profitability by having more corn to sell!

A teachable moment
The risk of not “thinking in partial budgets” is that decisions are then made more on emotion, hearsay or tradition. These small budgets and spreadsheets can turn into big-time teachable moments on the farm because they bring some objectivity to the decision.

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Here’s an example: The recent rule changes affecting SCC and milk quality have spring-boarded yet another opportunity to re-measure what milk quality is worth to the dairy. As quality premium structures evolve to reflect these new rule changes, the use of partial budgeting spreadsheets for milk quality payments can become an invaluable tool. They can help you evaluate the economic impact of changes that may or may not be necessary on the farm. Since milk quality is affected by multiple factors (nutrition/immune system, milking procedure, cow comfort/environment), the partial budgets would need to reflect those factors that may need to be changed on the farm. Each of them brings a certain value and, depending on the circumstances on the farm, may weigh more or less heavily in the decision.

When my colleague and co-author Brant was a dairy management instructor, he taught and encouraged students to use partial budgets to help make management decisions. This past spring, one of his dairy students came into class holding a new milk quality premium sheet that his dairy just received from his milk plant. He asked, “Brant, how are these new quality premiums going to affect our dairy?” Brant suggested that he build a partial budget using a spreadsheet, then they’d discuss the effect on the dairy. The student came back the next day with a very well- done spreadsheet, and Brant used it for a teachable moment for the entire class: Quality premiums can make or lose big money for a dairy. In fact, one of the students with a 400-cow dairy that has very consistently low SCC plugged his numbers into the partial budget. It clearly demonstrated that they would receive more than $100,000 in quality premiums in one year.

Dairy producers can use these same kinds of partial budgets for all types of situations. When considering milk quality, for example, a spreadsheet can help a dairy farmer understand (in specific detail) how quality premiums and the extra milk production from lower somatic cell count (SCC) will greatly improve the bottom line. This helps the producer, and his nutritionist, develop prioritized protocols for improvement, and gives them a budget and measuring stick by which to monitor success.

More examples, simple examples
A simple Google search of “partial budgets for dairy” can provide the dairy owner with several unbiased examples and templates to assist in decision-making. There are some great ones out there for reproductive programs, heat abatement, specific feed additives, cow comfort, milk quality, heifer-raising, culling cows, forage management and much more.

The thought doesn’t have to be so ominously complicated, though. You don’t have to be an Excel expert to do this stuff – it can become a simple mindset that runs your dairy’s day-to-day decisions. I recently witnessed a superb example of simple partial budgeting done on a napkin in the dairy lunchroom. One of my clients analyzed whether it was better to let our company freight his feed, or if he should pick it up himself with his own truck. It was a classic, simple example of a real decision made objective by a simple handwritten projection. He was “thinking in partial budgets.”

A productive way of thinking
The mindset of “thinking in partial budgets” is a repeatable opportunity to take the emotion and guesswork out of every kind of decision, from day-to-day practices to major purchases. Whether it’s deciding to cull cow #42, or measuring the return on the cost of inoculant and oxygen barrier to reduce shrink on your corn silage pile, a partial budget is one of the most useful practices in the dairy business, or, any business. From well- designed spreadsheets to simple notes scratched out on paper, thinking in these terms provides a basic economic plan and a guide for potential outcomes for a specific decision. Most dairymen have performed them from time to time without realizing it. Just think of how powerful the outcomes of future decisions might be if a partial budget is done intentionally for every one of them. PD

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Co-author Brant Groen is the director of dairy wellness at Form-A-Feed and TechMix companies, headquartered in Stewart, Minnesota.

Daniel Kohls
  • Daniel Kohls

  • Feed and Nutrition
  • Consultant
  • Form-A-Feed, Inc. and TechMix, LLC
  • Email Daniel Kohls

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