Key management areas of higher profit farms
What are key management areas affecting profitability for farms? When looking at the top producing farms what does the top 20% do compared to other producers?
Jason Karszes with Pro Dairy and the Department of Animal Sciences at Cornell University, talked about key points including variability, milk production, cost control, people, investment balance, continuous improvement and preparing for opportunities, during a Professional Dairy Producers of Wisconsin webinar in February.
"These are some of the key areas management-wise that seem to show up on our higher profit farms over time," said Karszes.
Variability is nothing new to those on farms. It's been on cycles for some time, such as previous poor years in 1997, 2000, 2002-2003, 2006, 2009, 2015-16, 2018. Looking at data from Cornell research and what has been done in good years and bad years, higher profit farms might not do as much reinvestment, but are positioning themselves for opportunities that may come down the road.
In poor years, numbers are used to make decisions as producers focus on operations, questioning if there is a short term issue or a long term issue. In poor years, is it possible to take advantage of opportunities such as equipment replacement if the equipment costs are a little bit lower.
"Can we change the business now to take advantage of a future year that might me better?" Karszes asked.
When looking at risk management factors, a farm that has strong earning, strong debt coverage, low debt per cow, low working capital, they're positioned for taking advantage of opportunities very well, Karszes explained.
Key questions regarding milk production on farms are 'What is the trend' and 'How fast is it changing'?
"Our higher profit farms over time are never comfortable," said Karszes. "They're looking at component levels."
Pounds of components, feed conversion — what's the cost of producing those components — are considered. Forage quality, which has been affected by weather challenges, is a big driver. Cow comfort also comes into play.
The top farms in the Cornell research averaged about 3% higher milk production per cow over six years.
"The real focus is making milk versus buying milk," Karszes said.
Producers can make higher profits if they can get higher feed conversions, manage the nutrition program better, get higher pounds of components per pounds fed and manage the cost and quality of feed.
"What's exciting with some of these higher profit farms is they know their numbers," said Karszes.
The management team is utilizing records, questioning everything — if it will work on their farm, how and when will they know if it's working.
"If they are thinking about a management change, they are asking these types of questions," added Karszes.
They are also watching if things get sloppy during good years, such as wasted feed and fuel, unnecessary repair costs and unproductive labor hours.
"All these things that can be little dollars here, little dollars there but over time start to add up," said Karszes.
Higher profit farms maintain lower costs and generate higher profits. Three principal means of doing that are chewing down price, using less product and maximizing economic use of the product.
"When people think about cost control, this is usually where the focus comes into play and a lot of people focus on chewing down price," Karszes said. "While we always want to pay the lowest price possible where we can for things, actually the larger potential value is less product or the maximum economic use of the product might be where there are greater returns to our farms."
When looking at purchased grain cost benchmarks, producers talk about cost per cow per day, cost per hundredweight, purchased grain costs as a percent of milk sales, net milk income over purchased grain costs per hundredweight and per cow.
Labor efficiency plays a big part when it comes to people working on the farm and it's becoming a more and more important measure as labor costs continue to increase.
Higher labor efficiency tends to result in higher milk per cow. When looking at operating expense ratios — out of every dollar of sales, how much goes to pay for expenses — higher labor efficiency farms tend to be on the lower side.
A newer area being discussed is labor effectiveness or how good a job employees are doing on farms and how are they impacting costs. Workers on farms impact almost every category of the farm except property taxes. Repairs, insurance, health costs, wasted expenses are affected by workers. Producers have to look at how this is managed and how workers are managed.
Owners and operators also affect the profitability of a farm.
"The owner sets the culture of the business and that culture percolates through all the employees and all the agri-service people," Karszes said. "How we approach things might dictate how the business does."
Continuous professional development, questioning what's the next thing to adapt, avoid getting stuck in a rut, surround yourself with others trying to accomplish similar goals, all has an impact.
For every dollar invested in assets, how much revenue is generated?
"If we have higher investment, it might be hard to generate the revenue versus the lower investment side," explained Karszes. "Over time, the trends pretty much stay the same. If we can be higher on asset turnover, we tend to be higher on returns on our earnings."
Some farms in the Cornell program own very little land and rent everything. Others own almost all of the land they farm, which impacts the investment per cow. With machinery and automation investments, as well as acres run per cow, how well that investment generates revenue becomes a key question.
Higher profit farms are never complacent, they are always looking at what to improve next and setting goals. They are asking questions of providers or service consultants, checking to see if there is something new they should be doing, how to improve or what's holding them back.
They are getting feedback from employees and as many people as they can to make sure they are not getting stagnant.
"The big question they are focusing on is where is profit growth going to come from in the future," Karszes said.
Profit growth equals volume times price minus cost divided by investment. "That's a real key equation to remember," added Karszes. "There are only certain areas that we can change profit."
Higher volume, higher price, lower cost and lower investment are the only four areas where profit can be changed, he said.
Preparing for opportunities
To prepare for opportunities, producers need to look at their earnings, their bank relationships, consider what's being done on the people side, where is the working capitol positioned, and what is their ability to make a decision?
"Our higher profit farms aren't necessarily standing still for too long," said Karszes. "They don't necessarily change or grow, or reinvest every year. They don't wait too long before they start changing something again. And they are always trying to build these areas to take advantage of things."
In higher profit farms, active business management is critical as well as knowing numbers, questioning things and understanding what is going on. The goal is not to minimize costs but to maximize profit or minimize losses. Producers should ask questions all the time, are we getting better, are we focusing on the right things for the business and looking at what is next for the business.