CASH FLOW STRATEGIES

Cash flow is an individual dairy’s effort

Cash flow and profitability aren’t the same. In times like these, cash flow is king.

by Dave Natzke

As dairy margins shrink and cash flow concerns grow,Monsanto veterinarian Mike Lormore says dairy producersmust focus on what’s important to their individual dairy.Milk prices and total U.S. milk production, the focus of federalpolicies and media debate, only cloud the picture.

“I see many people who make microeconomic decisionsbased on macroeconomic data,” said Lormore, technicalservice specialist in Idaho and the Pacific Northwest. “Thebottom line is that if a 1,000-cow producer goes out and sellsall his cows today, that’s inconsequential to total U.S. milkproduction, and won’t impact individual dairies a bit. Whatthe producer has to focus on is what’s happening on hisdairy. What’s happening on a nationwide basis is irrelevantto the decision he has to make today. Control the controllableand forget the rest.”

What is relevant to most dairy producers at this criticaljuncture is cash flow.

“Cash is king and profit is an accounting concept,”Lormore said. “If you can generate cash, you’re in goodshape. The single most important thing you can do rightnow is to make as much milk as possible. That helps diluteout your fixed costs, the majority of costs on your dairy.That’s the No. 1 thing people can do daily to minimize risk.

“There has been some notion that high production is notmore profitable than low production,” Lormore said. “Thisbelief has largely been based on some old work that showsno relationship between net income and RHA, and nothingcould be further from the truth. What we should be lookingat is operating profit, which eliminates the effect of debtstructure. If the analysis is done correctly, we wouldabsolutely see that high-producing herds generate significantlymore operating profit than low-producing herds.”

Keep facilities at capacityGreg Steele, senior financialservices executive for AgStarFinancial Services, Northfield,Minn., uses a little differentlanguage, but the the overridingtheme is the same.

“One critical operatingstrategy is to maintain thedairy facility at capacity,”Steele said. “This is a key tocapturing the benefits ofeconomies of scale and fullyutilizing invested capital. Cowflow is huge. You have to makesure the hundredweights ofmilk are going off the farm. Ifyou’re dropping cow numbers,you have the double-whammyof low milk prices and lessmilk going off the farm. It raiseshavoc with cash flow andthe dairy’s budget.

“You can do a good milk marketing job from a price standpoint, but you’re missing opportunity if you aren’t shipping enough milk because the facility isn’t at capacity.”

– Greg Steele

“It’s an area lenders are veryconcerned with,” Steele continued. “You can do a good milkmarketing job from a price standpoint, but you’re missingopportunity if you aren’t shipping enough milk because thefacility isn’t at capacity.”

Similarly, with facilities at capacity, cows must be milkingat capacity. Total milk = number of cows (maximum capacity)x milk production (maximum output per cow).

Putting operation under the microscopeTighter margins have producers putting every aspect oftheir operation under the microscope. Lormore offers ideason where to look – no matter what milk price level.“The devil is in the details,” Lormore said. “It doesn’tmatter whether milk price is $9 or $19. Attention to detailis what separates premier producers from those doing anOK job.”

Lormore identifies four management areas where detailsare critical – now more than ever.

Transition cow management. “You make or break cows right there,” Lormore said. “If you can get it right, it’s worth tremendous profit; if you get it wrong, it’s a tremendous lost opportunity, if not a direct expense. People don’t understand how much the transition period impacts milk production and reproduction. Healthy cows that come through the transition program well will be successful in your reproduction program. The reproductive performance of cows that don’t will be compromised.”

Reproduction management. “When it comes to reproduction, the important thing to look at is average days to first service and 21-day pregnancy rates,” he explained. “Days to first service tells us how long it takes to get semen into cows. That is possibly more important than highly accurate heat detection. If you’re using an aggressive synchronization program, every cow should be inseminated by 75 days in milk. Semen is cheap and days open are expensive. The important thing is getting semen in them.

“Twenty-one-day pregnancy rates are a measure of the speed at which we get cows pregnant,” Lormore continued. “With the short time period, pregnancy rates are far more responsive to management changes than many traditional measures, so we get rapid feedback.”

Reacting can mean it’s too late

Without a plan already in place, the best a dairy producer can do when low milk prices hit is react.

“The first thing people need to do before they ever get to the point of having to manage through a cash flow crunch is to have a plan,” said Monsanto’s Mike Lormore.

“They need to know their personal and business strengths and weaknesses, have an eye out for opportunities, and they need to know what threats may come from outside,” he said. “They need to know what they expect of their business and have some thoughts about how they will respond if those goals and expectations aren’t being met.“

Plans need not be set in stone, but they do provide a foundation.

“I always like to say, ‘plans are made to be changed,’ but the real truth is that people who go through the planning process are much more adept at altering their management to meet the challenges of a rapidly changing market than those who just seem to take it as it comes.”

Pregnancy rates range between 18%-22% in herds with good reproductive performance; outstanding producers sustain rates in the 25% range. Unfortunately, a lot of herds are in the 12%-15% range, and those herds often drop down into the single digits during summer. Improving those numbers minimizes the number of lower-producing, late-lactation cows in the herd, which increases herd productivity.

Cow environment. “Cow comfort is really hard to measure, but when it’s not there, you know it,” Lormore said. “Assess stall or lot cleanliness. Make sure there is adequate, clean, dry, wellmaintained bedding. Look at how cows lay down and position themselves in stalls, how they get up, how many are laying down.

“Cow cooling also plays a role,” he said. “Hot cows don’t eat, and they expend energy to get rid of body heat, so production takes a hit. Shade is important in open lots. In freestalls, building layout, roof height and slope greatly affect ventilation. Fans and sprinklers help. Holding areas are a real nemesis when it comes to heat. Body temperatures tend to spike, and you really can’t over ventilate them.”

Employees. “If you treat your employees right, they’ll treat you right,” he said. “You have to train them, communicate with them and build a good team. People get edgier as money gets tighter. They can handle it for a little while, but if the cash crunch goes on and the access to funds gets tighter, it’s important to step back and talk to your employees and family about the business. Nobody likes it when they aren’t able to pay bills. The producer has to keep a clear head. That can be really hard.”

Manage risk

Steele offers other items to place under the financial microscope. Two fall under risk management: feed costs and milk marketing.

“It’s truly on a case-by-case basis, because everyone’s debt and cost structures and break-even levels are different,” said Steele. “What’s right for one might not be right for another from a milk marketing standpoint. But they should at least map out their opportunities and develop a strategy using the available risk management tools to enhance their price over the next 12 months.”

Third, but possibly most important, is to feed high-quality forages.

“It’s probably the best way to impact profitability,” Steele said. “Employ best management practices during harvest, cover bunkers and do things to minimize shrink and maintain forage quality.”

Steele recommends tracking budgets and actual numbers to be able to recognize any approaching adversity.

“Knowing the number is half the battle,” he said. “Hopefully they don’t just put a budget together for their lender to get the line of credit renewed and then don’t look at it for the rest of the year.”

People skills

Dairy producers shouldn’t try to go it alone, urged Lormore.

“As dairying gets more complex and the whole industry moves faster, producers need to be good at surrounding themselves with other good people,” he said. “None of us know all the answers, no matter how much expertise we’ve developed. You can make better decisions when you have input from a team. People who make all the decisions themselves generally make more mistakes.”

Personal relationships are critical to the dairy’s success and health.

“The key thing is having the opportunity for quality time with the family,” Steele added. “They need to get away from the business, take some family time and get involved in their children’s school activities. It helps control your business life when you take care of your personal life.”

Source: Midwest Dairy Business
Author: Dave Natzke