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Extension > Agriculture > Dairy Extension > Farm life >Help! How am I going to survive the next six months?

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Help! How am I going to survive the next six months?

Jim Salfer

Published in Dairy Star February 28, 2009

We’re in for a wild roller coaster ride.  It was only months ago that we were basking in the glow of over $20 cwt milk and futures into 2010 of over $20 cwt.  How times have changed!  Some projections indicate that February and March farm mailbox milk prices may end up the lowest since 1978.  Can you remember 1978?  The average household income was $17,000 and the average new house cost $53,000.  Gasoline was 63 cents per gallon.  The Federal Reserve interest rate was 11.75% with inflation running over 7%.  Now, at the beginning of 2009, milk prices have most producers in survival mode, at least for the next 3 to 6 months.  Here are some tips that may help in making it through this challenging time.

  1. Maintain working capital – This may be one of the most important items you can work on over the next month. Work with your financial advisor to determine your cost of production. If you do not have a financial advisor, look at all of your receipts for the last quarter of 2008. Then, estimate what your monthly expenses might be over the first six months of 2009. Estimate your milk production and the milk price. Use this information to establish an estimated cash flow over this time. If there is a shortfall, now is the time to visit your lender. Lenders do not like surprises, so be as accurate and forthright as possible. Work with the lender to develop a plan to cover the estimated shortfall. A workable solution is more likely if you have excellent records and show potential positive cash flow into the future.

  2. Maximize income over feed cost – Table 1 shows parameters of Midwest (mostly Minnesota) dairy herds for 2006 and 2007 sorted by net return per cow. There is a tremendous difference between the low profit and high profit herds in both years. On average, the high profit herds have higher production. Note that the high profit herds also averaged lower feed cost per cow than the average or low profit herds. Why? I suspect part of the reason is that the high producing herds were fed higher quality forage and had less feed disappearance (less waste during feeding or less shrink in storage) per cow. Therefore, the goal over the next few months should not be to minimize feed costs, but to optimize feed costs while striving for good production. Examine feed additives, bunk management and shrink losses. Also, re-balance heifer and calf rations to minimize feed costs while meeting nutrient requirements.

  3. Reduce costs that do not reduce milk production – Do not reduce any costs that will affect cow performance, longevity or health.  These include bedding, high quality feed and vaccinations.  However, there are costs that do not affect individual cows.  Can you get volume discounts (be careful not to tie up too much cash)?  Price shop and watch for bargains.  Perhaps you can save money by splitting plant direct loads with your neighbors.  Examine all areas of the operation and look for waste.  Can you delay some purchases due to current inventory, such as semen?  Examine "needs" versus "nice to have" items.  Buy used or delay capital purchases if at all possible.  However, be careful not to let preventative maintenance slip.

  4. Review asset use – The biggest item here is to optimize cow numbers. Even though the industry needs fewer cows, make sure that your barn is full, but not excessively overcrowded. Can you sell any assets that you do not need to increase cash flow over the months ahead?

  5. Take care of yourself – Don’t forget, these are difficult times for everyone in the industry. You are not alone. Many in dairying and in other industries as well are facing very difficult issues. Continue to take some time off and do the things that you enjoy. Maintain your social network and visit with other dairy producers about ideas and options.

Even though the next six months will be some of the most challenging in several years, by sharpening their management skills using some of the ideas presented here, dairy producers can make it through this milk price crisis and will be well positioned financially for the better times to come.

Table 1. Financial Performance of Minnesota Dairy Herds.1

Item

2006

2007

Low 20%

Average

High 20%

Low
20%

Average

High 20%

Net return, $/cow

-$260

$309

$893

-$142

$865

$1,592

Milk/cow,  lbs

20,848

21,432

22,106

19,987

21,300

23,226

Gross return, $/cow

$2,515

$2,749

$3,061

$3,264

$3,816

$4,463

Feed cost, $/cow (cwt)

$1,236 ($5.93)

$1,145 ($5.34)

$1,071 ($4.85)

$1,487 ($7.44)

$1,439 ($6.76)

$1,418 ($6.10)

1 U of MN Center for Farm Financial Mgt – Sorted on net return per cow.

 

 

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