It wasn’t that long ago that I would never see articles about on-farm profit margins. There are always plenty of articles on prices received and costs paid, but almost never one on margins. But, thankfully, this has begun to change and for good reason. Profit margins are where we all live. Have no margin and you’re out of business in a real hurry.
The need to reinforce watching margins and not prices was certainly highlighted by discussions at a recent meeting. I had the opportunity to speak to a number of dairy farmers. My opening comment was always pretty much the same: “The excellent corn yields this year here in Pennsylvania, should bode well for profit margins over the coming year.” The retort was also pretty much the same: “Yes, but the price of milk will be dropping soon.”
Wow, I guess the glass is always half empty and clearly points to linear rather than dynamic thinking.
Modern farm management teaches us all that linear, or one dimensional, thinking on the farm must change. Think about it: The dollar amount received for milk at the end of the day is set by market forces, not the farmer. Also, the cost of most farm inputs is set by the market, not the farmer. The farmer is not in control, so what can they do?
The most profitable and best- managed dairy farms follow the price of milk, much like a driver follows the curves in the road. Then they use that information, along with other information, to make key management decisions. They worry more about managing the farm in a way that maximizes the difference between income and expenses, and spend very little time or energy on what they cannot control.
Want to make a dairy farm more profitable? Get each cow to milk another pound of milk. The next pound of milk is almost always the most profitable pound of milk produced. This is because all but the extra feed, electricity and hauling have already been paid for, driving the cost of production deeply into the single digits and profit margins into the double digits. But always remember that the inverse is also true: When the cows lose a pound of milk, the most profitable pound has been lost. Think about this fact the next time you consider reducing feed purchases.
The key element in all this is watching the markets and making the proper adjustments based on what is seen and what years of paying attention have taught. Remember that a room full of managers, presented with the same facts, will reach very different conclusions on what actions to take. Some will respond correctly and others, perhaps, not so right. But my message today is that if you base your decisions on the information’s impact on profit margins, the result will be a good one.
Editor’s note: Michael Evanish is the manager of MSC Business Services, a member service of the Pennsylvania Farm Bureau. For more information, call 717-731- 3517.