Farmers Gather for Insights on Managing Dairy Crisis

Charlene M. Shupp
Espenshade
Special Sections Editor

STOUCHSBURG, Pa. — This year, dairy farmers have taken a one-two punch. Milk prices started a steep slide in response to the global recession. Australia and New Zealand came back into milk production leading to an oversupply, while global demand for milk slowed down.

Brad Hilty of the Penn State Dairy Alliance urges producers to pay close attention to their farm’s cash flow to weather the crisis. He spoke to to an audience of more than 100 dairy farmers at a Fulton Bank symposium here at the Marion Volunteer Fire Company Social Hall last Thursday.

“We all seem isolated because we are on the farm and it is sometimes difficult to realize that you are not in this alone,” he said.

Hilty said the recession has hit at many levels and all aspects of the country’s economy. He has seen many friends, inside and outside of the dairy industry, who have had to make heartbreaking decisions on what is best for their families and livelihoods, including exiting their businesses.

To get through this price downswing, farmers need to focus short-term. But once the industry recovers it will be time for dairy farmers to take a look at the long term and be sure to develop a viable business model, according to Hilty.

“We need to focus right now on short term, then we need to restructure to be more competitive with the western dairies,” he said.

A lot of unknowns surround the sustainability of the dairy industry. Economists continue to extend their predictions for when price recovery will begin later this year.

In many cases, profit margins from the last decade have been wiped out. Hilty said he is hearing reports from contacts across the country that dairies are considering exiting the business if prices do not recover soon.

What should farmers do? Manage cash flow, Hilty urged. Farms need to manage to cover debt obligations and living expenses. Until milk prices recover, farms might have to hold off on investments that improve profitability, opting instead to focus on cash flow.

“A decision that might improve long-term profitability is not an option right now if it does not improve cash flow,” he said.

Hilty challenged smaller farm owners to focus on activities that provide the most profitability. Small farms, he said, often do not have a sustainable business model in place like their larger counterparts.

To make it through, Hilty said farmers need to follow a three-step strategy — assess, plan and communicate.

Farms need to look at what is happening on the farm and understand the farm “numbers” — key benchmarks such as income over feed cost, break-even milk price, milk per cow, herd performance, farm balance sheet, and threshold equity level. The numbers, he said, will provide a picture of where the farm business is going.

He stressed that farmers need to let people know what is happening on the operation, whether they be family, employees, vendors, advisers or lenders.

Cutting costs does not necessarily lead to improved cash flow, Hilty pointed out. Farmers need to look at how a cost cutting decision will impact the overall health of the farm. As an example, Hilty shared his experience with one farmer who decided to cut out key parts of his feed ration to save money.

Instead, milk production crashed and the farm lost financial ground to the point were the only option was dispersal.

Hilty believes in a strong accounting system for farm management rather than just tax purposes.

Addressing cow productivity, he said the last five pounds of milk a cow makes are the farm’s cheapest. Make sure cows are bred back in a timely manner.

Farmers choosing to opt out of heat synchronization must practice a strict heat detection program to not lose ground on breeding intervals.

With lower milk prices, the farm needs to keep up on its culling program to remove unproductive cows. The barn should be kept full, but not overcrowded. Cows should be kept comfortable.

Quality forages improve milk production and reduce feed costs. Hilty said if a farmer has to make the choice between planting corn or making haylage, choose the haylage.

While the entire industry is struggling with low prices and overproduction, Hilty said producers should be focused on the “microeconomics” of their farm, not the macroeconomics of the whole industry. That means managing the “controllables,” on the farm such as the feed ration, breeding intervals and cow health.

“Pay attention to udder health, there is an opportunity if you stay on top of it,” he said regarding milk quality premiums available from cooperatives and dairy processors.

“Look for (marketing) opportunities, but beware,” he said. If considering forward contracting, he urged farmers to do research and work with experts on the decision. “This is a strategy, it is marketing. It is not something to be done without the help of professionals.”

If a farm does not have a management team, Hilty said now is the time to implement one, such as the Center for Dairy Excellence’s profit team model. “They can provide objective input.”

If a farmer admits the farm cannot make it, that is not an admission of failure, Hilty concluded. Farms should make sure they “don’t farm away their last dollar.”