Dairy producers must know their numbers, manage margins

2012-05-10T07:07:49Z 2012-06-18T14:16:52Z Dairy producers must know their numbers, manage marginsPeggy Coffeen, Agri-View The Prairie Star
May 10, 2012 7:07 am  • 

"It used to be that you could work hard, take care of the cattle and the crops, and you made money. I'm not saying you don't still have to work hard, but you better understand the numbers today," Gary Sipiorski told dairy producers at the Kewaunee County Ag Power Luncheon on April 12. The lunch was sponsored by the Kewaunee County Economic Development Corporation.

Sipiorski, dairy development director for Vita Plus Corporation, shared his view on how dairy producers can best position themselves to be competitive and profitable in today's dairy markets. He also facilitated a panel discussion featuring three other industry professionals: Dr. Brian Gould, UW-Madison professor, Department of Agricultural and Applied Economics; Mark Ludtke, Stewart-Peterson Group, Inc.; and Jim Smidel, partner in Smidel Brothers Farm and agricultural lender with Baylake Bank.

SIPIORSKI'S 'EIGHT RULES YOU CAN'T BREAK'

To make sound marketing decisions, dairy producers must have a solid understanding of their financial position. According to Sipiorski, this means having a full set of financial statements available to discuss with your lender, including a current balance sheet, three-year history, three-year average, and 2012 projections. Sipiorski went on to outline his "eight rules you can't break" for dairy producers:

1. Maintain a 2:1 liquidity ratio on your balance sheet. "That's $2 of current liquidity (cash or items that can be turned into cash in the next 12 months) compared to principle due in the next 12 months in payables," he said.

2. "You can't spend more than 20 percent of your milk check on interest and principle - 15 percent at best," he added.

3. You can't be over 85 percent expense rate, according to Sipiorski. In fact, he prefers that number to be 80.

4. An acceptable range of debt per cow is $3,000 to $5,000. In times like this, he said, be particularly cautious not to exceed $5,000 in debt per cow, noting that terms and interest rates may push that figure.

5. You have to keep at least 30 percent equity.

6. Optimize for a three-year asset turn-over rate. For example, if you have a $1 million farm generating $330,000 in gross income each year, it would take three years to turn your assets.

7. You need to have 8 percent return on assets (profit). Historically, that number has been 4 percent, and that is not enough. If you had a gross income of $1 million last year and netted $80,000, that is an 8 percent return.

8. You need to know your cost of production. "If you don't know your cost of production, how in the world can you make decisions?" Sipiorski asked.

Gould went on to tell dairy producers to think about adopting a strategy to cover their cost of production. "A person has to know what their strategy is. You cannot control milk prices, but to a certain degree, you can manage the milk price," he said.

The panelists agreed that successful dairies are the ones that know their numbers. Over his 17 years in the lending business, Sipiorski recalled that only a mere 15 percent of the farmers who walked into his office knew their cost of production. These days, however, knowing that figure is critical, especially when it comes to making informed decisions on marketing.

"It's not just marketing milk anymore. It's marketing for a profit," said Smidel, noting that the high cost of inputs and price volatility make marketing even more important these days.

Ludtke described some of the strategic marketing tools available for dairy producers, including cheese plant contracts, futures contracts and Livestock Gross Margin for Dairy (LGM-Dairy) insurance. "We, as marketers, cannot tell you what the price is going to be," he said, and that is why he focuses on market scenario planning, analyzing the "what happens if" scenarios with the unique considerations of each dairy.

"Good marketing is not perfect," he added. The goal over time is to avoid the deep valleys of the milk market, even if that may mean giving up some of the peaks. He encouraged producers to look at the time invested in marketing just like they would the time invested in building a barn. "If you put that much thought into marketing every day, you probably wouldn't have near the concerns you would have if you didn't think about it at all."

Gould also emphasized the importance of making marketing a priority. "Producers need to think about risk management as another input," he said, adding that it should not be viewed as a "profit center," but rather as a tool to help manage the lows and take advantage of the highs.

One of the risk management tools that Gould has worked extensively with is LGM-Dairy, an insurance program that creates a floor to protect margins from being eroded by rising feed cost or drops in milk price. Noting that Wisconsin led the country in the number of contracts written during the last sign-up, the next round to purchase the insurance will be available in October. While LGM-Dairy is currently subsidized and will remain so unless there is a change to the program rules, he feels that even if the premium assistance were to go away, there would still be a strong producer demand.

"We know that volatility of milk prices is not going to go away, regardless of any changes in dairy policy," he said. Gould alluded to the continued debate over the 2012 Farm Bill.

Regardless of what happens in dairy policy, the panelists agreed that the export market provides optimism for the future of the U.S. dairy industry. They also suggested that dairy producers learn more about the marketing tools available to them and enlist the aid of experts, whether that be through professional commodity marketing groups or UW-Extension.

"In this day in age, we need to do something to survive," Smidel added. "The tools are there."

Copyright 2014 The Prairie Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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