The dairy business climate remains challenging, to say the least. Milk prices may be up, but the overall economy remains sluggish and the cost of inputs has certainly not gone down. Therefore, astute managers must be at the top of their game to guide business profitability and manage risk in these turbulent times.
“Everybody says that cash is king, but that’s only half the equation,” says Mike Boehlje, Purdue University ag economist. “It’s the cash you generate from a profitable business that’s the key.” In reality, he says, profitability is the kingdom.
While not every facet of profitability is within your direct control, several key business tactics that can help improve your bottom line are within reach. Here are seven areas you should address in your quest for business success.
1. IMPROVE RISK MANAGEMENT
You’re going to hear more and more about risk management and risk-management tools, whether it’s from lenders, other business advisors or even politicians as the Farm Bill debate heats up and the economy flounders. When it comes to risk management, your goal is all about protecting margins and cash-flow, not about maximizing prices, explains Alan Zepp, Center for Dairy Excellence risk-management program coordinator.
And it’s not going to be enough just to say you have a risk-management plan. You must have a written plan that includes action triggers and your overall strategy, regardless of whether you use risk-management via your co-op, a brokerage firm, the livestock gross margin for dairy insurance program or any combination thereof. Plus, these plans must be followed, not simply written up and then put in a drawer and forgotten.
Lenders want to be able to track performance, so if goals are missed, they can determine how close you came to meeting the targets. Or, be able to adjust your plans and strategies as needed.
Given the choice between lending to a dairy with written risk-management plans in hand that has slightly lower equity vs. another dairy that does not have written plans and goals, most lenders will offer the dairy with the written plans preferential treatment, observes Mike Hosterman, AgChoice Farm Credit agricultural business consultant.
2. CAREFULLY MANAGE BORROWED CAPITAL
The Federal Reserve may have signaled that it will hold interest rates to near-zero levels until mid-2013, but that doesn’t mean you shouldn’t use caution when it comes to borrowed capital. “We’ve been in a cheap capital market,” says Boehlje, “but it still makes sense to lock in the lowest interest rate possible on term debt. The prediction is for a 4-percentage point increase by later this decade.”
Furthermore, he suggests that you take advantage of higher commodity prices to pay down debt if you are highly leveraged. Focus efforts on building working capital reserves and rebuilding equity that was lost in the dairy market downturn of 2009. It’s a worthwhile exercise to explore what would happen to your business if interest rates were to double in the next five years so you can plan ahead.
“If you want to gamble, go to Las Vegas,” he advises. “Otherwise, run a business.”
3. EXAMINE TECHNOLOGY ADOPTION
Successful businesses also pay attention to the benefits and drawbacks of new technologies they adopt, so follow their lead. Focus on tools that simplify procedures and processes. For example, game-plan the utility and benefit of any number of computer programs that track feed and feed delivery, animal identification that meshes with health and reproductive programs and herd management software, or other management tools that cut down on repetitive or inefficient actions.
That is, your objective is to search out those technologies that offer improved task precision, that enhance management information or offer better process control — and also make economic sense for your operation. This is a great place to decide the best way to reinvest your retained earnings.
4. PLAN FOR BUSINESS GROWTH
The old business growth model was operations-centered — it featured hands-on management with a hierarchical command and control structure and little need for interpersonal skills. A closed information system was not a hindrance because owners and managers “did it all.” But that doesn’t cut it anymore.
In today’s dairy economy, business growth centers on a team approach that depends on leadership and delegation and requires open access to information so that the right messages and incentives are delivered to the entire team. Efficiencies of scale have increased in importance and business relationships are combined with family dynamics.
If this does not reflect your dairy business, or you are not in the midst of a transition to this model, you need to determine why not. The longevity of your business depends on this answer.
5. IMPROVE OPERATIONAL EFFICIENCIES
For a farm to be successful over a long period of time, it must respond rapidly to competitive and market changes, benchmark to achieve best practices, and establish a few core areas of strength, notes Michael Langemeier, agricultural economics professor at Kansas State University. To do that, you must work to improve your operational efficiencies, like the use of standard operating procedures that help you focus on product quality and consistency. Again, efficiencies of scale come into play, as does continuous process improvement.
A study of farms with five years of continuous data in the Kansas Farm Management Association program shows that the farms with above average cost efficiency levels, on average, were larger, were more cost efficient, and had higher profit margin, asset turnover and return on asset ratios. These results illustrate that it is possible for a farm to have a sustained comparative advantage which allows the farm to grow at a faster rate or make relatively larger off-farm investments if that’s the direction they decide to take.
6. EXERT MANAGEMENT FLEXIBILITY
Today’s top managers run lean operations. That is, they focus on their core operations and search for ways to improve on existing competencies, yet remain flexible in options and management. “These individuals choose carefully what they are going to pursue and, maybe more importantly, what they are not going to pursue,” explains Boehlje.
In addition, it is critical to understand that the business climate for agriculture is increasingly shaped by forces outside the industry. Think globally, he recommends.
7. BECOME A PREFERRED CUSTOMER AND SUPPLIER
Finally, a good relationship with your key suppliers can be a major component in your business success, says Boehlje. For example, becoming a preferred customer opens the door to better deals on goods and services. And delivering what your customer (for example, your dairy co-op or processor) wants goes a long way toward maintaining and even building new markets for your dairy’s output.
“Ask, ‘What can we do for you?’” he suggests. “Don’t treat your buyers and sellers as villains trying to take advantage of you.”
Ultimately, however, exploring these tactics doesn’t matter if you don’t act on them. “Execution is the key,” says Boehlje. “The difference between those farmers that are successful and those that are less successful has less to do with strategy than execution.”
Check out these resources for more information on these seven areas of business management:
• Small business growth management: http://bit.ly/nnKjJy
• Comparing the LGL program: http://bit.ly/pnxPCy
• Ag Manager: http://bit.ly/pK8d89
• Financial tools: http://bit.ly/pL0kFw
• Dairy revenue vs. dairy prices: http://bit.ly/oWepCn