Jim Youngers admits that he is not getting rich. And, of course, it would be good to see higher milk prices. But, in the meantime, he’s doing all right.
All of the bills are getting paid, says the Arcade, N.Y., producer. “The farm, itself, is paid for. I’m happy with where we are at. I have a comfortable life, and I enjoy what I do.”
Part of the solution has been to keep fixed costs low, as might be expected from a 70-cow, rotational grazing operation. He has a working relationship with a larger dairy farm, which allows him to buy alfalfa, corn silage and some dry hay. That allows him to get by without any planting and harvesting equipment, although he does have a small square baler for hay. He also rents some of his land back to the larger dairy farm, which — in addition to the low fixed costs — does wonders for his asset turnover or utilization ratio, a key factor in dairy profitability.
Given the current state of the dairy economy, asset turnover or utilization is more important than ever.
According to Purdue University agricultural economist Michael Boehlje, agriculture lags behind other industries in terms of asset utilization. No other industry would invest $250,000 in a combine and run it just 300 hours a year, he told a recent Professional Dairy Producers of Wisconsin profitability seminar.
Boehlje turned to the producers in the room that night and said he suspected that most of them could improve their asset utilization by 10 percent or more.
Easier said than done
Yes, asset turnover ratio is important. But it is only one measure of profitability. The Farm Financial Standards Council now has 21 ratios to measure financial viability. (Note: For many years, these were known as the “sweet 16.” Then, last year, five more ratios were added, creating the “legal 21.”)
In judging a farm’s financial viability, you need to take a number of these measures into account — not just one.
And, sometimes, the reality of dairy farming gets in the way.
For example, a young farming couple hired a custom harvester to harvest their crops in order to save on equipment costs. Then, in 2006, the custom harvester did not show up on time to harvest their soybeans, and the soybeans suffered shatter loss. The farming couple became irritated and decided to buy a used combine. Before ever turning the key on the combine, they had a fixed-cost investment of $55 per acre, without even factoring in the variable costs it would take to run the combine, points out Ken Bolton, dairy agent for the University of Wisconsin Center for Dairy Profitability.
“It just wasn’t a good investment,” he adds. In that case, it likely would have been better to have stayed with custom harvesting, which, at the time, was only costing the couple around $20 per acre.
What about the shatter loss to the soybeans? At the average price of $6.43 per bushel and yield of 43 bushels to an acre in 2006, a one-time shatter loss of 20 percent was needed to offset the annual ownership cost for one year only. And, remember, the annual cost to own the equipment continues every year.
The couple’s irritation at the custom harvester got in the way of objective analysis.
Wide variation among farms
It’s an over-simplification to say that all farms do a good job or a bad job when it comes to asset utilization or turnover.
Asset turnover is the “rolling herd average” of financial performance, Bolton says. Like rolling herd average, it is an efficiency measure and varies widely between farms.
During 2009, the average farm in the Agriculture Financial Advisor database of the University of Wisconsin had an asset turnover rate of 0.531, which meant that it generated 53.1 cents of revenue for every dollar of farm assets. (There were a total of 497 farms contributing information to the database. These measures were calculated using the cost basis of assets.)
Yet, averages can be deceiving. It has been Bolton’s experience that the numbers can vary quite considerably. Some farms will be around 0.10, which means they only generate 10 cents for every dollar of farm assets, while others will be up around 2.0.
Why do the numbers vary so widely? There are at least three different areas to explore, Bolton says.
• Whether you own your assets or rent them. In the following equation,
Total revenue ÷ Average assets for The Year
the dominator will be smaller when renting, because you haven’t bought land, equipment or other assets. Therefore, the revenue doesn’t have to be divided as much. But, when renting, the numerator may be smaller, because rent is a cash cost that comes out of revenue.
• Whether you are a high-resource or a low-resource producer. Maybe you are entering the last 15 years of your dairy-farming career, and you want those years to be relatively comfortable. So, you put up a new free-stall barn and a new parlor; you buy a new TMR wagon, two or three Gators and the newest tractor, and you own all of your land. You would then be a high-resource producer. A low-resource producer, on the other hand, would be someone who rents his equipment and land and hires someone to get his cropping done. From an asset-utilization standpoint, is it always better to be a low-resource producer? Not necessarily, Bolton says. It also depends on the level of revenue generation. But, if someone is a low-resource producer with high revenue generation, he will end up on top if his input costs are competitive, Bolton adds.
• Efficiency of your management.
A rotational grazing farm like Jim Youngers’ in western New York would be considered “low-resource.” With high production, it gives him a definite edge.
“The farm’s doing quite well,” Youngers says.
Of course, other producers want to go the high-resource route, and that is fine as long as there is a significant increase in revenue.
Be aware of the asset turnover ratio; see where you stand in relation to your peers, and set a goal of improving performance by 10 percent.