From rumination collars and parlor monitoring systems, to cameras and robotic milking, technology advancements can be seen all across dairies in the U.S.
With financial challenges facing dairy farms, Curtis Gerrits, senior animal ag lending specialist for dairy with Compeer Financial, says it is essential for producers to evaluate how these technology investments impact their farm’s overall financial position when reviewing business updates and opportunities.
“In today’s world, evaluating financial metrics is crucial due to rising costs, global supply and demand dynamics, narrow profit margins and ongoing market volatility,” he says.
Gerrits offers the following tips for producers to consider before making significant capital purchases for their farm.
- Return on Assets: To investigate any major capital purchase, start by determining the return on the assets (ROA) for your operation. Calculate ROA by adding the operation’s net income plus interest and then divide it by the average of total farm assets. As capital investment costs rise, understanding the financial impact and return on investment is vital. Establish a business threshold for ROA, such as greater than 8%, for consistent measurement across all capital purchases. If the calculated return is less than 5%, proceed with caution, as the capital could be better used elsewhere in your business.
- Balance Sheet – Post Purchase: After a significant purchase, complete a “post-purchase” balance sheet to evaluate your expected net worth and owner’s equity. Larger capital purchases often lower overall owner equity, so understanding this impact is important. Aim for a “post-purchase” owner’s equity of 50% or greater, providing flexibility to mitigate marketplace volatility by leveraging assets as needed.
- Liquidity: Evaluate your liquidity position, particularly cash or line of credit availability, when making a capital purchase. Considering the importance of liquidity in the global agriculture environment, use caution when deploying cash for such purchases. Assess where your ending cash/liquidity will be after the purchase to ensure financial stability for production agriculture operations.
- Other Areas of the Business: When considering the capital purchase, review its potential impact on other aspects of your business. Will the asset improve labor efficiency and reduce costs? Is it replacing an existing asset, reducing repairs, updates or supply usage? Alternatively, could the new asset increase expenses due to being unfamiliar to your operation? Consider the expected life span of the investment and understand its complete impact on profitability.
- Insurance Consideration: Before making a large capital purchase, assess the insurance coverage on the asset. Given recent volatility in the insurance market, especially for technologically advanced agricultural equipment, review replacement costs, premiums and your insurance carrier’s position on the asset. Ensure proper insurance coverage to mitigate additional capital outlays in the event of damage or loss.
8 Additional Tips
Independent dairy financial consultant, Gary Sipiorski, says technology will continue to advance and come to us. He recommends producers think of these considerations before making a purchase.
- Research the information with sales reps and on the internet.
- Talk with your trusted service people such as veterinarian, lender, equipment people, milk field person etc.
- Remember the old cliché - it is okay to be on the leading edge but be careful not to be on the bleeding edge.
- Go and see is a must. Talk with producers who are using the technology. Technology in general is expensive and mistakes are costly.
- Do a business plan with family and key employees to get their input.
- Do a projected cash flow with realistic figures.
- Match the useful life of the technology with the loan amortization.
- More than likely the money will have to be borrowed. Lender buy is important.
Finally, Sipiorski says to keep emotions out of the decision, as technology investments must be a business decision and “not just a want.”
To Read More on Dairy Technology:
