Pa. trio offers tips on production cost management
STATE COLLEGE, Pa. — A trio of dairy industry professionals focused on “Pathways for Managing Your Cost of Production” at the Dairy Summit on Feb. 5.
Mike Hosterman, AgBusiness Consultant for AgChoice Farm Credit, contrasted the net cost of production vs. break-even price. He noted that the production cost reflects the cost to maintain net worth and uses depreciation. The break-even price uses principal payments in cost to cash flow.
Managing the cost of production, Hosterman noted, is most important. It requires leadership, planning, smart goals, an advisory team, and a benchmark.
Hosterman said a great leader sets the course, communicates it constantly and inspires the team. Planning must be adjusted, implemented and evaluated. “Planning provides direction and keeps us on track,” he reported.
Goals should be SMART, meaning specific, measurable, attainable, realistic, relevant and timely. Advisors, Hosterman said, bring other ideas and keep everyone focused. A benchmark can evaluate progress, determine costs and allow for comparisons.
In answering the question, “What do top producers do to be profitable?” Hosterman said, “They manage.” Further describing that essential action, he noted that it is a business with no magic solution; but a positive attitude and controlling the uncontrollable helps management.
Hosterman added, “Don’t let what you cannot do interfere with what you can do.”
Greg Squires, Land O’Lakes, identified the cost of production management components as the production business plan, cow care, the middle management team, efficiency of capital, information systems, continuous improvement and the marketing plan.
Squires pointed out, “The lack of strategic planning is one of the most limiting success factors in many, if not most dairy operations in the U.S.” In addition, he noted that business planning is not about the finished process. “The plan is never finished,” he said, continuing, “Business planning is all about perfecting the process.”
Cow care involves forage quality, cow comfort, reproduction, the transition period, milk quality and employing the correct protocols consistently.
Squires also stressed acknowledging that the manager cannot do it all, but must coach employees toward executing correct standard procedures. However, the protocols must be monitored and expectations must be reinforced.
He advised developing a culture of information. “The first key to creating great profitability in a highly sustainable business model is to identify areas of greatest inefficiency,” Squires said. Stressing constant improvement, he added, “Never, ever be satisfied.”
Tim Beck, dairy business management educator, Penn State Extension, focused on factors such as the cropping and the heifer management programs impact on break-even cost.
In developing the cash flow ‘mechanics,’ he calculated the micro issues such as forage quality and inventory, ration formulation, and feeding and the macro issues of reproductive management, cull rate and the heifer. To determine the milk income needed, he tallied the expenses in relation to the milk price.
Beck traced the cash inflow and outflow figures that determine the break-even point. He detailed the cost of items of corn silage, alfalfa, corn, soybeans, ryegrass and corn and the input costs of seed, fertilizer, chemicals, custom hires, and land rent to determine the cost of home-raised forages and grains.
Other analyses figured farm demographics, feed costs, and costs compared with milk price, plus how heifer costs impact the profitability of the entire farm.
In his summary, Beck advised, “Fix strategic planning issues first.” Calculate and monitor break-even and production costs regularly. Study the feed and crop programs and evaluate the heifer cost.
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