This document provides an overview of 12 ideas for improved dairy farm management. It discusses recognizing the dairy farm as a business and understanding supply and demand economics. Key steps include measuring performance with data, using analytics as a competitive advantage, maintaining accurate financial records, analyzing investments, understanding how earnings and asset turnover impact profitability, and maintaining a consistent business strategy regardless of milk price fluctuations. The overall message is that the most profitable approach focuses on increasing milk production at the lowest cost.

1. Dairy Farm Economics 101
12 Ideas for Improved Dairy Management
Jeffrey Bewley, PhD, PAS

2. Objectives
• Understand that a dairy
farm must be managed as
a business
• Introduction to some
essential dairy business
management ideas
• Introduction to concepts
without in depth
discussion of equations or
calculations

3. Step 1. Recognize that
you are the CFO

4. Reality Check
• Every dairy is a business
• Every dairy producer is an
entrepreneur
• Every dairy producer loves working
with cows
• BUT, that doesn’t pay the bills by
itself
• Reduced governmental regulation=
more competition

5. Application of Business
Management Principles
• Finance
• Accounting
• Manufacturing
• Human resource management
• Risk management
• Marketing
• Strategic management
• Outsourcing
• Information management
• Precision Dairy Farming technologies
• Third party audits (ISO 9001, HACCP, TQM, BTM)

6. Step 2. “You can only do what the markets will
let you do, no matter how clever you are”
-Dr. Joseph Steinman

7. Supply and Demand
• Market: a group of buyers and sellers of a
particular good or service
• The terms supply and demand refer to the
behavior of people . . . as they interact with
one another in markets
• Law of Demand: price goes up, demand goes
down OR price goes down, demand goes up
• Law of Supply: price goes up, suppliers offer
more product OR price goes down, suppliers
offer less

8. Supply
Demand
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
Equilibrium of
Supply and Demand
21 3 4 5 6 7 8 9 10 12110
$3.0
0
2.50
2.00
1.50
1.00
0.50
Equilibrium

9. How an Increase in Demand Affects
the Equilibrium
Price of
Ice-Cream
Cone
2.00
0 7 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D1
1. Hot weather increases
the demand for ice cream...
D2
2. ...resulting
in a higher
price...
$2.50
10
3. ...and a higher
quantity sold.
New equilibrium

10. S2
How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream
Cone
2.00
0 1 2 3 4 7 8 9 11 12 Quantity of
Ice-Cream Cones
13
Demand
Initial equilibrium
S1
10
1. An ice storm reduces
the supply of ice cream...
New
equilibrium
2. ...resulting
in a higher
price...
$2.50
3. ...and a lower
quantity sold.

11. Step 3. If you don’t
measure it, you can’t
manage it

12. Why do We Need Data?
• Measure animal and business
performance
• Accurate and efficient
decisions
• Analyze the past
• Control the production
system
• Plan for the future

13. Production Monitoring Areas
• Production
– Average milk yield
– Milk components
• Quality
– Somatic Cell Count
– Bacteria counts
• Disease incidence
• Mortality/Culling
• Treatment Success
• Reproductive Performance

14. Step 4. Analytics can be your
competitive advantage

15. Business Intelligence and Analytics
SAS, Competing on Analytics, Davenport, Harris
Optimization What’s the best that can happen?
Predictive Modeling What will happen next?
Forecasting/Extrapolation What if these trends continue?
Statistical Analysis Why is this happening?
Alerts What actions are needed?
Query/Drill Down What exactly is the problem?
Ad hoc Reports How many, how often, where?
Standard Reports What happened?
Dairy
Industry
Usually Here

16. Time for a Change in Records Management
• Losing ground compared to other businesses
• Often limited to creating production tables,
attention lists, and working schedules
• Generally retrospective
• Diagnostic capabilities remain largely untapped
• Data integrity concerns (garbage in/out)
• Have we reached the “Tipping Point”?
• Can this be your “Dribble Drive Motion Offense?”

17. Step 5. Financial records are as
important as production records

19. Do you know?
• Rolling herd
average
• Bulk tank
average
• Culling rate
• Calving interval
• SCC
• Return on assets
• Asset turnover
ratio
• Operating
expense ratio
• Current ratio
• Debt: asset ratio

20. Financial Analysis
• Cash flow analysis
• Cost of production
• Balance sheet
• Financial ratios
• Do you really know what is going on in
your dairy business?

21. Now, Look What You Can Do
• Benchmarking
• Identify strengths and weaknesses
• Projected cash flows/budgets
• Improve profitability and cash flow
• Useful bank/tax information
• “What if” analysis
• Decision analysis
• Survive and thrive

22. A Dose of Reality
• Not a snapshot process
• Only the first step
• Garbage In = Garbage Out
• Results and recommendations-farm
specific
• Knowing the numbers does NOT change
them
• Strategies and corrective measures
• You might learn things you didn’t want
to know
• Sometimes, change hurts

23. Step 6. Economies of size----it’s just
basic math

24. Spreading Fixed Costs over More Animals

25. Economies of Size
• The concept that the average cost of production
per cow declines as the size of the operation
grows.
• Increasing returns to size
• Economies of size result from:
– Full utilization of labor, machinery, buildings.
– Ability to afford specialized labor and
machinery and new technology
– Price discounts for volume purchasing of inputs
– Price advantages when selling large amounts of
output

26. Costs and Returns by Herd Size
Milk production costs and returns per hundredweight
(cwt) sold, by size of operation, 2005

27. Step 7. Investment analysis
should be more than just gut feel

28. Partial Budgeting
• Examines the expected economic returns to
a specific management change
• Total benefit-Total Costs=Profitability of
Intervention
• Used to calculate Benefit: Cost ratios
• Examples: Using sexed semen, adding a
feed additive, using a synchronization
protocol

29. Partial Budget Calculations
Benefits
Increased revenue
+ Decreased costs
=
Total benefit
Costs
Decreased revenue
+ Increased Costs
=
Total costs
Profitability=Total benefit-total
costs

30. Net Present Value
• Considers the “Time Value of Money”—
a dollar today is worth more than a dollar
tomorrow
• Considers timing of expenses and income
• More accurate way of examining an
investment decision
• A little more complex and time
consuming
• Should be used for major capital
investments

31. When to do a Net Present Value Analysis?
• Adopting a new technology
• Changing enterprises
• Choosing to specialize
• Hiring custom work
• Leasing instead of buying machinery
• Modifying production practices
• Making capital investments

32. Profitability versus Financial Feasibility
• Profitability: rate of return on investments into
the business
• Financial Feasibility: Can I pay the debt?
• Land and buildings may be profitable but not
financially feasible because of residual value
of land
• Farmers often get themselves into trouble here

33. A Tale of Two Families
The Over’s
• Investments
– Land, toys, and
parlors
• Labor/owner
withdrawals
• Hospital
• Cull rate
The Under’s
• Production
• Cow comfort
• Cow cooling
• Forage storage
• Transition cow
facilities and
nutrition
• Preventive health
• Human resources

34. Step 8. Know the
difference between
earns and turns

35. Fundamental Drivers of Profitability
• Measured by ROA (Return on Assets)
and ROE (Return on Equity)
1. Earns (Margins, measured by
Operating Profit Margin)
2. Turns (Throughput, measured by
Asset Turnover Ratio)
3. Financial structure and costs

36. Earns and Turns
Earns
• Quantity of product
sold
• Prices
• Costs
• Productivity and
efficiency
Turns
• Prices
• Quantity
• Amount of money
invested in business
(assets)

37. Agriculture has Low Margins
• FALSE!!!! (OK, maybe not for 2009)
• Agriculture has high margins (~32%)
• Only computer/software businesses are
higher
• Wal-Mart (~3 to 4%-think not much
inventory, lots of product out the door)
• Struggle with asset turnover (large
proportion of assets in real estate)

38. DuPont Analysis
Operating Performance
Gross
Revenue
Fixed
Costs
Variable
Costs
Net
Income
- - =
Total Assets
Gross
Revenue
Turnover
Ratio
=÷
ROAx
Interest
Expense
Net
Income
Gross
Revenue
Operating
Profit Margin+ ÷ =
Total Assets Equity
Financial
Structure
=
Financial Structure
÷
ROE
Interest
Assets-
x

39. Base Example

40. ↑Gross Revenue 10% and ↑ Variable Cost 5%
Increased
by 2.4%
Increased
by 3.6%

41. ↓ Variable Costs by 5%
Increased
by 1.0%
Increased
by 1.4%

42. Take Home Message
• Most farmers spend most of their time lowering
costs
• Cost control only impacts earns, not turns
• Biggest impact comes from changes that impact
both earns and turns
• So, efforts should be focused on
– Increasing throughput
– Improving product quality
– Taking advantage of market price premiums
– Remove non-productive assets

43. Step 9. Your overall business strategy
shouldn’t change much as milk prices
change

44. Strategy for High Milk Prices
• More milk
• 3X milking
• Increase components
• Keep facilities full
• Keep cows cool
• Raise/feed high quality
forages
• Pay down debt
– First, open accounts
– Operating lines of credit
• Maximize cash reserves
– Pay off short-term debt
– Prepay expenses
– Rainy day fund
– Prepay taxes
– Invest in productive
assets
Brad Hilty, Hoard’s Dairyman, August 25, 2007

45. Strategy for Low Milk Prices
• Do not reduce milk income
• Keep barns full
• Examine feeding program
• Evaluate labor management
• Reduce supply inventories
• Reconsider capital purchases
• Take home less

46. Step 10. The most profitable pound
of milk on your farm is the next one

47. Marginal Thinking
Current Situation
Feed Cost per Cow Per Day $6.00
Milk production per Cow Per
Day
70 pounds
Feed Cost per Pound of Milk $0.086
Feed Cost per 100 Pounds of
Milk
$8.57
Milk Price $18/cwt.
Milk Income Per Cow Per
Day
$12.60
Income over Feed Costs $6.60
Increased Milk by 5 Pounds*
Feed Cost per Cow Per Day $6.24
Milk production per Cow Per
Day
75 pounds
Feed Cost per Pound of Milk $0.083
Feed Cost per 100 Pounds of
Milk
$8.32
Milk Price $18/cwt.
Milk Income Per Cow Per
Day
$13.50
Income over Feed Costs $7.26
*Assume $0.12 per lb/DMI, 1 lb DMI yields 2.5 lb milk, 1 lb milk costs $0.048
But, at $18/cwt milk it provides $0.18 of income, so…..
Profit per Additional lb of
Milk
Profit per additional
100 lbs Milk
Return on $1 Spent for
Feed
$0.132 $13.20 $3.75

48. Step 11. Always look for cow-related
economic opportunities

49. Major Opportunity Areas
• Milk quality
– Missed premiums
– Lost milk production potential
• Reproduction
– Excessive days open
– Culls
• Lameness
• Heifer raising
– Inefficiencies
– High age at first calving
• Disease incidence and related costs
• Low peak milk

50. Step 12. Never lose sight of the real reasons
why you are doing this

51. Questions?
Jeffrey Bewley, PhD, PAS
jbewley@bovisync.com
jbewley@cowfocused.com