Volume 4 Issue 1

The annual Southern Dairy Conference brings together a unique group of people, including producers, regulatory persons, processors, cooperative administrators and academics. Speakers are brought in from outside the region to discuss the problems facing the dairy industry. The outside speakers are noted for telling us what they think we should hear rather than telling us what we would like to hear.

Dr. David Barbano, a Food Scientist, talked about some new technology that could be of interest. The first was reverse osmosis and the fractionalization of milk. These procedures will allow plants to remove water from the milk to make designer products that could make milk more valuable but could also reduce the cost of shipping. That technology brings the competition just that much closer to our doorstep. The second new technology is adding carbon dioxide, at much lower levels than is added to soda, to add to the shelf life of milk and milk products. A great technique that could keep yogurt and other products fresh longer but would also allow people to transport milk and milk products longer distances while maintaining the freshness.

The report on the Northeast Compact showed that the dairymen in that region were able to get more money for their milk, at least on a short-term basis. My impression is that compacts will be a short-term bandage for the problem. Following the regular session a few of the cooperative people and academic people stayed around to explore what is being done in the area of risk management. With volatile prices, and they could get worse if we were to lose the Federal Milk Market Orders, it will be important that our producers be aware of the tools available to them to reduce risk. This is especially important for highly leveraged operations and for dairymen with relatively high cost of production. Several Cooperatives reported that they offer their members the option to sell a portion of their milk through their cooperative on the Commodity Market. To date relatively few dairymen have taken advantage of the system, but it is there if they wish to take advantage of it.

In spite of the quota system and high subsidies in Canada, the rate of attrition of dairies is as great there as it is here. In Canada, there the less efficient dairies can't afford to purchase enough base to allow them a high enough volume to provide an adequate return.

A proper summary for the conference is that we can devise a lot of schemes to temporarily adjust the milk price in one coop or one region. But the bottom line is that the only way that an individual dairyman can be assured of a profitable business is to operate his dairy as efficiently as possible so he can compete.

Mark you calendars for the Dairy Production Conference on May 4 (starting with a Luncheon) and May 5 (ending with a luncheon). Emphasis will be on management application recommendations that came out of 10 years of research sponsored by the Dairy Checkoff Grants. Also, Dr. Bill Thomas, Dairy Marketing Economist from the University of Georgia, will give an analysis of Milk Marketing in the Southeast and our own faculty will present new summaries on from the Dairy Business Analysis Program that will help you analyze your costs of producing milk.

New factors for adjusting DHIA records made under 3X milking will begin to be used in 1999. The new factors are lower than the old ones, therefore decreasing the amount of adjustment made in expressing a 3X record as 2X.

All records are adjusted to a 2X basis for calculating genetic evaluations. PTA's should change little because of the new adjustments.

The old 3X factors were based on data compiled in 1953 and have needed updating for some time. The old adjustment factor was 20 percent for first lactation cows, 17 percent for second lactations and 15 percent for later lactations.

The new factors are based on work done at Iowa State University. Separate factors will be provided for milk, fat and protein. The new milk factors will be 12 percent for first lactations and 14 percent for second and later lactations.

There is a lot of press about Y2K. Most computer experts indicate three areas of concern: 1) your hardware; 2) your software; and, 3) services received from firms that rely heavily on computer technol.ogy.

Rogers offers a number of key steps to control dairy business costs. First, the manager must know their costs of production by knowing how many pounds of milk were sold and the total costs of doing it. Second, investment decisions must be made in terms of whether or not costs per cwt. milk sold will be lowered by the decision. Finally, the business should be monitored for how competitive it is at cost control by 'benchmarking' both costs and other performance factors that drive costs. In essence, all decisions and activities are focused around how much it costs the business.

To demonstrate the effect that cost control has on dairy farm profitability, a sample of dairies participating in the Dairy Business Analysis Project were sorted into three groups by total expenses per cwt. milk sold. The accompanying table lists selected financial performance statistics for fiscal year 1997.

Several concepts should become clear by looking at the table. First, the lowest expense group (<$17.00 per cwt. milk sold) had the highest net farm income at $1.30 per cwt. milk sold. This was due to the lowest total expenses among the groups of $16.47 per cwt. milk sold. Conversely, the high expense group (>$19.00 per cwt. milk sold) had the lowest net farm income at $-1.67 per cwt. milk sold. This was a $2.97 per cwt. milk sold difference in net farm income between the high and low expense group. Translated into total dollars, there was over a $800,000 difference in net farm income between the low and high expense groups. This was mostly due to total expenses for the high expense group that was $4.17 per cwt. milk sold higher than the low group.

So we can see that total expenses were drastically different between expense groups. A prudent manager may ask, 'How do I know if I am effectively controlling costs in my business?' Because every dairy faces a unique situation, control of individual expenses is key to effective cost control. The degree to which the groups controlled individual expenses can be seen by looking at the number of expense categories above or below average.

In the project, expenses were separated into nine different categories; personnel, purchased feed, crops, machinery, livestock, milk marketing, real estate, other, and depreciation. For each expense category, it was determined if the expense group was above or below the project average for the category. The low expense group had eight of nine expense categories below the project average. Conversely, the high expense group had six out of nine expense categories above the project average. This suggests that cost control is defined as keeping all costs low not just one or two as did the high expense group.

These results support the benchmarking recommendation by Rogers. Since cost control is so important to business profits, dairy managers should continually understand how competitive their business is for all expenses, not just one or two. While your dairy may have a low cost ration, high expenses in other areas may cause you to lose out on potential profits. (It happens to be that the middle expense group had purchased feed expense below the project average.)