One constant that we seem to have in life is "change". Our reaction to it differs greatly if we are the one in charge causing the change or if we are on the receiving end of unsolicited change.

Several months ago Dr. Mike Martin joined us as the Vice President of IFAS. In one of his first major actions he initiated a strategic planning effort known as "Florida First". The initial phase of that planning effort was the creation of documents that highlighted the current situation with each of our industries and outlined the challenges ahead to maintain efficient and profitable industries in the State. Next came a statewide gathering that provided for a dialogue between representatives from the industry and the IFAS faculty and administrators. Summary reports of that meeting are now being finalized.

In a memo to the faculty several weeks ago, the Vice President for IFAS announced his plans to consolidate the Animal Science related departments. Citing the high cost of carrying out animal research and his goal of providing strong support for the efforts he decided there were advantages to the consolidation. He is also of the opinion that if the departments were combined in some manner that the producers from all the species would unite in an effort to provide support for IFAS programs. Any significant savings would likely come from de-emphasis of some current programs, and those savings would be reinvested in the animal programs.

An implementation committee comprised of faculty from the two affected departments, industry representatives, an IFAS administrator and a faculty member from one of the cooperating departments will be assembled to recommend the nature of the final structure and to suggest when the plan will be implemented. Mr. Don Bennink has agreed to serve as the dairy representative to the committee.

Just received an unofficial update from Georgia. Their dairy industry voted on a referendum recently covering two issues. The first was a one-cent per hundred pounds check-off to reestablish the Georgia Milk Producers organization; that vote passed. The second was to establish a similar check-off to establish a fund for research, teaching and extension. Preliminary results indicate that it was not passed.

Thought you might be interested in what has been happening to cow numbers in the southeast.

Manager, Dairy Business Analysis Project
University of Florida
Gainesville

In dairy businesses there are three primary activities which management focuses on, operating, investing, and financing. Most daily activities fall under the operating category. Investing activities are more strategic in nature, not occurring on a regular basis but still important because they affect the capital efficiency of the business. However, financing activities influence both daily operations and the ability to invest. This article will focus on the impacts that financing activities have on the profitability and efficiency of dairy businesses To illustrate this, dairies participating in the Dairy Business Analysis Project were sorted into two groups on the basis of average total liabilities per cow. Only those dairies providing complete and verifiable information were included in the average. The adjoining table lists selected financial performance statistics by total liability group.

The first point of interest was the close relationship between financial and operating efficiency. This can be observed by looking at the differences in profitability between the two groups. Net farm income from operations of $1.12 per cwt. milk sold of the low liability group (less than $1,500 total liabilities per cow) was $1.73 above the ($0.61) loss of the high liability group (greater than $1,500 total liabilities per cow). This was due to a difference in cost control ability as total expenses of $16.85 per cwt. milk sold for the low liability group were $2.06 below the $18.91 of the high liability group. Total revenues were slightly higher for the high liability group ($18.30 per cwt. milk sold), reemphasizing the cost control ability of the low liability group. These differences translated into a 5-percentage point difference in the operating profit margin, as the low liability group posted 4% profit while the high liability group had a (1%) loss.

The close relationship between financial and operating efficiency is also observed by looking at interest expenses. For the low liability group, interest expense of $0.36 per cwt. milk sold was $0.60 below the $0.96 of the high liability group, a 63% difference. This expense was partially driven by the large difference in liability levels. Total liabilities for the low group were $768 per cow, 64% below the $2,116 of the high liability group. While this is basic math, it revealed the wide degree of variation that exists among dairies.

A valid argument may be that those dairies with higher debt will always have higher interest expense. This higher debt may not always be a bad thing, especially considering the age of the business and the ability to leverage investments. However, investigating liability composition illustrates another concept about financial efficiency, namely how effectively debt is being used in the business.

Three major types of liabilities are investigated in the adjoining table, accounts payable, operating notes, and term notes. Short term notes and capital leases are other types of liabilities but they were of negligible composition for these dairies so they are ignored for this analysis. Accounts payable are those liabilities in a non-structured note that are owed to another business or vendor for operating expenses. Examples include the feed bill, supplies, machinery repairs, etc. The low group had accounts payable of $25 per cow, 85% below the $168 per cow of the high liability group. This was a substantial difference as accounts payable often carry high interest rates (18% and higher are not uncommon). Even though accounts payable are easy to acquire and often the first source of financing in times of tight cashflows, they are often the most difficult to manage of all liability types.

Operating notes are any structured note due with a year that are used for operating expenses. Examples include lines of credit and seasonal loans for crops to name a few. The low liability group averaged $166 per cow, 23% above the $135 per cow average for the high liability group. While the low liability group was actually higher than the high liability group, the real story is in the relationship with accounts payable. The low group had higher operating notes (to purchase feed, etc.) but they did not finance the purchases, on average, with accounts payable. Conversely, the high liability group had more accounts payable per cow than operating notes per cow. Either operating notes were not feasible, not granted by lenders, or payables were a more convenient source of financing for the high liability group.

Term notes differed substantially between groups. These include any note used to finance capital items with a maturity in excess of one year. The $1,812 per cow average for the high liability group of was 3.2 times the $566 per cow average of the low liability group. This difference may have more to do with the age and maturity of the business. However, this is a substantial encumbrance on future cashflows, with average total liabilities of $1,812 per cow in excess of the value of most cows. This puts increased pressure on cows to generate revenues just to service debt, let alone generate returns to management.

These differences in liability composition between groups were further reflected in the times interest earned ratio. The times interest earned ratio was computed by dividing net farm income from operations by total interest expense. If the broad view of financing is taken such that all debt is borrowed in anticipation of generating future profits, this ratio will measure the effectiveness of financing activities in attaining that goal. The low liability group averaged 8.67, 9.74 points above the (1.07) negative average for the high liability group. The negative number indicates the operating loss of the high liability group. It also revealed that the cost of debt service (i.e. interest) was well above earnings and indicative of poor financial efficiency.

It is obvious from these numbers that the financing activities directly affected the financial and operating efficiency of these dairy businesses. Liability composition, although not widely discussed, is an important factor determining cash flow ability and interest expense. Dairy managers need to control both the level and structure of liabilities, something that is usually not disclosed in the fine print of most loans. Without deliberate control, debt service and interest will negate any profits and erode the operating efficiency of the business

Selected 1997 financial performance statistics grouped by total liabilities per cow.