April 2010 Issue

Published by John Ellsworth,

© Success Strategies, Inc.

Sounds like a given doesn’t it? However, it has been my observation that those producers who do the best job of mastering the feed acquisition game seem to be the ones that thrive financially, year in and year out. Since feed, as an expense, can consume 50-60% of your total revenue, it is crucial that you manage its cost as if your business depended on it because, in reality, it very well might. If there was one lesson we all learned in 2008, it was that we have entered a new world where speculation in the commodity markets can force a new trend that impacts every producer. In spite of having record high corn crops the past several years, the dairy industry was treated to a new and less than “user- friendly” corn market. Unfortunately, as corn goes, so goes the price levels of most other commodities and feed crops.

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Thus, whether you grow a lot of your forages or buy it all as some producers do on the west coast, we need to think it through in terms of what our needs will be, what our potential sources could be, and what our break-even feed costs are at various milk prices.

1. While this planning process is critical for those who buy their feed, it has become increasingly important to even producers who grow a great deal of their forages. We must consider what factors can change the market prices for feed items: weather, the strength of the dollar, shortages in other parts of the world, and potential wars that may disrupt either supplies or deliveries.
2. For those dairymen who grow their feed, fuel can also impact your production given its direct correlation with fertilizer prices, the number of trips you can afford to make across a field in one season, and indirectly through the effects of ethanol production. In some cases, you may find it beneficial to sell some of the feed you grow and replace it with lower priced alternatives.
3. You may not know where to start. The following outline is an overview of how you can plan your feed needs and acquisition strategy for the next year.

Steps to take this year:

1. Determine what your needs will be.
   1. With the assistance of your Nutritionist or other advisors, develop a plan.
   2. How many cows and heifers will you house, and what are their ages?
   3. What is your expected production level on cows?
   4. What rate of growth do you hope to achieve on heifers?
   5. What do you already have in your current feed inventory?
2. Decide how much you can grow.
   1. How many acres do you own or currently rent?
   2. Is there more land available to you this year?
   3. If so, what will it cost & can you afford it in your annual budget? This goes back to our March 2010 issue.
   4. On the acreage you have, what are reasonable yields? Can you double or triple crop or is your growing season too short for that?
3. What will you then need to buy?
   1. After you have determined what you can expect to grow and what you will need during the next 12 months, you can calculate what items you will have to buy, i.e. how much you will be short on roughages or grains.
4. What do you expect the cost of what you grow and what you buy to be?
   1. Again, we need a budget to outline our needs for inputs and costs.
   2. How much will it cost for seed, fertilizer, water if you must irrigate, labor, cultivation, spraying, harvesting and other inputs.
   3. Can you do all of it yourself, or is it more cost effective to hire a custom operator to plant and/or harvest it, even if you own your own land?
5. Develop a plan, including what you will need to contract for and when the most optimal time will be to set up these contracts.
   1. Will you need a line of credit to help finance these items?
   2. Can your ongoing cash flow cover this crop growing plan?
   3. If you need financing, will it come from your bank, your local farm credit office or from your vendors? This is an important item to think about because everyone wants to get paid on time, and nothing can disrupt a good crop plan more than one of your suppliers being unhappy.

What to do if you cannot complete your plan as set?

1. First, change it! The goal here is optimization, not perfection. Perfection would require that nothing ever change, which is probably an unrealistic expectation. Optimization involves setting a plan to maximize what you have working for you and then adjusting course to stay on track as much as possible.
2. Decide what needs to be altered. Are there controllable factors involved in having to deviate from your original plan or is it due to factors that are out of your control?
3. This is why you have professional advisors on board. Your Nutritionist should be in a position to help you decide what the best options are at any given point. He will decide what to include in your various rations and thus should be a key player in determining what changes need to be made. He should also be well aware of what current prices are on both roughages and commodities.
4. If an item becomes less available on the open market, is it something you can grow? In 2008, I saw corn grown in places that I did not think you could get grass to grow. Indeed, necessity is the mother of invention…

Action Items:

1. Where do we begin? Develop a plan for what you expect your needs to be, what your potential sources might be for that production, and what you can do to keep your plan on track and don’t be afraid to “think outside the box” a little. Set up a time table for various action steps such as acquisition of your needed seed & fertilizer, ground preparation, and any additional labor you may need to plan for. Think about any factors that could turn against you and develop a contingency plan for dealing with them.
2. Develop a plan to monitor your progress on each and every step of your process. Be sure to include your Crop Advisors and Nutritionist in this process. Having an extra set of eyes (or two) can prove very beneficial in staying on track. Include a Variance Analysis Chart in your system to make sure that you know when you are behind schedule or over your budget. When these incidents occur, you want to know it as soon as possible so you can get it corrected quickly. As I have stated previously, knowing where you stand on each expense area compared to your budget and on timing compared to your original plan will keep your operation moving forward in a positive manner. The key is to know what is really occurring in your business.

Financial Tips for Success

By this time, you should have completed your 3/31/10 Herd & Feed Inventory position report. It is helpful to set a date to complete each of the Inventories that are required quarterly. Again, if you need a format for your Inventory Position Report, simply go our “Membership Area Files” on the “Success Tools” page to download an Excel file located there for such purposes. Why? This may sound repetitious. However, I believe it is worthy of being reviewed again.

a.)    Remember, your bank likely requires you to provide them with just such a position report. If not, they should. Regardless, giving them one will keep them and their auditors out of trouble by showing that you are in compliance in terms of Loan to Values (e.g. Less than 65% on Herd and Less than 100% on Feed).

b.)    Your CPA will, undoubtedly, need this same information to complete your year end Financial Statements. It is necessary for him or her to have these numbers to generate an accrual set of statements. There is no other way!

c.)    Finally, you should also be interested in this information, because it tells you a lot about how you are running your business. If you have a higher feed loan balance than what you have in inventory, it shows that you are probably not cash flowing. If your cash flow is short (as it has been for most dairymen in 2009), you need to find the extra dollars needed somewhere. The only two sources I know of include a personal cash injection from you or a good friend or a draw on your feed line of credit. Of course, for most of us, this is the more likely source of funds. Thus, as you use up your feed inventory, and particularly if you can’t replenish it with new feed, your LTV % will start to exceed 100%. The best way to avoid this calamity is to always manage your LTV very closely. If you measure it often, you will be in a better position to facilitate this.

Management Team Meetings (MTM) Future Topics:

As a follow-up to our prior discussion on Management Team Meetings, I suggest that you include the following items at every meeting:

1.)    Herd Management Issues

2.)    Herd Health Update & Concerns

3.)    Herd Reproductive Performance

4.)    Nutrition Update

5.)    Financial Review, including what is happening within the dairy industry.

6.)    Additionally, be certain to begin collecting the information that your banker will need to complete your annual renewal of your lines of credit for 2010-2011. As we will discuss next month, loan renewals will undoubtedly be more challenging this year as a result of the industry downturn we have experienced the past 15 months. Thus, you will need to be very clear about what you wish to accomplish through your loan renewal and how you plan to cash flow in 2010. All lenders will be under closer scrutiny from regulators going forward. Thus, be prepared to explain why it makes perfect sense for your loan officer to complete your renewal on time. Show them your step-by-step “Success Plan.”

Monthly Reminders – W.I.N.

(What’s Important Now?)

Are there any significant challenges that you are currently facing as you approach your annual loan renewal? Can your Management Team assist you with them and/or help you to find solutions? If so, be certain to include it in your MTM list of topics.

Finally, with the recent upturn in cheese and butter prices, as well as the expected higher milk prices that may be ahead for us in 2010, many producers will lose sight of the factors that can greatly impact their bottom line. However, do not fall for the false sense of security that these temporary price spikes can deliver. Regardless of what milk prices are currently doing, you will want to focus on your overall margin, i.e. what is left at the bottom line when all your expenses are paid. That margin is what matters more than anything else, including how high per cwt your milk price was.

Every suggestion in this issue of The Business Confidence Maximizer^TM is intended to keep you on the leading edge of your financial relationships. Remember, stay ahead of the game and deal with any new hurdles you may face. Always focus on your overall margin and the plan that will get you to the finish line.

“Plan for the future or you will have no future.”

Jim Taylor, Futurist and Business Management Expert