Do you ever feel like your operation needs some fresh thinking? I do. That’s precisely why I read so many different books and publications…to get great new ideas. It helps to build exciting new challenges into our daily activities. Maybe it’s time to change our thinking in the Dairy Industry, too!! Author Seth Godin, in his book The Big Moo, explained his thoughts on organizations. This can include your business, your bank, your vendors, and even your milk cooperative. He states: “There are two kinds of organizations. One kind likes to be on the cutting edge, to do what hasn’t been done before, to embrace the new. The other kind fears that, and holds back to allow someone else to go first. The United Way was facing tough times because they were afraid to change. The Saddleback Church in California was doing wonderfully (10,000 percent growth over several years) because they love to change. Companies that are good at being edgy will always find a way to thrive. The sure way to fail, it seems, is to attempt to compromise that affinity for edginess for the mass market. It’s harder than it looks. But what if your organization embraces its stuckness? What’s it going to take for you to start changing? What do you do when the market is moving away from you, not toward you? It seems to me that if you wait too long, it’ll be too late to do much of anything at all. Instead, recognize that change is coming, that the reality you operate in is dying out, and start practicing how to do the next big thing. Betting on change is always the safest bet available.” The lesson here is quite clear. We all need to be open to change. The outcome for businesses that refuse to change is equally obvious: They’re going to get crushed! I’d like to conclude with one of my favorite quotes from the Successories Corporation in Chicago, Illinois: “Our destiny is shaped by our thoughts and our actions. We cannot direct the wind but we can adjust the sails.” So, always be open to change and new ways to operate! Also, be sure to watch for my upcoming program in early 2017 entitled Six Hours to Your Best Year Ever!

When I meet with my Clients, I often remember reading an article in Inc. magazine written by Adam Hanft that was entitled “The Risk of Doing Nothing.” I thought the article had some themes that were particularly fitting for the dairy industry. I realize that it is often more comfortable to do nothing when so many items look bleak.  However, doing nothing can often put you at greater risk than boldly moving forward with what looks like the correct option.  Look what happened to Montgomery Wards as they stood by and watched Wal-Mart become, not only the largest retailer around, but also one of the largest companies of any kind.  As I write this blog, I am comfortably seated at my favorite café owned by a company called The Roasterie in Kansas City, Missouri. While they appear to be thriving, think about the comparison between this company and Folgers, who also had a large operation here at one time. Wow! The key is to break the “Continuum of Paralysis.”  As Adam Hanft so accurately states, “No one decision to defer action ever looks all that monumental at the time.”  However, over time, look out!  The sad part is that indecision rarely punishes current management, but it often “mortgages the future.”  Thus, for those of you with another generation potentially coming into your business, can you do better for them? Here are some things to do to get through the current situation:  

• Do not misinterpret the industry situation of the last two years as an excuse to keep your finger on the Hold Button.

 

• Rather, look at your Costs/cwt, your Volume of milk produced, Labor Utilization, and how you might spread your Fixed Costs out even further.

 

• Just as important – Ask yourself, “Is there a better way we could do this…?” Often, your Management Team can offer you some suggestions.  Recently, one of my clients made some simple changes in their feeding program and also changed the age at which their heifers were being bred.  These adjustments boosted production nearly five pounds per cow per day and reduced their heifer raising costs.  This has been very helpful to their bottom line!

 

• Along that same line, be open to new ideas. We must overcome the ongoing temptation to think that it is more risky to try new ways of completing tasks than it is to keep everything unchanged.  In this dairy industry environment, doing nothing can get you run over!

 

• Put together an ACTION AUDIT and see how well you stack up against the rest of the industry. Are you currently doing everything you can to stay competitive?  Are you taking the time to complete and measure the small tasks that can have a large impact on your operation?  This is not just about costs per cwt.  It is also about how your operation is faring in terms of Cows Milked per Hour, Labor Efficiency (cwt shipped/employee), Heifer Efficiency (e.g. age at first calving) and many other items.

 

• One other thought as you compare yourself to the industry. You will likely notice that you are doing better than others in terms of costs/cwt in some areas and not as well as other producers on other items.  Sometimes your facility can restrain your performance in comparison to a new operation, but how are you doing compared to your results five years ago? Are you doing better or worse?

  To summarize, don’t just resist change.  Remember that the best time to plant an oak tree was 20 years ago, but the second best time is TODAY!  Make an appointment with greater levels of success.  As one of my favorite motivational speakers, Les Brown, said about making improvements in your business, “You gotta be hungry!”  Consider the possibilities of his statement as you continually strive for excellence. Remember, it’s your business!

Do you ever have that feeling that your neighbors or brother-in-law seem to be doing better than you in certain areas of their operation? I think everyone has felt that at some point. The more significant question, however, assuming that might be partly true is: “Why?” What is their advantage over the way you normally operate? One item that I have found very helpful to people in assisting them to reach their highest levels of success is the implementation of Management Team Meetings. This is a concept that I introduced to my clients over 15 years ago. As we have seen during that same time period, these sessions have guided many of our clients to achieve items that, had we asked them before, they would not have believed possible. How do Management Team Meetings work? The concept revolves around the benefits of solid communication, positive teamwork and accountability. When we meet as a group, usually every other month, we have a written agenda that we try to follow as closely as possible. The benefits of doing this are two-fold. First, it makes sure that we do not skip over any important topics we need to discuss. Second, it keeps us from getting off on tangents that almost always seem to revolve around insignificant items. In the “Tools” section of our website, www.success-strategies.com, I have included a WORD file for your consideration and use. You may rename this file however you wish to and then use it for your own Management Team Meetings. The primary benefit of keeping a set of written minutes during each meeting is that you create accountability within your Management Team. At the end of each meeting, I send each and every Team Member a copy of the minutes (usually two pages). This is sound because it allows everyone to know what items are supposed to happen prior to our next meeting (e.g. changes in the breeding program, improved heat detection, getting some help on milking procedures or milk quality issues). It is also useful for their review prior to the next meeting. Additionally, as the facilitator of these meetings, you will find these minutes very useful in setting your agenda for the next meeting and to make sure that you cover all the necessary items to keep you moving forward in your operation. For example, if you have discussed the need for improved heat detection at your last meeting and then established a set of steps to take to make improvement, having this in the minutes will remind you to revisit the current situation to see if you are indeed seeing positive results. Otherwise, it can end up on the “back burner” and not really get resolved. Of course, in the case of heat detection or other key management issues, this could spell disaster down the road. Who is involved in Management Team Meetings? This is a decision that you need to make early in the process. Here are a couple guidelines for you to consider:

• You will want to include anyone who is a “key player” in your operation. Normally, this will include your Veterinarian, Nutritionist, Herd Manager, your Financial Advisor if you use one, your Banker if you wish and you as the owner.
• Include only people who have something positive to contribute. These meetings are designed to improve your business, not to point fingers at each other and determine who is at fault in an area that needs improvement. The real reason for the meeting is to make sure that you are achieving everything you possibly can. My experience has been that participants who are argumentative or critical of others do not really add to the success of the Team.
• When you hold these meetings, you can reach a point of saturation in terms of participation. In other words, you can get to the point where you have too many people in attendance. This will tend to impede your progress because it will tend to reduce the level of open dialogue between your Team members. Thus, we typically do not include anyone who is selling a product. For example, your semen salesman may be a great guy and also very intelligent. However, do you actually need him at these meetings? The same goes for feed salesmen & pharmaceutical representatives. Your Nutritionist and Vet can cover their areas of expertise sufficiently.

Why do they lead to higher levels of success? These meetings will lead to greater levels of success in your business because they generate greater:

• Accountability
• Teamwork
• Common Goals
• A reason for Celebrating Success

Management Team Meetings (MTM) Future Topics: If you want to maximize the success of your MTM, I suggest that you include the following items at every meeting:

• Herd Management Issues

• Herd Health Update & Concerns

• Herd Reproductive Performance

• Nutrition Update

• Financial Review, including what is happening within the dairy industry. This discussion can also cover what challenges you are having and how they potentially can be overcome. You should also include your team of dairy professionals in discussions of potential Capital Expenditures, i.e. what items do you need to acquire of build in the next 12 months? A conversation about their potential payback and what your Vet and Nutritionist have seen other places may prove very helpful as well.

Monthly Reminders – W.I.N.     (What’s Important Now?) I believe it is important to position yourself to successfully handle obstacles and overcome business hurdles. Let’s say you are facing a difficult business challenge. Wow!! That sounds like a call to action. I have observed that in this type of situation people often do not want to face reality, as if it will change on its own or the problem will eventually go away. The odds of that occurring are remote. How can you deal with change? How can you turn this into a positive outcome? Here is one method that I’ve used successfully with clients and seems to work even better with tougher problems:

1. Surround yourself with your entire team. Yes, multiple brains works better here…
2. Develop a chart on paper or on a marker board. At the top, list the problem to be overcome or the goal that you want to reach.
3. Work as a group to complete a “brain drain” where every possible idea that the team comes up with gets written on the board. Do not evaluate them, judge them or criticize them at this point. Just write them down with no judgments or laughter (later, it could turn out to be the best response…)
4. Additionally, each member of the team needs to participate. This is not a passive activity where some of us can just watch. We can only capture the best ideas if we get them all written down.
5. Finally, after every idea that you can think of is written down, start to evaluate the pros and cons of each idea. However, this should not begin until you have a minimum of 20 ideas listed. I know what you are thinking – “You are kidding, John!” The fact is – I am not joking. This is the only way you can be assured of not overlooking a great option.

To give you an example of how this works, I was working with a client whose facility had become overcrowded. After listing 20 possible options, we concluded that he could reduce his herd, lower his debt levels and improve efficiencies or he could change his facility, which would add to his debt levels. Another option that surfaced was that he could diversify his operations. Eventually, he decided to decrease his herd size and diversify into some tree crops, and this is working out very well. This process of brainstorming for all possible options can be used to work through a crisis. It can also be utilized on a regular basis for ongoing business decisions, as well. Why not try it in your operation today?

People love to be offered options in life, up to a certain point. Unfortunately, if they are faced with too many options or ones that they do not understand, the choices available to them become overwhelming. Actually, that may describe the current situation with Milk Options. There are so many options available that the choices can, indeed, be confusing. Several years ago, I wrote an article for the Western Dairy Business publication centered upon what I felt were the “Top 10” steps to take in preparation for the coming year. One of the most critical of these steps was the development of a Milk Marketing Plan.  This is an absolute must today, particularly with the increasing amount of volatility and fluctuation in milk prices. Understanding your break-even price level (check out: www.financematters.solutions today) and knowing how to position your business to achieve that price will continue to be essential to your financial future. Get involved in your own marketing plan by working with an options broker that you trust. He or she can be invaluable to your business. About the same time, I also had an opportunity to moderate a panel of Agricultural Lenders in a discussion on the availability of financing. One of the recurring themes that seemed to surface was the issue of whether or not a producer should be using milk options, also known as Puts and Calls, in the management of their dairy business. Their response was unanimous. About the same time, I was asked to describe a scenario when I felt it would be smart to make use of a Call Option. When would it be wise to make use of a Put Option? In a moment, I’ll share my response to those two questions as well. However, I feel it is important to consider what all “options” are about. Who, in fact, needs them? The key to successfully using milk options revolves around a task known as “Margin Management.” You may know this as “Risk Management.” Several of our lenders on the panel emphasized how important they felt that was for any borrower. Their explanation covered some of the aspects of how you should use milk options to almost ensure that your margin is more positive. Our lenders also discussed a term called your “Burn Rate.” This is the rate at which you will eliminate your entire Net Worth if you continue to lose money each month. For example, if you milk 2,000 cows that produce 70 pounds per cow per day, you will produce about 42,000 hundredweights in a thirty day month (2,000 X 70 X 30 / 100). If you have a Net Worth of $2,000,000 and are losing $2.00 per cwt, your Burn Rate is about 24 months ($2,000,000 / $84,000). In other words, you could potentially operate for about two years at that rate of loss until you ran out of Equity. Your lender would much prefer that you consider making reductions in your costs or somehow place a “floor” under your milk price prior to that occurring. That is what you can accomplish by using a “Put Option.” The Put places a floor under the price you receive. Puts are all priced using Class 3 Federal prices, which can create some issues in California, Idaho and possibly several other states due to the difference in basis. These states’ systems may be somewhat correlated with the Federal Pricing system. However, they do not match it. By purchasing Put Options through a broker affiliated with the Chicago Mercantile Exchange (CME), you essentially put a floor under your milk receipts/cwt on the portion of your milk you cover. If you purchase a Put Option for $15/cwt milk for June 2010 and the Federal Order Milk price at the end of June lands at $14/cwt, you will still receive the $14/cwt from your Cooperative. However, you will also receive the difference in a separate check from the CME ($1.00/cwt e.g.). If, on the other hand, the market price comes in higher than the level your Put Option is set at, it expires unused, and you only lose the cost of the premium you paid for that Put. This is an extremely simplified example of how Put Options work. You can only purchase these through licensed, qualified brokers, for good reason, but there are many great firms out there for you to access. Why would you use Puts? Let me give you four reasons: 1.) Your loan renewal is coming up, and your banker is worried about your projected profit/cwt. 2.) Your “Burn Rate” is looking rather small. 3.) You are a young producer just getting started and need to be certain that you protect your bottom line. The use of options may help. 4.) You are highly leveraged, either as a result of past losses incurred or due to a recent expansion you’ve undertaken. How about using “Call Options” in your dairy business? These allow you to “buy” milk at the CME (not literally) at a pre-set price. Primarily, I see these used when a milk buyer offers a “Fixed Price Contract” for your milk. If, for example, you agreed to a $15/cwt price with your milk buyer for the next 12 months and during that same time period the Federal Class 3 Milk Price climbed to $18/cwt, you would still only get $15 from the buyer of your milk. What can you do? If you simultaneously have Call Options in place for some level such as $15, they will allow you to buy milk at $15 when it is worth $18/cwt, allowing you to collect the difference from the CME. This information covers only the basics of what you need to know before using Milk Options. However, I think it is important to consider how they might benefit you by smoothing out the highs and lows of the dairy industry. The easy days of managing dairy prices and margins are over. It will be critical to your future that you master the art of margin management, which requires knowing your true cost of production, particularly on feed, with which you can also use options (Hint: See www.financematters.solutions). If you have developed a better system, I hope you succeed greatly with it. However, for most producers, options offer the best insurance against devastating losses. Talk to some brokers and other dairy producers who have actually used them and develop a plan. A number of my Clients used a combination of Options and Fixed Price Contracts with their milk buyers during 2009 & 2015. Several Clients averaged almost $16/cwt for their milk and netted out over $2.00/cwt before their personal draws from the business. This was excellent, but, more importantly, it happened because they’d set themselves up to have more “options!”

Dan Sullivan, founder of The Strategic Coach organization stated that “people do strange things when they have no future.” Since this is undoubtedly true, I have attempted to keep my Clients on the leading edge by providing them with a system for setting regular business objectives and keeping them as far away as possible from the dangers often encountered in their industry. The purpose of this article is to demonstrate a working model for completing this process – one that we can revisit as often as needed.   It might be best to start by answering five basic questions. Why take the time to set these goals and develop a Disaster Agenda^TM? I often hear people refer to the goals they have set for themselves. When they do, they often say that they have them all firmly planted in their head. However, my experience has taught me that this just does not work as well. It is imperative that we get them down on paper since it makes us completely focused in our thinking about what we wish to accomplish. If you try to do this “just in your head,” you will find that it is too easy to get distracted by other issues, and we are all faced with distractions every day. Thus, commit them to writing, and your goals are much more likely to be reached. Even if you write them down and put them in a desk drawer, your subconscious mind will go to work on them.   How do you get started on this process? I believe that corporate America has done a great disservice in this area. During my time in corporate America, I constantly felt inundated with demands on my time. “Do this, do that, achieve the impossible! We know we didn’t provide you with your annual goals until April and they may be high, but you should have been planning for this type of production demand…” and so on. This is crazy! Why not set aside some quiet thinking time to establish new objectives for the next 12 months.   When to complete this is the best part. While it may be a “corporate sin” to set aside work time to do such planning, you will definitely be rewarded with better results. I cherish the two days each fall that I take to get away and set new goals and objectives for my business. Take advantage of this time to move your business forward.   What should your goals center on? Challenge yourself to set goals in areas that you can reasonably expect to make progress. Please note that I did not say “easily” expect to make progress. Your goals need to be challenging and set high enough to keep you excited about reaching them. However, they also need to be achievable. Otherwise, you will get frustrated with them and give up. You do not need that outcome!   I will leave the when and where part of the process up to you. As I stated earlier, I spend two days per year off site (to minimize distractions) planning my next year. Believe me; this really has paid off for my business. I normally complete this process in November of each year. This allows me to review what happened during the prior 10 months of the current year and also look ahead to what I want to accomplish in the next calendar year. I always do this off site, simply because I want to be able to focus on my objectives without any distractions. I believe the elimination of distractions is imperative to the success of this process, but you decide for yourself.   Now, let’s go one step further. I also work with Clients to develop a Disaster Agenda^TM. What is a Disaster Agenda^TM? It is a list of the three worst things that could happen in your business and how you would respond to them. When you complete this process, you accomplish several tasks:  

• You will be better prepared if one of these crises actually does occur.

 

• You are more likely to avoid these crises, due to your increased awareness of their potentially occurring.

 

• If one of these problems, or something similar, does occur, you will have a response or action plan ready to go, yielding a quicker turnaround and saving you both time and money.

  Need some examples? Here are some that I have previously written about. They still make sense today, but think of three that fit your experience and your operation.  

• Environmental Pressure – This is an area that is worthy of some serious review. How will you respond if your dairy business is sued for potential damage to the environment, whether the claim is legitimate or not?  These types of lawsuits are not going away anytime soon!  Litigation is a costly process, particularly when you consider the legal costs and the expenses associated with capital projects “held hostage” in an unfinished state that does not lead to your intended increase in cash flows.  One solution might be to pursue the training that is available from various agencies.  This is time well spent.
• Losing Financial Control – As the number of dairy operations in the US continues to decrease (76,630 in 2001) and average herd size keeps increasing, it is more critical than ever to maintain control over your operation’s finances. Regardless of industry, businesses often run into trouble when they expand in a rapid, uncontrolled manner.  The primary reason is they run out of cash.  One of the best preventative measures against this problem, as covered in prior columns, is to work within the guidelines of an ongoing strategic plan with detailed financial projections.  Another helpful item is to know your costs/hundredweight on a historical basis and for future projections.  Increasing the size of your dairy is no excuse to lose control over costs/cwt.  Visit us at financematters.solutions.
• Inability to locate financing – This has been the case for many producers across the US as they attempt to expand their operations. This trend toward tighter lending standards actually began in late 2000.  In an effort to avoid a credit crunch, some borrowers have accepted excessive short-term financing when they should have focused on additional long-term financing.  Unfortunately, having the wrong loan structure always seems to “rear its ugly head” at the most inopportune times, e.g. during a period of low milk prices.  A potential solution: Grow your business with better financial records to help you maintain a loan structure that yields Debt Service Coverage of at least 1.25 times the level required to make your loan payments.  Having good financial information can go a long way toward avoiding unnecessary challenges in finding financing.
• Loss of your Milk Market – I was visiting with a dairyman who had suffered the loss of his milk market due to a sudden change among the players in his area. It literally cost him in excess of $30,000 monthly for six months before he was able to get the situation under control.  What would you do?  Eventually, he was able to negotiate a better contract with a new buyer of his milk.  However, his losses in the short term were enormous and help remind us of the vulnerability we face as a “price taker.”  This could also occur if your herd was suddenly faced with a major health problem.  These potential cash flow shortfalls further reinforce the need for cash or available credit at all times.
• Sudden Loss of Key Personnel – Whenever a key worker departs, particularly on short notice, it is essential to have a plan in place to cover for them, at least in the short term. These departures clearly illustrate the need for team development and the cross training of personnel at each key position. Attractive benefits, retirement plans, insurance and competitive pay help to avoid this type of crisis.  However, it still pays to have a backup plan in place.

  This list of potential crises is far from exhaustive, but hopefully it will stimulate your thinking as you develop your own “Disaster Agenda^TM.” As Author Jim Taylor stated, “Plan for the future or you will have no future.” It can be crucial to your success levels!