April 11, 2016

Diversify Without Betting the Farm

 |  By: Nate Birt

The soft milk market is prompting many dairy producers to diversify. Yet new endeavors can quickly become sinkholes rather than routes to higher profits without a strong plan and a willingness to lose money at first.

Because dairying is so labor-intensive, producers should stay away from starting side businesses that require more than 1,000 hours of their time each year, says Dave Kohl, a dairy entrepreneur and ag economist at Virgina Tech University. An even safer threshold is 500 hours, he says.

Pursuing a business that demands too much time could hinder your primary milking operation, adds Kohl, who is part-owner of a milk processing, ice cream production and home delivery business.

Think through operations, markets and financing for your new product or service, he says. Hire a facilitator to ask difficult questions and help your team through the process, from goals to marketing. It takes from two to five years to build a brand, Kohl says. During that time, dairy operations need to do cash-flow budgets as well as variance analyses to determine whether revenue is improving or losing traction. “If you start finding you’re not covering your variable costs after a couple of years, you’d probably be better off shutting it down,” he says. Operators shouldn’t forget to factor in the value of their own time and wages.

“Good budgeting and having accurate financials are very critical, and then monitoring it as you go through is extremely important,” Kohl says.