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February 6, 2020

Key To Profitability Is Continual Improvement

Top Story  |   |  By: Dairy Talk

The formula for profitability never changes, says Jason Karszes, a dairy farm management specialist with Cornell University.

Profit, he says, equals volume times price less cost divided by investment.

In other words, for profit to grow you need:

• Higher volume, i.e. more units.

• Higher price per unit.

• Lower cost per unit.

• Lower investment per unit.

The trick, of course, is to achieve all or any of the above. And in a volatile business environment, constantly buffeted by world markets, changing weather and climate, rising costs, labor challenges and unpredictable political leadership, it sometimes seems impossible.

And yet, the top tier of dairy producers are able to maximize profits in good years and minimize losses in bad years, says Karszes. High production and large herd size are part of it. But they are by no means a guarantee. It’s more about the efficient management of the resources you have and continual, constant improvement, he says.

Records from more than 100 New York dairy farms over the past decade show that herds in the top 20% typically produce a little more milk per cow than those in the lower 80%. But it’s only about 3% more milk, he says.

“It gets down to making milk versus buying milk,” he says. And that gets back to the basics of growing, harvesting, storing and feeding high quality forage. Some herds might have double the grain cost than others to produce the same amount of milk simply because their forage is poor.

Even with labor costs now exceeding $40,000 per worker per year in the Northeast (based on 2,760 of labor hours per worker per year), the key is not necessarily wage rate per hour and maybe not even labor costs per hundredweight. (The top 20% of dairy farms in the Northeast are actually paying 3% more for labor per hundredweight of milk sold.)

But these top herds are selling more milk per worker and more milk per cow, says Karszes. The real key is labor effectiveness, he says. “How good a job are our people doing? How good a job are they at impacting output? And how good a job are they at impacting costs?” he says.

These are the same questions dairy managers need to be asking of their own operation’s performance:

• Are we getting better?

• Are we focusing on the right things?

• What is holding us back?

• What is new that we should be doing ?

• Where is profit growth going to come in the future?

In good years, high-profit farms generate profits, focus on operations, don’t get sloppy or wasteful, build working capital, pay down debt and position themselves for poor years, says Karszes.

In poor years, high-profit farms focus on operations and use numbers to make decisions. They try to figure out if any losses are coming from short- or long-term issues, and then position themselves to fix those as soon as they can. And they take advantage of opportunities, perhaps purchasing equipment or land that might be lower priced because of the down year. They position their businesses to take advantage when good times resume.

“High-profit farms aren’t standing still very long,” says Karszes. “They don’t change every year, but they are continually looking for the next opportunity.”