Dairy Excel/Channel: Decision-making for increased profit

I had the privilege last week, of attending the Tri-State Dairy Nutrition Conference in Fort Wayne, Ind.

My sincere thanks to the Ohio State University Department of Animal Sciences and the Northeast District Dairy Excel Team for financial support for the conference.

I do not formulate rations for clientele. However, the conference gave me much food for thought and many ideas for helping dairy producers improve their farms’ profitability and competitiveness. Almost all of the papers and presentations contained suggestions for improving management of feeding programs, dry and transition cow programs and cost control.

One of the most interesting and thought-provoking presentations of the conference was by John Fetrow of the University of Minnesota and Steve Eicker of Valley Ag Software, titled Marginal Thinking: Making Money on a Dairy Farm. These two ‘outside the box’ thinkers talked about the changing dairy industry in the United States and the characteristics of successful dairies. They pointed out that the number of dairy farms in the United States has declined by almost 90 percent since 1965, from almost 1.2 million farms to about 120,000 farms. The reasons for this decline?

* Expansion in milk production capacity by individual farms in order to improve profits. This expansion was accomplished largely by better feeding, better genetics and better management, resulting in oversupply of milk and lower prices.

* Lower prices (relative to cost of production) resulted in loss of unprofitable herds while more profitable herds were willing to continue producing milk at the lower prices. These remaining herds found ways to continue to improve profitability through adoption of new technology and economies of scale.

The most successful dairies (as well as businesses in most other types of manufacturing) fit a very familiar set of characteristics:

* Early, wise adoption of technology

* Economies of scale

* Cost control

* Efficient use of resources

* Good decisions/problem solving

Economies of scale. According to Fetrow and Eicker, as dairies have become larger and more specialized, they have also afforded the management team increased opportunity to shift their time from daily labor to business management.

At the same time, increased size has increased buying power and has allowed management to exert increased leverage with suppliers, resulting in significant cost savings. Increased herd size has also made it possible to spread overhead costs (facilities, equipment, consultant fees, manure management, etc.) over more cows resulting in greater efficiency and reduced costs per cwt.

So far I haven’t told you anything new (if you have been watching recent trends and developments in the dairy industry.) However, producers often ask me how to decide whether to invest in new products and technological developments. These decisions are critical to the cost structure of the business (and, therefore to profitability.)

Planned changes. Good business and problem solving decisions fall into two broad categories:

* Decisions made to directly increase profitability (cutting costs while keeping production constant, or improving product value or quality to get a better price, etc.)

* Decisions made to reduce risk (and in the longer term indirectly improve profit)

Managers make two types of critical errors in deciding whether to use a given product or technology:

Type I Error – Using a product to fix a problem that doesn’t exist.

Sometimes we use things like teat dipping, vaccinations and dry cow treatments to guard against problems that may not always exist. Insurance and biosecurity precautions are other examples.

Most business managers have concluded that the costs of some of these measures are necessary, because the problems they guard against are very common or are catastrophic when they do occur. How do you decide which of these ‘insurance policies’ to invest in?

Type II Error – Concluding that a product is not needed when using it would have solved a problem.

Consultants and salesmen often recommend products to improve productivity of cows. Most managers have had the experience of trying new things only to find they got no response. Managers need better diagnostic tools to evaluate alternatives and prevent Type II errors.

Biggest dent. According to Eicker and Fetrow, “Most dairy farm problems most days don’t matter.” If a pipe has four dents which restrict flow, the way to have the most effect on flow through the pipe is to fix the biggest dent. There would still be three dents in the pipe restricting flow, but fixing the biggest one will have the biggest effect on level of production or profit.

The take-home message is: identify the problems that are having the greatest impact on costs or productivity.

Then figure out things to change to fix the problem. Monitor the results immediately and carefully, until you see the results of the change.

Do not change more than one thing at a time. This allows you to link the change with the results. Each herd of cows is unique. If your herd is deficient in feed dry matter intake, it is unlikely that a new feed additive will have any effect on milk output. Dry matter intake is critical to maximizing milk yield.

If cows are dying or leaving the herd early in lactation, the average cull rate for the herd is not important! You must find and fix the problem that is breaking cows, immediately.

Voluntarily culling cows for low production when you have replacement heifers available to keep the stalls full is making positive progress. Involuntarily culling cows due to fertility problems, mastitis or metabolic problems, etc., can be devastating to the future of the business and must stop if you expect the business to survive.

Get help. If you have trouble prioritizing problems or making management decisions, ask the rest of your management team for input. This includes your veterinarian, accountant/tax preparer, attorney, crop consultant, feed consultant and extension agent.

Don’t forget the valuable input you can get from employees and family members, too.

(The author is an agricultural extension agent in Columbiana County. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)