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Take the farm to the next level

Tom Kriegl, University of Wisconsin Extension and Center for Dairy Profitability agricultural economist, says if a family is realistic, they can usually figure out within 10 or 15 minutes where their farming operation falls on the profitability chart.

If you have read over the profitability chart and determined your farm is not in the top three levels, you’re not alone.

Key Points

• Tom Kriegl, Center for Dairy Profitability, has developed a profitability scale.

• Farmers can gauge where their farm businesses fit on this scale.

• Most Wisconsin dairy farms had a tough year in 2009.

“Levels 8 to 10 should be the goal [especially when entering the farm business], although few farms consistently achieve levels 9 or 10,” Kriegl says.

“We didn’t have very many Level 8 or Level 9 dairy farmers in 2009, and it doesn’t look like we’ll have a lot in 2010,” he notes.

Further analysis

“Many farms move between levels 5, 6, 7 and 8 from year to year, with variations in weather, price and other factors,” Kriegl says. “But most farms do have a level at which they typically operate more than at any other level. The future in the dairy industry is not bright for anyone who spent much time at Level 6 or lower in 2007 or 2008, because they will likely be lower in bad years.”

The more farmers relax their standard of profitability below economic profit (Level 10), the greater the risk they assume and the easier it is to fall to the next level. The lower the level of profitability, the faster the business and family can move in the wrong direction.

“Those who find themselves at Level 6 or lower owe it to themselves and their family to seek financial advice soon. Of course, farm families above Level 6 can also benefit from financial advice, and often do,” Kriegl says.

At Level 5 or lower, improvement is difficult. “Unfortunately, transitioning out of farming while maintaining equity may be a more realistic goal for those who are frequently at Level 5 or below,” he says.

Kriegl says if your farm is at one of the exit levels, you may not need to sell everything. “Maybe they just need to sell the cows and machinery and rent the farm out. Rent values are fairly attractive, and if one or both spouses can find a job — that’s a big ‘if’ today — maybe it will work out.”

Many farm families have a number of non-business goals that interfere with maximizing profitability. This isn’t necessarily bad, but too often the level of profitability that farm families are willing to accept places them under great risk, not only of falling short of business goals, but also of falling short of personal goals of improved family living and security. According to Kriegl, financial analysis can help farm families understand the price they pay for the choices they make.

“When times are tough — when commodity prices are low, when there is drought or a shortage of feed, for example — farmers often ask: ‘What are the most profitable practices under these conditions?’ The answer usually disappoints those who ask it, because practices that maximize profitability when times are good are the same practices that help maximize profits [or in many cases, minimize losses] when times are tough,” he explains.

“I think this surprises people because when times are good, one can achieve a satisfactory profit level without using all of the profit-maximizing practices,” Kriegl says. “When times are good and profit margins are generous, people may become complacent and adopt practices that seem convenient or appealing even though the practices reduce profitability. When these practices become routine, it is easy to think of these less-profitable practices as essential.”

It’s also important to recognize that the components of a practice that contributes to profitability can change.

“For example, feeding the least cost balanced ration is a practice that helps maximize profits or minimize losses under all conditions except one: when revenue fails to equal or exceed variable cost,” Kriegl says. “However, the components of the least cost balanced ration can vary radically as prices of the ingredients and the product change.

“We must also recognize that tools that maximize profit can be underused. For example, feed testing, milk testing, soil testing, and recordkeeping and analysis are all tools that can help maximize profits. Yet, some managers pay for these tools but ignore the information these tools provide. Misusing or not using such tools will actually detract from profitability.”

The practices and tools that contribute to profitability are similar in both good economic times and bad, he says. However, the way managers implement these practices and tools may change.

Timing is important

Kriegl says timing greatly influences financial success. “If you bought your farm in the 1960s or 1990, you had a greater chance of being successful than if you bought in 1980 or in 2008,” he notes.

“Most farmers couldn’t win in 2009. Milk prices were below the average cost of production. Without daily profitability, liquidity quickly evaporated, requiring farmers to use solvency [equity], forcing them lower on the profitability scale,” Kriegl adds. “A lot of equity was eroded on dairy farms in 2009. The dairy farms whose timing allowed them to begin 2009 with a lot of equity and little debt were more able to weather the storm.”

Make adjustments that can help maximize your farm’s profitability

To maximize profitability, Tom Kriegl of the University of Wisconsin Center for Dairy Profitability says managers must pay attention to details and make adjustments to farm practices to fit their circumstances. No two farms are the same. Here is a list of adjustments:

• Analyze, measure, test and monitor. You can’t manage what you can’t measure.

• Review all of your practices: financial, production, etc.

• Return to the basics — the practices that serve best in most conditions.

• Focus on input-output relationships.

• Pay attention to details.

• Eliminate waste wherever you can, whether it is reducing feed spoilage or avoiding spilling manure on the road where it does no good.

• Monitor your cost of production on a regular basis. On many farms, this should be done monthly.

• Focus on the controllable larger expense items first. Even among dairy farms that raise most of their feed, purchased feed is usually the largest cost item. Other cost items that rank high for most dairy systems in most years include depreciation, labor, repairs and interest. When costs are categorized in a different way, raising or buying replacement heifers is also a very large cost. The same is true for all costs associated with raising feed. Don’t focus too much on the smaller costs without having these larger costs under control.

• Defer or pass up capital investments unless they are really needed now. However, if your debt is low, you intend to farm for several years, and you have cash reserves or a good credit rating, you might find bargains for capital items and interest rates. Even then, limit capital purchases to items that can get you closer to profitability (Level 10). An item like a low-cost, labor-efficient milking parlor could fit into the “need” category even now.

• It is appropriate to time capital investments for tax management purposes, but few if any capital investments can be justified on tax benefits alone.

• Make sure your debt is productive debt — debt that supports investments that will pay for themselves in a reasonable time frame.

• Check opportunities to refinance for lower interest rates, but make sure refinancing costs don’t nullify the reduced interest rate. If refinancing converts your interest rate from fixed to variable, be aware of what that means.

• While one needs to survive the short run to have a long run, don’t lose sight of the long run.

• While many farm families routinely minimize family living expenses, that’s not the case for all families. Consequently, 2009 was (and 2010 is) a good year to reduce or defer large discretionary family living expenses such as new cars, houses, etc.

• For more information, call your county Extension agent, tech school ag instructor, or the Department of Agriculture, Trade and Consumer Protection Farm Center at 800-942-2474. Or, call Tom Kriegl at the Center for Dairy Profitability at 608-263-2685, or e-mail

This article published in the May, 2010 edition of WISCONSIN AGRICULTURIST.

All rights reserved. Copyright Farm Progress Cos. 2010.