Pathways For Managing Your Cost of Production · buddy. A great leader sets the course for the...

Pathways For Managing Your Cost of ProductionPADairySummit– February5,2020

Presentedby:MikeHosterman,AgBusinessConsultant

IfmanagingCOPwasonlyaseasyas,cowscaringforthemselves,orsittingatthetoplookingdown?

Net COP vs. Breakeven 2differentconceptsthatneedtobeunderstood

Costtocashflow:• usesprincipalpayments

Breakevenprice

Costtomaintainnetworth:• usesdepreciation

CostofProduction(COP)

Managing Your COP

• Leadership• Planningprocess• SMARTgoals/KPIs• Advisoryteam• Benchmark• Manage

Mostimportantthing:

KnowyourCostofProduction

Leadership -- Success

Thesuccessofyourcompanyiscontingentonyoubeingastrong,effectiveleader.Thisdoesnotmeanyouneedtobeanauthoritarian,butyoualsoshouldn’tbeeveryone’sbuddy.Agreatleadersetsthecourseforthecompany,communicatesitconstantlyandinspirestheteamtogettothenextlevel.

Plan

ImplementEvaluate

Adjust

Planning process Planning:

Helpsusknow

Helpsusadjust

Keepsusontrack

Providesdirection

Businessplan,Mission,Vision,Budgets,CapExplan,Production

plan,Riskmanagementplan,&more

Set Goals & Use KPIs to monitor

• GoalsshouldbeSMART:• Specific,Measurable,Attainable,Realistic/Relevant,&Timely

• Definewhoisresponsiblewithatimeline• Determinethekeynumberstomonitor• DevelopyourKPIsheettotrackregularly

Use an Advisory team

• Advisorsbringotherideas• New/Additionalsetofeyes• Specialistsintheirareaofexpertise• CanhelpmonitorKPIs• Keepallfocused

Benchmark

•Whatprogressareyoumaking•Whatareyourcosts• ComparetotheKPIs

• Againstyourself– Better,Worse,Statusquo• Againstothers– Better,Average,Worse• Moredetailsavailablewheninenrolledinabenchmarkprogram

What do Top producers do to be profitable?

• Controlthecontrollable• Haveapositiveattitude• It’sabusiness• Nomagicsolution

TheyManage

Many tools available to calculate COP

• AgChoiceconsultantshave:• Benchmarkprogram,Dairyprofitanalyzer,Budgetingtools

• Otherconsultantscanhelp• Extension• On-linetools• CDEfundsforTeams&DDCs

• CalculatingCOPisthe#1thingtomanageCOP• Cannotmanagewhatyoudon’tknow

14

Contactinformation:MichaelHosterman• [email protected]• 717-263-3315x4107• 717-215-3179(cell)• 109FarmCreditDrive,Chambersburg,PA17202

Presented By:

PathwaysForManagingYour

CostofProduction

1. BusinessPlan2. TakeCareoftheCows3. MiddleManagerTeam4. CapitalEfficiency5. InformationSystems6. ContinuousImprovement7. MarketingPlan

COPManagementComponents781. KnowYourCostofProduction

BusinessPlanning Thelackof

effectivestrategicplanningisoneofthemostlimitingsuccessfactorsinmany,ifnotmostdairyoperationsintheU.S.

Averagebu

sinessp

lann

ing

Greatb

usinessp

lann

ing

Businessplanningisnot aboutthefinishedproduct…

…becausetheplanisnever“finished.”

Businessplanningisallaboutperfectingtheprocess.

Takecareofthecows

• ForageQuality• CowComfort• TransitionPeriod• Reproduction• MilkQuality• TakeCareofPeople– CorrectProtocols,Consistently

MiddleManagement• Youcan’tdoitallyourself• Mustcreatetimetoworkfromdesk,notalwayswithyour

hands• Verydifficult(ifnotimpossible)tomanageandcoach

employeestowardconsistentexecutionofcorrectSOP’swhennooneismonitoringresultsandreinforcingexpectations

• EffectiveMMisasignificantwatershedmomentforevolvingbusinesses

• DidImentionthatyoucan’tdoitallyourself?

CapitalEfficiency

DairyInvestment/Cow

AssetTORatioDebt

Service/Cow Debt/Cow

ROA

NFI

Continuedconsolidation

Producersforwardintegratingintoprocessing

Non-GMO,VFD,Sustainability,Traceability,AnimalWell-Being

Automation/Robotics

BigData

BigData

Thefirstkeytocreatinggreaterprofitabilityinahighlysustainablebusinessmodelistoidentifyareasofgreatestinefficiency.

Developacultureofinformation

ContinuousImprovement

• Setexpectationsforexcellence• Buildacultureofproactivemanagement• Bechooseyinselectingadvisors• Constantprocessofidentifyingbestnextrockstoturnover• NEVER,EVERbeSATISFIED

ForageQualityLowestStave=MaximumFill

ThisisDairy

Farming

UdderHealth

BunkManagement

FixedCosts

FreeStallCondition

Liquidity

Not

Marketing/RiskManagementPlan

Why?

WeatherUS $ Exchange Rate

Interest RatesSupply

DemandSpeculators

Why? Market Factors

Feed PricesVolatility

Devote 15 Minutes Per

Week Toward

Managing Margin

Windows of Opportunity

PathwaysForManagingYourCostofProduction

PADairySummitFebruary5,2020

TimBeckDairyBusinessManagementEducator

PennStateExtension

Overview

• Key Strategic Planning Issues• How do Breakeven Costs Differ?

o Dairy benchmark data• How does the Cropping program impact

breakeven cost?• How does the Heifer management program

impact breakeven cost?

KeyStrategicPlanningIssues

Whatwillimprovemyfarm’ssituation?

Cash Flow “Mechanics”

8,176,000

MilkComponentsMilkQualityRiskManagement

CowFlow:• ReproductiveMgt.• CullRate• HeiferProgram

ForageQualityForageInventory/CroppingProgramFeedingManagementRationFormulationCowComfortReproductiveMgt.

MacroIssues

MicroIssues

Macro orMicro

Problem(s)?

Where should I focus for my farm?

Macro Problem Example

Determiningmilkincomeneeded

DairyEnterprise

Only PerCow "MacroFix"

Numberofmilkingcows 125 250

Expenses:Directcosts $152,124 1,217$ $304,250 1,217$Overheadcosts $207,391 1,659$ $375,000 1,500$Familylivingexpense $65,000 520$ $65,000 260$Taxes $0 $0 -$Loanpayments(principal+Interest) $45,557 364$ $100,000 400$TotalfeedcostHome-raised&purchased) $365,318 2,923$ $550,000 2,200$

Totaloutflow $835,390 6,683$ $1,394,250 5,577$Non-MilkIncome $83,539 668$ $167,000 668$

Minusnon-milkincome $751,851 6,015$ $1,227,250 4,909$

Averagemilkprice $17.00 $17.00Minimumpoundsofmilkshipped/year 4,422,651 7,219,118Averageproduction,lbs/day 96.93 79.11


Micro Problem Example

Determiningmilkincomeneeded

DairyEnterprise

Only PerCow "MicroFix"

Numberofmilkingcows 270 270

Expenses:Directcosts $245,830 910$ $245,830 910$Overheadcosts $459,391 1,701$ $459,391 1,701$Familylivingexpense $70,000 259$ $70,000 259$Taxes $0 $0 -$Loanpayments(principal+Interest) $84,854 314$ $84,854 314$TotalfeedcostHome-raised&purchased) $551,153 2,041$ $513,000 1,900$

Totaloutflow $1,411,228 5,227$ $1,373,075 5,085$Non-MilkIncome $220,250 816$ $220,250 816$

Minusnon-milkincome $1,190,978 4,411$ $1,152,825 4,270$



BreakevenCostToolsHowdoIcalculateand

monitormybreakevencost?

Breakeven Cost

Howdobreakeven

costsdiffer?

Whatistherangeofdifferenceacrossfarmsandwhatitemsreallymatter?

2016 Dairy Breakeven Summary

DairyEnterpriseperCow: <$16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 Average

TotalInflow/Cow/Year $4,461 $4,350 $4,305 $4,425 $4,320 $4,311 $4,361

TotalFeed($/Cow/Year) $1,695 $2,114 $2,180 $2,359 $2,344 $2,525 $2,148

DairyExpenses $789 $780 $808 $797 $916 $964 $828

Overhead Expenses $711 $688 $714 $774 $989 $966 $775

OwnerDraw $218 $286 $326 $333 $254 $408 $297

LoanPayments $498 $489 $525 $638 $540 $785 $555

ExpensesOtherthanFeed $2,216 $2,244 $2,372 $2,542 $2,700 $3,123 $2,456

TotalInflow– TotalOutflow $549 $(8) $(247) $(476) $(724) $(1,337) $(243)

(104 farms)

2016 Dairy Breakeven Summary

DairyEnterpriseperCow: <$16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 Average

GrossMilkPriceFarmBreakeven $14.67 $17.27 $18.48 $19.44 $20.89 $24.03 $18.48

IOFCBreakeven $6.96 $7.44 $7.62 $8.46 $8.73$10.09 $7.96

TotalInflow- TotalOutflow $549 $(8) $(247) $(476) $(724) $(1,337) $(243)

TotalFeed($/Cow/Year) $1,695 $2,114 $2,180 $2,359 $2,344 $2,525 $2,148

(104 farms)

Whole Farm compared to Dairy Enterprise

CropBenchmark

DataHowdocropproduction

costsimpactdairybreakevencost?

Project Farm Demographics

Metric 2016 2017 Total

Number of Farms 24 26 50

Total # Cows 7,974 8,385 16,359

Total Milk Sold (lbs) 195,801,178 206,722,139 402,523,317

# acres farmed 12,879 14,323 27,202

# acres double cropped 5,781 5,995 11,736

# acres corn silage 5,675 5,553 11,228

# acres small grain silage 4,731 4,736 9,467

Corn Silage Enterprise Analysis

Low profit Medium profit High profit

Number of Farms 16 17 17

Acres, average 212 306 152

Yield per acre (as-fed tons) 15.25 19.83 21.60

Cost per ton, $ 40.51 31.43 22.58

Cost per acre, $ 617.78 623.31 487.65

Cornsilageenterpriseanalysiscombined foryears2016and2017andsortedbyreturnoverlaborandmanagement.

Average Total Feed Costs

Feed Costs

High Low Average

Total feed costs/cow/year (home-raised and purchased) $3,208 $1,683 $2,295

Milk income and cattle sales/cow/year $5,894 $3,361 $4,637

Feed costs/milk income and cattle sales 78% 33.5% 50%

Averagetotalfeedcostsrepresenting2016and2017fromtwenty-fivedairyoperationsusingFINPACK®

Dairy Enterprise Analysis

Values 1-Low 2-Med 3-High Average

Milk produced per cow, lbs. 23,116 22,975 25,495 23,955

Milk sold per FTE, lbs. 1,176,820 1,174,076 1,290,832 1,218,380

Milk Income, per cow $4,100 $4,192 $4,537 $4,294

Non-Milk Value, per cow $290 $336 $394 $344

Home Raised Feed, per cow $1,153 $942 $878 $980

Purchased Feed, per cow $1,295 $1,324 $1,323 $1,315

Feed Cost, per cow $2,448 $2,265 $2,201 $2,295

Total Direct Expenses, per cow $3,366 $3,108 $3,086 $3,176

Total Overhead Expenses, per cow $1,815 $1,629 $1,486 $1,630

Labor & Management Charge, per cow $236 $235 $246 $239

Net Return Over Labor and Management, per cow -$1,002 -$430 $116 -$395

Dairy enterprise analysis combined for years 2016 & 2017 grouped by return over labor and management

Monthly Feed Cost and Milk Price

Values 1-Low 2-Med 3-High Average

Milkpermilkcowperday,lbs. 73.7 72.3 79.9 75.9

Energycorrectedmilk/milkcow/day,lbs. 74.7 75.6 81.3 77.7

Milkfat,% 3.7% 3.9% 3.7% 3.8%

Milkprotein,% 3.0% 3.1% 3.0% 3.1%

Costofproductionw/ labor&mgmt.,$/cwt $22.22 $20.25 $17.39 $19.76

Grossmilkprice,$/cwt $18.11 $18.63 $18.24 $18.31

Milkcowfeedcost,$/cwt

Usinghomeraisedcosts $6.65 $7.24 $6.59 $6.80

Usingstandardmonthlymarketcosts $7.98 $7.93 $7.68 $7.84MilkMargin(GrossMilkPrice– FeedCost),$/cwt $11.46 $11.39 $11.65 $11.51

Monthly feed cost and milk price data combined for years 2016 & 2017 grouped by return over labor and management

HeiferCosts

Howdoheifercostseffectdairybreakevencost?

How do Heifer Costs Impact Whole Farm Profitability?

Summary:

• Fix strategic planning issues first• Calculate and monitor breakeven

cost and cost of production regularly

• Carefully study the dairy feed and crop program—enterprise your crops

• Evaluate heifer cost of production

Pathways For Managing Your Cost of Production · buddy. A great leader sets the course for the...

Documents

Transcript of Pathways For Managing Your Cost of Production · buddy. A great leader sets the course for the...