the economics of dairying -...
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The Economics of DairyingInsights into the Global Market
November 7 – 9, 2017Matthew Lange, Dairy Business Consultant
Compeer Financial Dairy Consulting Team
Activity in U.S.• Volatility increasing over last 15
years.• Story behind the story
• Gains from increases in prices are limited by greater decreases in prices.
• Heightened risk of unrecoverable losses.
• Hyper-consolidation.-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
U.S. Dairy Cattle PerformancePerformance 2013 2014 2015 2016 1H 2017Milk Shipped/Lact. Cow/Day 37.06 37.06 37.45 37.19 37.28Milk Shipped/Lact. Cow/Day ECM 38.06 38.15 38.46 38.28 38.36
Base price for milk P/Litre £30.91 £38.35 £27.15 £25.53 £27.66
Marketing gain/loss -£0.14 -£2.03 £0.41 £0.33 -£0.07
Government Payments £0.12 £0.00 -£0.05 -£0.02 £0.00
Component Payments £4.45 £4.86 £3.38 £3.11 £2.83
Total Milk Price £35.34 £41.18 £30.89 £28.95 £30.50
U.S. Cost of ProductionCOP/UK 2013 2014 2015 2016Top 25% 1H 2017Feed Cost P/Litre £21.18 £21.22 £18.25 £16.15 £16.18 £15.26
Labor Cost P/Litre £5.36 £5.93 £5.89 £5.70 £5.12 £5.76
Net Herd Replacement Cost P/Litre £2.23 £1.62 £1.77 £2.35 £2.15 £2.25
Capital Cost P/Litre £3.85 £4.09 £4.09 £4.48 £4.09 £4.43
Other Production Cost P/Litre £3.88 £4.14 £4.07 £3.90 £3.85 £3.50
Overhead Cost P/Litre £11.61 £12.83 £11.96 £11.25 £10.53 £6.22
Less Other Inc. P/Litre -£15.33 -£15.58 -£14.93 -£13.57 -£13.83 -£7.37
Whole Business P/Litre £32.80 £34.24 £31.10 £30.27 £28.11 £30.03
U.S. Financial Performance RatiosRatios 2013 2014 2015 20161H 2017Net Profit / Litre £2.58 £6.68 -£0.19 -£1.27 -£0.45Net Profit / Cow £313.26 £832.18 -£24.53 -£157.98 -£50.07Return on Equity 7.00% 18.80% -0.70% -4.30% -----Owners Equity 52% 57 56 52 -----Working Capital / Cow £637.50 £965.25 £617.25 £303.00 -----Capital Debt Repayment Capacity 151% 253% 91% 61% -----Debt Revenue Ratio 0.62 0.55 0.66 0.81 -----
“In times of turbulence the biggest danger is to act with yesterday’s logic.”
- Peter Drucker
Six Degrees of Separation1. Somatic Cell Counts
• Top third most profitable herds had 196,000 cells/mL while lowest third of profitable herds at SCC of 239,000 cells.
2. Energy-Corrected Milk• Spread between 91lb/cow/day of energy corrected milk versus 72lb/cow/day
for high and low herds, this equates to nearly $1.14/cwt. in more profit.
3. Death Losses• Top 1/3 of herds with lowest death loss were $.86/cwt. more profitable than
lowest 1/3. Target is 4%-5% death loss or better.
Six Degrees of Separation4. Net-Herd Replacement Cost
• NHRC = (# of cows removed from herd * replacement value) – cull value.• Lower culling decreases NHRC loss and increase milk production.
5. Preg. Rates• Great profit with greater preg rates in the neighborhood of $50
more/cow/year.
6. Heifer Survival
Lifetime Value Depends on LongevityProfitability is driven by healthy and genetically capable cows living into the prime of their life, generally 3rd through 5th lactation.
Source: Zoetis
Raising the Right ReplacementsOn average, heifers should have greater genetic merit than cows in traits under selection, but not all heifers are better than the cows already in the herd
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Num
ber o
f Hd
NM$(G)PTA
Cows
Heifers
Heifers with NM$ GPTA below the adult herd average
“You need cash. Cash is like oxygen. When you don’t need it, you don’t notice it. When you do need it, it’s the only thing you think about.”
- Warren Buffet
Create Cash Management Dashboard
1. Checkbook Balance2. Operating Loan/Line
• Current Balance & Availability
3. Payables and Receivables• Total amounts and days past due.
4. Burn Rate• Projected Annual Losses / Working Capital
5. Seasonal Cash Expenses
“The secret of success is to do the common thing uncommonly well.
- John D. Rockefeller Jr.
3M (Margins Matter Most) - IOFC
Case A Case B
£13.40 Feed Cost P/Litre £14.78
£4.80 Feed Cost / Cow £5.74
35.80 Milk Production 38.85
£25.36 Milk Income P/Litre £27.52
£14.36 IOFC £14.38
3M (Margins Matter Most) - IOFC
• Forage Quality • Manage for target quality • Bunker management • Minimize shrink
• Feed Refusal • How much do you
manage for? • Production grouping strategy • Percentage of herd not in the tank
Feed Ratios 2016Feed Cost/Cow/Day £4.88
Forage Cost/Cow/Day £2.28
Non-Forage Cost/Cow/Day £3.35
Milk Inc./Cow/Day £10.76
IOFC / Cow/Day £5.88
Litres Milk / Kilos DM 1.472
Cost P/ Kilo Dry Matter £16.73
3M (Margins Matter Most) - NHRC
• Net herd replacement cost/cwt is the difference between the cost of a replacement heifer and the value of the replaced cull cow represented on a cwt milk basis.
Replacement cost $2.50/cwt. - Cull revenue of $1.10/cwt. Net herd replacement cost is $1.40/cwt.
• Increasing milk production,• Obtaining higher cull revenue, • Reducing death loss, and• Limit < 60 DIM Involuntary Culls
Tactical Measures to Improve Margins
• Usable, Quality Financials.• Negotiate with vendors.• Maximize cash discounts.• Review ration formulations with nutritionist & consultant.• Manage labor, seek retention.
Tactical Measures to Improve Margins
• Movement of dry cows to increase cow numbers.• Reduce excess heifer inventory beyond targets.• Look at leases vs. ownership/repair.• Discuss debt structure with lender/consultant.• Risk management, even if you have never done it or even if you been
there done that.• Maximize existing investments.
“Capital Isn’t scarce, Vision is.”
- Sam Walton
Contact
540 Baldwin Plaza Dr.Baldwin, WI 54002United States
@DevelopingDairy
Matthew G. LangeCompeer Financial
Dairy Consulting Team
Questions ….
Lunch ….