By MEGGIE I. FOSTER
Assistant Editor

INDIANAPOLIS, Ind. — With farm milk prices dipping to the lowly number of $9, it may not be the best time to be milking cows. However, according to an expert from Cornell University, there are still plenty of opportunities for profitability in the dairy biz.

“During a down cycle your business goal should be to minimize the negative loss impact on the business associated with the downturn in markets,” said Jason Karszes, an Extension specialist in the area of applied economics and management at Cornell. “Management of cash is key to accomplish this goal. Cash is king in dairy, you need it to pay the bills.”

And the best way to manage cash, simply, he said, is to bring more in, send less out and borrow more.

While that may sound pretty simple, Karszes said it’s important to move through a series of steps to help determine sources and uses of cash.

“For instance, where are you now, what are your earnings in 2008, what are the trends over the last several years, what could be worked on, what needs to be worked on, can more cash be brought in and can less cash be sent out,” he asked participants during the Indiana Cattle and Forage Symposium on Feb. 28 in Indianapolis. “Also, is there a way to improve profits, if so, should they be done or not, what are the risks if I do it and it doesn’t work and what are the risks if I don’t do it and it does work?”

Another critical key to determining future profitability he said surrounds on-farm investments.

“What investments should be put off, what machinery was scheduled to be replaced this year and what investments should be made, what should I borrow money on and invest, even though I might be looking at 4-6 months of negative cash flow,” added Karszes.

Step two toward gaining new profitability in times of distress is all about budgeting.

“What do things look like within your business with lower prices,” he asked. “What is your cash base, what months may you be short and if you made changes, what would be different.”
During the budgeting process, Karszes urged producers to look at accrual (where you stand today) 2008 numbers and adjust to the average year.

“What things occurred in 2008 that were unusual, one-time expenses are not a normal part of business, what are management changes you might make for 2009,” he said. “And finally … answer the question – what additional cash will be needed to fund operations in 2009.”

Also, determine what the milk price is that returns the business to positive cash flow.

According to University of Illinois dairy specialist Mike Hutjens, on a typical 100-cow dairy in Illinois or Indiana, he estimates that $18 per cwt. is needed to cover general operating costs.

The bad news for producers, the Class III milk price is far from $18. In fact, according to Farm World Dairyline columnist Lee Mielke, farm milk prices have plunged to the lowest level since March 2003, with a federal order Class III benchmark price at $9.31 per cwt., down $1.47 from January, $7.72 below February 2008, and just 49 cents above government support.

However, Karszes said there are sources of cash producers can take advantage of to muddle through the storm in the means of borrowing, selling unused assets, contributed capital and selling utilized assets. “I was talking to a New York dairy farmer the other day who told me he just sold $75,000 of equipment he wasn’t even using,” Karszes added, referring to the sale of unused assets.
In reference to contributed capital, he said, that this occurs when a family chooses to invest in outside sources of capital back into the business.

“It may or may not have expected payout in future years,” Karszes explained. “What return will the family receive for the additional investment.”

As a more drastic step, producers can also sell utilized assets, meaning things that might impact earnings such as replacement heifers, tillable land, equipment or even selling part of the milking herd.

“This generally leads to a fundamental change in how you’re doing business and could also include changes such as no longer growing feed, a switch to grazing or no longer raising heifers,” said Karszes. “This is potentially a decision of last resort, but also can be a decision to improve business, based on business analysis.”

Positioning the farm business is another key to achieving potential profitability. “If you’re going to have another high in the future, you don’t want to jeopardize the ability of the business to capture the highs,” he added. “People in New York say ‘Don’t pull the rug out of underneath the cow.’ Sometimes it can take just one year to recover so don’t jeopardize that.”

Karszes urged dairy farmers to look for opportunities that may present themselves in the form of satellite operations, additional land, barns, management and cattle. “Barns are costing less to build, heifer prices are low – there are opportunities to take advantage of in this type of economy,” he said.

In closing, Karszes said during a low cycle producers should minimize the impact on the business due to the downturn, position the business for the next up cycle and survive to the next up cycle.
“In return, during a high cycle, capture as much profit as possible and utilize that profit to position the business for the next cycle,” he said. “Your long-term goal should always be to maximize profits and support family goals. And to accomplish these two goals over the cycles you have to survive the lows and capture the highs.”