University of Minnesota Extension
www.extension.umn.edu
612-624-1222
Menu Menu

Extension > Agricultural Business Management News > Strategies for managing your farm's profitability

Monday, April 25, 2016

Strategies for managing your farm's profitability

By Betty Berning, Extension Educator

One of the most common questions I receive from dairy farmers is, “What is the price of milk going to do?”  A close runner-up is, “What should I do given the current milk price?”  Finally, in times like this, the question is often, “When will it get better?”

There are no easy answers to any of these questions.  I always joke that I don’t have a crystal ball and I am not omniscient.  And while the price of milk certainly matters, which is revenue, so does a farmer’s cost of production, or expenses.  

First, I’d like to address the question of “What is the price of milk going to do?”  Two things establish a price: supply and demand.  Simply put, if I supply the market with more product than it is demanding, prices fall.  If I produce less than the market demands, my price increases.  Supply and demand are dynamic, which means they can change.  For example, if dairy exports increase, this causes demand for dairy to increase.  Similarly, if there is poor weather in Ireland and feedstuffs are in short supply, milk supply may drop, and price may increase.

So what is driving the market right now?  Just like I mentioned above, supply and demand drive markets.  In 2015, China imported less dairy products and this drove markets lower.  Chinese imports have picked up in 2016 and it remains to be seen if this trend will continue for the duration of this year.  Additionally, milk supplies have been strong both domestically and internationally. With demand down and supply increasing, this causes prices to drop. You may be thinking, “Does this mean farms need to go out of business in order to regulate supply and demand?”  Not necessarily.  That’s only one side of the equation.  If China, or anywhere else for that matter, continues to consume more dairy products, then demand will balance out the supply.  And often times it is an adjustment of both supply and demand to bring prices back to equilibrium.
 
Now I’d like to turn the question of “What should I do?”  First and foremost, know your cost of production.  That is, how much money does it take for you to make a hundredweight of milk? Carefully examine your expenses.  Are there areas where you are overspending?  Are there surprises in your budget?  Do you have some “nice to have” items that you might be able to cut?  You can use FinBin data (found at www.finbin.umn.edu) to compare other farms’ costs to your own.  Sometimes comparing your operation to another can provide new ideas or opportunities.  Be sure to cut costs wisely.  Cutting feed costs or other items associated with a cow’s milk production will lead to a decrease in your income! 

Second, be sure to talk to your lender, if you have one.  Make sure you are on the same page.  Your lender can be a very important partner in managing costs.  There may be an opportunity to restructure debt or adjust payments.

Third, look for ways to maximize your assets.  Are you breeding cows back quickly?  Do you have equipment that you could rent out or share with another producers?  What are you doing to ensure optimal cow health?

Finally, create a risk management plan.  There may not be much you can do about today’s milk price, but risk management is a way for you to proactively manage your future milk price.  If you know your cost of production, you can determine your “break even” milk price.  This becomes your price floor or minimum price you’ll accept for your milk. You can create a plan for how you will market your milk in future months based on this “break even” price.   Additionally, you can go a step further and also lock in prices for your feed and energy inputs.  Risk management is NOT about beating the markets.  It IS about creating a plan that allows you to escape some of the volatility that exists in the dairy markets.  Furthermore, it allows you to establish a margin level that works on your farm, so you can ensure profitability.

To answer my last question, “when will it get better?”, I will say it’s hard to know.  It comes down to- you guessed it- supply and demand.  A drought and hot temperatures in the US could cause milk supply to decline and push prices back up.  Likewise, continued renewed buying from Asian markets could cause demand to surge.  Conversely, strong European production or a decline in demand from overseas markets could cause low prices to stay longer.  It is important to take a little time each day or week to read up on market factors and understand what is driving supply and demand for dairy.  


Times of low prices are not easy for any dairy farmer.  Take it one day at a time.  Do your best to proactively manage your finances.  It won’t change the milk price, but it will give you some control and hopefully options to help you survive in difficult times.

No comments:

Post a Comment

  • © Regents of the University of Minnesota. All rights reserved.
  • The University of Minnesota is an equal opportunity educator and employer. Privacy