DAIRY BUSINESS PLANNING

Tim BeckDairy Business Management Educator

Parts of the Plan – Kurtz Example

“Owning” Your Plan• Does every farm plan have

this much information?– Company summary, Goals, S.W.O.T analysis,

Mission Statement, farm alternatives and Human Resource Plan already completed

– Preliminary Financial Analysis – spreadsheets with breakeven costs

• The Farm Manager needs to fully “own the plan” to manage it successfully in the future.

Key Financial Ratios• Term Debt Coverage (Repayment Capacity)

1.20 1.5015. Term-debt coverage ratio 2.71

Term-debt coverage ratio

- tells whether your business produced enough income to cover all intermediate and long-term debt payments. A ratio of less than 1.0 indicates that the business had to liquidate inventories, run up open accounts, borrow money, or sell assets to make scheduled payments

Key Financial Ratios• Current ratio (Liquidity)

Liquidity Vulnerable StrongBegin End 1.1 1.7

1. Current ratio 2.02

Your Farm

Current ratio:

measures the extent to which current farm assets, if sold tomorrow, would pay off current farm liabilities

Key Financial Ratios• Farm debt-to-asset ratio (Solvency)

Begin End 60% 30%4. Farm debt-to-asset ratio 53 %

Farm debt-to-asset ratio:

is the bank’s share of the business. It compares total farm debt to total farm assets. A higher ratio is an indicator of greater financial risk and lower borrowing capacity

Key Financial RatiosCost Market Per Cow

7. Net farm income 318,430$ $ 652$ 637$ 4% 8%

8. Rate of return on farm assets 8.4 %

Net Farm Income: (Profitability)

represents return to 3 things:• Your labor,• Your management and• Your equity,that you have invested in the business

Key Financial Ratios• Loan Payments per Cow (Risk Tolerance)

145 Farms (2013 Cash Flow Plans):

– Average $665/cow/year

– Range $132 -- $1,697/cow/year

Financial Ratios—Before/AfterTiestall & Rented

FarmTiestall, Rented Farm & Robotics

Goal

Term Debt Coverage .50 1.52 > 1.25

Current Ratio 1.04 3.00 > 1.5

Debt-to-asset Ratio 43.9 60.3 Comfort < 30Caution 30 - 60

Net Farm Income/Cow $186/cow $596/cow $400-$800/cow

Rate of Return on Assets 1.8 7.3 8.0

Loan Payments/Cow/Year $695/cow $756/cow $400-800/cow

http://www.finbin.umn.edu/

Unique Considerations:Robotic Systems• Hired labor should be lower per cow, loan

payments per cow may be higher– Trading capital investment for hired labor cost

• Debt per cow high compared to historical standards:– Look more closely at loan payments/cow– Milk sales/cow—evaluate adequacy of the

revenue to service debt

Environmental Costs & Funding• Required manure handling, storm water and

site improvements can cost $200K - $700K per project– Seek the support of environmental professionals

to explore grant funding for these projects• The financial viability of your expansion plan

may depend on grant funding– Be prepared to revise your plan as funding is

confirmed

Plan Risk Assessment• Ratio of Cows to Crop Acreage• Current production and management

compared to plan estimates• Historical proof of business performance• Risk assessment:

– Milk / Feed Prices– Milk Margin– Environmental

2013 Summary – Cash InflowAll Breeds 17% 21% 15% 13% 20% 13%

Breakeven Milk Price

Dairy Summary per Cow < $16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 AverageTotal Number of Cows 77 131 149 231 169 90 141 Number of Cows Milking 69 114 132 206 145 76 124 Percent in Milk 89% 87% 88% 88% 86% 85% 87%Milk Sold per Total Cows 22,561 23,281 23,103 22,454 21,541 18,053 21,832 Milk Sold per Milking Cow 25,458 26,860 26,359 25,637 25,086 21,155 25,093 Average Lbs Milk per Day 70 74 72 70 69 58 69 Average Milk Price Planned $ 19.15 $ 20.13 $ 19.92 $ 20.19 $ 20.11 $ 20.74 $ 20.04 Milk Inflow $ 4,320 $ 4,672 $ 4,602 $ 4,529 $ 4,351 $ 3,693 $ 4,361 Cull Cow Sales $ 199 $ 193 $ 225 $ 253 $ 200 $ 231 $ 217 Bull Calf Sales $ 42 $ 38 $ 39 $ 51 $ 36 $ 42 $ 41 Misc. Dairy Sales $ 58 $ 31 $ 111 $ 92 $ 214 $ 91 $ 99 Non Milk Inflow $ 306 $ 259 $ 376 $ 370 $ 327 $ 330 $ 328 Total Inflow $ 4,925 $ 5,192 $ 5,352 $ 5,294 $ 5,127 $ 4,388 $ 5,046

143 farms

2013 Summary – Feed CostsAll Breeds 17% 21% 15% 13% 20% 13%

Breakeven Milk PriceDairy Summary per Cow: < $16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 Average

Milking Cow Home Raised Feeds $ 502 $ 658 $ 682 $ 704 $ 644 $ 753 $ 657

Milking Cow Purchased Concentrates $ 1,008 $ 1,044 $ 1,115 $ 1,203 $ 1,180 $ 1,126 $ 1,113

Milking Cow Purchased Forages $ 273 $ 224 $ 152 $ 103 $ 166 $ 415 $ 222

Heifer and Dry Cow Home Raised Feed $ 93 $ 63 $ 214 $ 91 $ 101 $ 119 $ 114

Heifer and Dry Cow Pur Concentrates $ 237 $ 279 $ 337 $ 305 $ 323 $ 322 $ 301

Heifer and Dry Cow Pur Forages $ 144 $ 82 $ 170 $ 130 $ 86 $ 181 $ 132

Total Feed $ 2,258 $ 2,351 $ 2,669 $ 2,537 $ 2,500 $ 2,915 $ 2,538

Percent of Milk Inflow (Milking Cows) 41% 41% 42% 44% 46% 62% 46%

Home Raised Feeds $ 595 $ 721 $ 896 $ 795 $ 745 $ 872 $ 771

Purchased Concentrates $ 1,245 $ 1,323 $ 1,452 $ 1,508 $ 1,503 $ 1,447 $ 1,413

Purchased Forages $ 418 $ 306 $ 321 $ 233 $ 252 $ 595 $ 354

143 farms

Spent $500 less purchased feed/cow vs.

2013 Summary – The Bottom Line

All Breeds 17% 21% 15% 13% 20% 13%

Breakeven Milk PriceDairy Summary per Cow: < $16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 AverageGross Milk Price Farm Breakeven $ 14.28 $ 17.06 $ 18.47 $ 19.39 $ 20.81 $ 25.61 $ 19.27 IOFC Breakeven $ 5.17 $ 6.96 $ 7.87 $ 7.70 $ 8.26 $ 8.21 $ 7.36 Gross Margin to Guarantee $ 7.46 $ 9.50 $ 10.88 $ 10.95 $ 11.96 $ 14.20 $ 10.83 Total Inflow - Total Outflow $ 475 $ 320 $ (383) $ (379) $ (228) $ (1,501) $ (283)

143 farms

Working with Your Lender• Involve your lender early in the process• Plan at least 1 year before any proposed start• Be flexible and open to lender requests and

bank standards• Expect plan revision requests• Be persistent and willing to redesign your

plan if the first edition isn’t considered fully viable

Tools for Plan Development:• Penn State Cash Flow spreadsheet:

– http://extension.psu.edu/animals/dairy/business-management/financial-tools/cash-flow-planning

• FINPACK software– http://www.cffm.umn.edu/FINPACK/

• AgPlan Web Site:– https://www.agplan.umn.edu/

• “Full Version” of Adobe Acrobat