dairy spending decisions

7/27/2019 Dairy Spending Decisions

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Where is the best place to put profits?

Goals of BusinessProfitabilityLiquidity



Profitability

Interest Savings Through Debt Reduction

New Investments

Liquidity

Build Savings

Build Credit Reserves



Which takes priority?

Short-run vs Long-run needs

Short-runSurvival

Long-run

Profitability and Security



First Priority

Liquidity Then Profitability



Build Liquidity

Save Profits

Build credit reserves for short-run

(operating credit)



What is Liquidity?

Ability to get cash needed to fund operations

Measures:Cash savingsWorking capital

(Current assets – Current liabilities)



ow much liquidity?

Working capital equal to one year family living expenses

Allows family to cover living expenses withouttapping into credit reserves



Choosing Between Dairy Cows, Land, and Financial Assets

Cows vs LandIn general, $1500-$2000 invested in an excellent dairy cow will result in higher cash flowsand operating profits than the same dollars invested in land. The reason for this is that the primary return from land is capital gains over time.

Cows or Land vs Financial AssetsInvesting in financial assets generates income for the current household but it fails toexpand the holding of farm assets such as cows and land so that family member may become a part of the family business. Thus investing in cows and land is generally preferred

to investing in financial assets.



Rate of Return On Dairy Cow Added to an Existing Dairy Enterprise For a CaseWhere: Purchase Price of a Cow is $1,300; Slaughter Value is $400; Cow UsefulLife is 3 Years; and Tax Rate is 35%.

Milk Income ( 20,000 lbs @ $13/CWT ) 2600.00Calf Sales 80.00Total Income 2680.00

Feed Costs 1042.00Other Variable Costs 490.00Death Loss 25.00Labor Costs 415.00Total Costs 1972.00

Net Operating Returns 708.00

Income & SE Taxes 96.13

Net Annual After-Tax Returns 611.87

Rate of Return 26.34%



Potential Returns on Dairy Cow Costing $1,800 With a

Productive Life of Three Years

Annual Milk Production

Rates of Return on Investment (%) When the per Hundredweight Price of Milk is:

$12.00 $13.00 $14.00

20,000 1.01 10.82 20.23

23,000 13.26 23.95 34.28

26,000 24.92 36.54 47.80

29,000 36.14 48.70 60.93



Potential Returns on Dairy Cow Costing $2,100 With a

Productive Life of Three Years

Annual Milk

Production

Rates of Return on Investment (%) When the per

Hundredweight Price of Milk is:$12.00 $13.00 $14.00

20,000 -3.80 4.92 13.72

23,000 7.08 16.58 25.72

26,000 17.43 27.72 37.67

29,000 27.37 38.47 49.25



Labor and capital constraints that make it difficult for farmers to addcows and/or land to their operations.

To overcome theses resource constraints farmers turn to cost savingor production enhancing investments.



Rates of Return on $100,000 Parlor Investment Over 10 Years, When Stall

Throughput is 22.5 Cows per Hour, Parlor Throughput is 64 Cows per Hour, and theTax Rate is 35%.

Cows Hourly Wage Rate For Labor ( In Dollars )6 7 8 9 10

25 -9.48% -8.62% -7.78% -6.97% -6.19%50 -4.70% -3.28% -1.93% -0.64% 0.61%75 -0.64% 1.21% 2.97% 4.65% 6.26%100 2.97% 5.19% 7.31% 9.33% 11.27%125 6.26% 8.83% 11.27% 13.62% 15.87%

150 9.33% 12.22% 14.98% 17.63% 20.20%175 12.22% 15.43% 18.50% 21.45% 24.32%

200 14.98% 18.50% 21.87% 25.13% 28.30%225 17.63% 21.45% 25.13% 28.69% 32.16%250 20.20% 24.32% 28.30% 32.16% 35.94%275 22.69% 27.12% 31.40% 35.56% 39.65%300 25.13% 29.85% 34.44% 38.91% 43.31%

325 27.51% 32.54% 37.43% 42.21% 46.92%350 29.85% 35.19% 40.38% 45.48% 50.50%375 32.16% 37.80% 43.31% 48.71% 54.05%400 34.44% 40.38% 46.20% 51.92% 57.58%425 36.69% 42.94% 49.07% 55.11% 61.09%450 38.91% 45.48% 51.92% 58.29% 64.59%475 41.12% 48.00% 54.76% 61.44% 68.07%



Rates of Return on $250,000 Parlor Investment Over 20 Years, When StallThroughput is 22.5 Cows per Hour, Parlor Throughput is 64 Cows per Hour, and theTax Rate is 35%.

Cows Hourly Wage Rate For Labor ( In Dollars )

6 7 8 9 10

25 -5.64% -5.25% -4.86% -4.49% -4.13%50 -3.44% -2.79% -2.17% -1.58% -1.01%75 -1.58% -0.74% 0.06% 0.82% 1.55%

100 0.06% 1.07% 2.02% 2.92% 3.79%125 1.55% 2.70% 3.79% 4.82% 5.81%

150 2.92% 4.21% 5.42% 6.58% 7.69%175 4.21% 5.62% 6.96% 8.24% 9.47%200 5.42% 6.96% 8.42% 9.81% 11.16%225 6.58% 8.24% 9.81% 11.33% 12.79%250 7.69% 9.47% 11.16% 12.79% 14.37%275 8.77% 10.66% 12.47% 14.22% 15.92%300 9.81% 11.82% 13.75% 15.61% 17.43%

325 10.83% 12.95% 15.00% 16.98% 18.92%350 11.82% 14.06% 16.22% 18.32% 20.38%375 12.79% 15.15% 17.43% 19.65% 21.83%400 13.75% 16.22% 18.62% 20.97% 23.27%425 14.69% 17.28% 19.80% 22.27% 24.69%450 15.61% 18.32% 20.97% 23.56% 26.11%475 16.53% 19.36% 22.12% 24.84% 27.52%



Housing investment – Free-stalls

Greater cow comfort

Higher milk productionLower health costs

Improved labor productivityLess time feedingLess time cleaning barns



Feed storage and handling

Improved feed quality

Higher milk productionReduced purchases of supplements

Improved Labor Productivity

Less time mixing and handling feed



Manure storage and handling

Less labor requirementsSchedule manure applications when labor and/or land availablePotential source of income



Dairy Replacement Enterprises

Custom Services vs Stand Alone Enterprise

Custom Services – Advantage

Reduced labor requirementsReduced capital requirementsReduced management strains

Custom Services – DisadvantagesBio-securityReliance on another manager



Cropping Machinery and Equipment

Higher feed costs if machinery and equipment not used to capacity

Labor required to operate machinery and equipmentRepairs and maintenance costsTechnical obsolescence and capital losses on investment

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