For starters, don't borrow your last dollar! That advice is just one of 18 critical factors that affect the success of dairy herd expansions.
The 18 factors were identified by analyzing more than 35 loan portfolios of the Faribault-based, Farm Credit Services of Southern Minnesota. Data included herds ranging from 250 to 1,000 cows, with at least 18 months of operational experience.
"We used loan records and worked closely with our loan officers to get beyond the financial issues, says Art Madsen, senior financial services executive. "The results were not as simple as we had expected. Most surprising was the large number of key factors involved."
Those 18 critical factors (in italic in the following paragraphs) fell into four categories: balance sheet issues, historical performance, relative cow number increases and management issues.
Balance sheet issues included owner equity, current ratio, debt/cow and new assets/cow. These factors showed the importance of proper loan structure, adequate equity and sufficient working capital.
Not surprisingly, those units with 40% or more owner equity had greater risk-bearing ability and had lower interest costs per cwt. of production. So they did better. Plus they had reserve capital or borrowing capacity to handle unexpected shortfalls.
"Unexpected cost overruns, abnormal culling rates and spikes in feed prices thus [lead to] the warning, do not borrow your last dollar!" says Madsen.
Historical performance factors—the correlation between historical earnings and expansion success—weren't a surprise. Pure and simple, if owners had a historic record of doing well with a small herd, they did well with a large herd.
Relative cow increase was another important critical success area. Doubling, from 50 to 100, 100 to 200 and 300 to 600 seemed to offer more benefits than high incremental jumps (100 to 350, for example). The expansion process places major stress on management. Increasing too fast, too soon, can be overwhelming, says Madsen.
Management issues were critical. "If there is one common thread between successful dairy expansion units it is the ability to manage change," say authors of the study.
Housing in new freestall barns is common. The key is to develop the necessary skill to manage the facility (vet checks, heat detection, AI, sick cows). Managing people to manage the herd becomes the focus rather than the owner/operator directly managing cows. The ability to recruit, hire, train and retain employees has a major impact on the business. "First-class managers have first-class employees," says Madsen.
Feed procurement, storage and feeding change markedly in expansion units. Often, there is a move from upright to horizontal storage; producing and handling massive tonnages becomes a challenge. Often, expansion operations must face the question of whether they can produce all the feed they need or use another method of acquiring feed, says Madsen.
Heifer procurement, and getting them into the milking string, is another important management factor.
Madsen's favorite approach: "Buy open heifers before you move dirt [on the expansion], put them where you can control health and nutrition, AI them and move them to the new site 45 days before calving. Whatever the plan, develop and strictly adhere to a sound health program."
Ownership structure might change from sole proprietorship to a partnership, a limited-liability corporation or a farm corporation. Carefully consider just what a structural change will do to the management style and control of the business.
Other factors: The most successful dairy expansions work with a team of competent consultants. But remember, not all consultants are created equal—managers must continually evaluate the advice offered and then fully implement offered changes to make them effective.
The number of enterprises (cropping, machinery, heifer raising) may have to be reduced in order to focus management efforts on efficient production of quality milk. Good production records are essential to making sound management decisions. Sound financial records are essential to monitor business performance. Two sets of records are important: one for income tax, the second for management decisions.
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