Spending Priorities For Dairy

Bruce Jones & Nolan Anderson UWEX

Where is the best place to put profits? Goals of Business Profitability Liquidity

Profitability Interest Savings Through Debt Reduction New Investments Liquidity Build Savings Build Credit Reserves

Which takes priority? Short-run vs Long-run needs Short-run Survival 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 savings Working capital (Current assets Current liabilities)

How much liquidity?

Working capital equal to one year family living expenses Allows family to cover living expenses without tapping into credit reserves

Long-Run Investments Income generating Dairy cows Land Financial assets (stocks, bonds, etc.)

Cost saving or production enhancing Milking facilities Animal housing Feed storage and handling Manure storage and handling Dairy replacement enterprises Cropping machinery and equipment

Choosing Between Dairy Cows, Land, and Financial Assets Cows vs Land In general, $1500-$2000 invested in an excellent dairy cow will result in higher cash flows and 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 Assets Investing in financial assets generates income for the current household but it fails to expand 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 Case Where: Purchase Price of a Cow is $1,300; Slaughter Value is $400; Cow Useful Life is 3 Years; and Tax Rate is 35%. Milk Income ( 20,000 lbs @ $13/CWT ) Calf Sales Total Income Feed Costs Other Variable Costs Death Loss Labor Costs Total Costs Net Operating Returns Income & SE Taxes Net Annual After-Tax Returns 2600.00 80.00 2680.00 1042.00 490.00 25.00 415.00 1972.00 708.00 96.13 611.87

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 20,000 23,000 26,000 29,000 1.01 13.26 24.92 36.14 $13.00 10.82 23.95 36.54 48.70 $14.00 20.23 34.28 47.80 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 20,000 23,000 26,000 29,000 -3.80 7.08 17.43 27.37 $13.00 4.92 16.58 27.72 38.47 $14.00 13.72 25.72 37.67 49.25

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

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

What is the first investment dairy producers turn to when trying to overcome resource constraints? Look to grazing operations in New Zealand for the answer Universal usage of parlors vs stall barns to milk because it is more cost effective to use parlor technology. Greater productivity of labor More cows per worker Lower labor costs per CWT milk Lower average cost of production Greater profit per CWT milk and more total milk production per farm

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 the Tax Rate is 35%. Cows 6 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 -9.48% -4.70% -0.64% 2.97% 6.26% 9.33% 12.22% 14.98% 17.63% 20.20% 22.69% 25.13% 27.51% 29.85% 32.16% 34.44% 36.69% 38.91% 41.12% Hourly Wage Rate For Labor ( In Dollars ) 7 8 9 -8.62% -3.28% 1.21% 5.19% 8.83% 12.22% 15.43% 18.50% 21.45% 24.32% 27.12% 29.85% 32.54% 35.19% 37.80% 40.38% 42.94% 45.48% 48.00% -7.78% -1.93% 2.97% 7.31% 11.27% 14.98% 18.50% 21.87% 25.13% 28.30% 31.40% 34.44% 37.43% 40.38% 43.31% 46.20% 49.07% 51.92% 54.76% -6.97% -0.64% 4.65% 9.33% 13.62% 17.63% 21.45% 25.13% 28.69% 32.16% 35.56% 38.91% 42.21% 45.48% 48.71% 51.92% 55.11% 58.29% 61.44% 10 -6.19% 0.61% 6.26% 11.27% 15.87% 20.20% 24.32% 28.30% 32.16% 35.94% 39.65% 43.31% 46.92% 50.50% 54.05% 57.58% 61.09% 64.59% 68.07%

Rates of Return on $250,000 Parlor Investment Over 20 Years, When Stall Throughput is 22.5 Cows per Hour, Parlor Throughput is 64 Cows per Hour, and the Tax Rate is 35%. Cows 6 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 -5.64% -3.44% -1.58% 0.06% 1.55% 2.92% 4.21% 5.42% 6.58% 7.69% 8.77% 9.81% 10.83% 11.82% 12.79% 13.75% 14.69% 15.61% 16.53% Hourly Wage Rate For Labor ( In Dollars ) 7 8 9 -5.25% -2.79% -0.74% 1.07% 2.70% 4.21% 5.62% 6.96% 8.24% 9.47% 10.66% 11.82% 12.95% 14.06% 15.15% 16.22% 17.28% 18.32% 19.36% -4.86% -2.17% 0.06% 2.02% 3.79% 5.42% 6.96% 8.42% 9.81% 11.16% 12.47% 13.75% 15.00% 16.22% 17.43% 18.62% 19.80% 20.97% 22.12% -4.49% -1.58% 0.82% 2.92% 4.82% 6.58% 8.24% 9.81% 11.33% 12.79% 14.22% 15.61% 16.98% 18.32% 19.65% 20.97% 22.27% 23.56% 24.84% 10 -4.13% -1.01% 1.55% 3.79% 5.81% 7.69% 9.47% 11.16% 12.79% 14.37% 15.92% 17.43% 18.92% 20.38% 21.83% 23.27% 24.69% 26.11% 27.52%

Housing investment Free-stalls Greater cow comfort Higher milk production Lower health costs Improved labor productivity Less time feeding Less time cleaning barns

Rate of Return On Dairy Cow Housing Investment of $1,200 for 20 Year Useful Life; and 35% Tax Rate. Returns on Investment: Milk Income ( 55% of 1000 lbs @ 12/CWT) Labor Savings ( 5 Hrs @ $10/Hr. Net Operating Returns Taxes Net Annual After-Tax Returns 66.00 80.00 146.00 28.35 117.65

Rate of Return

6.46%

Feed storage and handling Improved feed quality Higher milk production Reduced purchases of supplements Improved Labor Productivity Less time mixing and handling feed

Manure storage and handling Less labor requirements Schedule manure applications when labor and/or land available Potential source of income

Dairy Replacement Enterprises Custom Services vs Stand Alone Enterprise Custom Services Advantage Reduced labor requirements Reduced capital requirements Reduced management strains Custom Services Disadvantages Bio-security Reliance on another manager

Cropping Machinery and Equipment Higher feed costs if machinery and equipment not used to capacity Labor required to operate machinery and equipment Repairs and maintenance costs Technical obsolescence and capital losses on investment