PDPW Dairy's Bottom Line September 6, 2018

Volume 20: Issue 6 September 2018

BOTTOM LINE Sharing ideas, solutions, resources and experiences that help dairy producers succeed.

Obtain agreement in writing Blake Knickelbein

Page 2 Protect against hidden dangers of manure

Page 4 Watch for mycoplasma in calves

Page 6 Stalled cycles call for financial strategies

Leadership — a function of the heart

Page 8

Many business transactions are still exacted with a handshake deal. People are generally trustworthy. Especially in the farming industry, people believe a pers o n ’s wo rd h a s va l u e .

Many transactions are successful without a Blake written agreeKnickelbein ment.

But when parties have different expectations of the transaction, when a circumstance in the transaction changes or when a party becomes unreasonable, a transaction with no written agreement can fall apart.

A verbal agreement can be legally binding even without a signed contract. In order to create a legally binding verbal agreement four elements must be met.

• One party must make an offer to another.

• The other party must accept said offer.

•T h e re m u s t b e a n exchange of value.

• There must be a level of certainty to the terms of the agreement.

A verbal agreement can be legally binding even if some terms are uncertain. Say a person agrees to mow her neighbor’s lawn for $20 per

Contributed

Many business transactions are still exacted with a handshake deal.

People are generally trustworthy. Especially in the farming industry, people believe a person’s word has value. Many transactions are successful without a written agreement. But when the parties have different expectations of the transaction, when a circumstance in the transaction changes or when a party becomes unreasonable, a transaction with no written agreement can fall apart.

hour. But she may not clarify on which day the lawn mowing will take place, when payment is due or if the clippings will be bagged. If the neighbor’s lawn is mowed, he’s more than likely legally obligated to pay the person who mowed his lawn. But with unclear terms he could make several arguments.

• The lawn wasn’t mowed by an agreed-upon date.

• He could pay for the ser-

vice three months later.

• The offer was made to mow his lawn free-of-charge.

Even though it’s advisable to clarify terms and obtain agreements in writing, many people forego that step — because it doesn’t seem necessary or the process seems daunting and time-consuming, or any number of other reasons.

See WRITING, page 2

Professional Dairy Producers™ I 1-800-947-7379 I www.pdpw.org

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September 2018 • PDPW • Dairy’s Bottom Line

PDPW Board of Directors President Jay Heeg Colby, Wis. 715-507-0030 jcheeg@yahoo.com

Vice President Katy Schultz Fox Lake, Wis. 920-210-9661 katylschultz@gmail.com Secretary Dan Scheider Freeport, Ill. 815-812-4012 dnscheider@gmail.com Treasurer Brian Forrest Stratford, Wis. 715-650-0267 bforrest70@gmail.com Directors Mitch Breunig Sauk City, Wis. 608-963-6819 mysticvalley336@gmail.com Andy Buttles Lancaster, Wis. 608-723-4712 stonefront@tds.net Janet Clark Rosendale, Wis. 608-341-6709 vafarmsllc@hotmail.com Marty Hallock Mondovi, Wis. 715-495-2812 marbec@nelson-tel.net Steven Orth Cleveland, Wis. 920-905-2575 orthlanddairy@gmail.com

PDPW Advisers Jim Barmore GPS Dairy Consulting Verona, Wis. jmbarmore@gpsdairy.com

Mark Binversie Investors Community Bank Manitowoc, Wis. mbinversie@investors communitybank.com Dr. Randy Shaver UW- Madison Dairy Science Madison, Wis. rdshaver@wisc.edu Andrew Skwor MSA Professional Services Baraboo, Wis. askwor@msa-ps.com

Protect against hidden dangers of manure Melissa Ploeckelman

Manure is vital to healthy farms. Healthy animals make manure. Healthy fields and healthy soils use the nutrients from manure to produce the crops that sustain the animals.

P a ra d o x i c a l l y t h e s a m e life-giving substance that fertilizes fields has a deadly side that can endanger even the most experienced farmers.

Two years ago in August, Amherst beef farmer Mike Biadasz, 29, left early in the morning to agitate an open manure pit from which loads would be hauled out later that day. Shortly after going out he

Writing Continued from page 1

There are some agreements for which a verbal agreement isn’t enforceable. The Statute of Frauds requires five types of agreements in writing to be legally binding.

• an agreement that cannot be completed within a year • an agreement to answer for the debt or default of another person • an agreement made upon consideration of marriage • an agreement for the sale of goods for the price of $500 or more • an agreement for the transfer of a real estate interest A verbal agreement for a farmer to deliver 10 bred heifers to a neighbor in exchange for $1,200 per animal isn’t legally enforceable because animals are considered “goods” and the price totals more than $500.

Therefore if the neighbor fails to

was overcome b y h yd ro ge n sulfide gas. The agitated manure caused the release of the toxic gas.

Melissa Ploeckelman Despite being re l e a s e d o u t into the open, the gases became trapped underneath the warm August a i r t h a t fog g y m o r n i n g .

Biadasz passed out from the fumes and later died – as did 16 head of cattle standing near the pit.

It was at the funeral home, preparing to bury their only

son, that Biadasz’ parents as well as his sisters decided the Biadasz family would become safety advocates. In lieu of flowers they encouraged donations so they could start a fund for farm-safety education.

The memorial fund created by the Biadasz family gives a farmer a $75 rebate when renting a gas monitor if he or she submits a rebate form. The program invites farmers to rent any four-gas monitor, with as many as five monitors per operation. The goal is to protect farmers, workers and family members. Visit bit.ly/ gasmonitorrebate for the

pay for the bred heifers, the farmer may have trouble recovering the money because there was no legally binding contract.

Fortunately there are exceptions. There are legal protections for people who rely on the promise of another. One is promissory estoppel, which provides a promise will be held enforceable — even if it doesn’t meet the requirements of a binding contract — if a party relies on the agreement to his or her economic loss or other detriment. Another legal protection is unjust enrichment, which provides a party cannot be enriched at the expense of another in a manner that is unjust. In the heifer example the neighbor was unjustly enriched by receipt of cattle without paying for them and the seller relied on a promise to pay — to his detriment. A court may find in the favor that the neighbor owes the seller $12,000. But without a legally binding contract it would be the

seller’s burden to prove one of those other legal theories.

During a difficult dairy economy it becomes even more important to have certainty in transactions. The neighbor might believe he has six months to pay for the bred heifers. But if the seller was relying on receiving that money immediately, the delay of receipt of payment could mean a default on another debt. Simply put, it’s advisable to clarify all relevant terms of a transaction and obtain all agreements in writing. The small amount of time invested in obtaining the agreement in writing can save time, money and relationships in the future.

Blake Knickelbein is an associate at Twohig, Rietbrock, Schneider & Halbach, SC, a law firm focusing on agricultural law, business and corporate law, and a Professional Dairy Producers of Wisconsin corporate sponsor. Email knickelbein@twohiglaw.com to reach him.

September 2018 • PDPW • Dairy’s Bottom Line rebate form.

On an Iowa hog farm, Jason Fevold nearly lost his life as a result of hydrogen sulfide gas.

He was hauling loads of manure from the farm’s swine nursery to the fields. He had gone into the barn to wash his hands and he knew something was wrong. But he doesn’t remember much more. His wife, Roxy, who had come to the farm so they could have lunch together, found him on the floor. Like Biadasz, he was abruptly overcome by the gases. But Fevold was fortunate; Roxy found him just in time and called 911.

While manure has always been a source of dangerous gases, dairy farms that incorporate byproducts in their dry matter may be at a higher risk of exposure. Those byproducts are high in protein and make an attractive feed option when they’re affordable. Unfortunately some byproducts tend

Contributed

The family of Mike Biadasz have memorial fund created on behalf of Biadasz after he died tragically on his farm from manure gases. From left are his niece Natalie Grenzenski, sister Megan Check, nephew Jacob Grenzenski, father and mother Bob and Diane Biadasz, nephew Tyler Grenzenski and sister Lisa Grenzenski.

to have a greater sulfur content, leading to larger proportions of dangerous gases in the

manure.

It’s always been important to monitor hydrogen sulfide

and other gases when working around and hauling manure.

But it’s even more critical when working with animals that have been fed byproducts containing large amounts of sulfur. Colorless, flammable and extremely hazardous, hydrogen sulfide characteristically has the foul odor of rotten eggs – but the odor isn’t always notable when in the proximity of animal manure.

When exposed to the gas, lack of consciousness and death can occur within moments.

Whether a farm manager, a farm worker or a manure hauler, a monitor can save a life. Now is the time to start the discussion. Always make safety a priority.

Melissa Ploeckelman is an outreach specialist for the National Farm Medicine Center.

Email ploeckelman.melissa@ marshfieldresearch.org to reach her.

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September 2018 • PDPW • Dairy’s Bottom Line

Watch for mycoplasma in calves Geof Smith

Mycoplasma bovis is an emerging cause of disease in dairy calves. Though it’s been around since the 1960s, cases of mycoplasma-associated diseases seem to be increasing.

Once thought to be a relatively rare problem connected only with large herds, it’s now identified on farms of all sizes. Of the many types of mycoplasma associated with disease in cattle, mycoplasma bovis is by far the most common. It’s routinely linked with disease in dairy calves.

There are several disease syndromes caused by the b a c te r i a . B e aware of three mycoplasma Geof Smith bovis-associated diseases.

Pneumonia — In most herds pneumonia is the most frequent and economically important disease associated with mycoplasma in dairy calves. Clinical signs include nasal discharge, dry cough, rectal temperature greater than 103 degrees Fahrenheit, difficulty breathing and decreased appetite. Risk factors for pneumonia before weaning include failure of passive transfer of immunoglobulin G antibodies to the calf through colostrum, prolonged exposure to adult cattle and poor ventilation.

The bacteria is difficult to treat with antibiotics, leading to treatment failures or chronic cases of pneumonia. A case is chronic when a calf has received one or more treatments and either doesn’t improve or seems to improve only to relapse five to seven days later.

Otitis — Inflammation of the ear canal, or otitis, is another syndrome associated with mycoplasma in calves. Clinical signs include droopy ears and

Contributed

A droopy ear is a classic symptom of otitis, a mycoplasma bovis-associated syndrome.

head tilt. Occasionally a thick yellow-to-white pus will be seen inside the ear. Sometimes the ear canal will rupture and the thick discharge will drain out. The bacteria likely enters the ear canal through the bloodstream — though that remains uncertain. In any case, once present the bacteria can damage important nerves and cause observable signs, including droopy ears and head tilt. The presence of those symptoms

along with pneumonia should raise immediate suspicion of a potential mycoplasma problem in the herd.

Arthritis — When the bacteria enters the bloodstream and spreads to the joints, the joints become enlarged and often fill with fluid. Frequently multiple joints are involved; that can lead to lameness that is non-responsive to antibiotic treatment. Calves will also experience pain when joints are

palpated or if their legs are moved. Suspect mycoplasma when multiple calves in a dairy herd are present with swollen joints not associated with umbilical disease.

The big questions on most farms regarding the bacteria are usually, “Where did the mycoplasma come from?” and “How do I get rid of it?” It’s long been known mycoplasma is a cause of mastitis. Therefore a general assumption has been that the

September 2018 • PDPW • Dairy’s Bottom Line bacteria entered calves via contaminated milk or colostrum. But in some dairies mycoplasma can be found in calves with no history of mycoplasma–associated mastitis in the milking herd.

The bacteria is also found in the upper respiratory tract of normal calves and cows.

Many of those animals can maintain long-standing infections without clinical signs, thus enabling bacteria to pass from animal to animal without detection.

The percentage of cattle that sub-clinically carry mycoplasma is unknown. But the number of carriers is almost certainly greater on farms with mycoplasma mastitis and on farms that feed contaminated whole milk to calves. Most researchers think mycoplasma could spread through the bloodstream from the udder to the lungs and vice-versa. That means both nasal secretions and contaminated milk are primary sources of infection in most herds.

Although mycoplasma live primarily inside the cow, they can survive in the environment surprisingly well. It’s been shown they can live as long as two months on sponges and in milk. They can live more than two weeks in water and about 20 days in straw. The bacteria frequently can be grown from standing water on dairies, with positive bulk-tank cultures of mycoplasma in the milking cows. Cool humid conditions are favored by mycoplasma. They die fairly quickly when exposed to direct sunlight and are killed by most commonly used disinfectants.

Dr. Geof Smith, veterinarian, is professor of ruminant medicine in the College of Veterinary Medicine at North Carolina State University. Contact geoffrey_ smith@ncsu.edu for more information.

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Herdsperson conference scheduled A f u l l - d ay p ro g ra m designed for herd managers, nutritionists and veterinarians will feature four experts in reproduction, transition-cow management, animal welfare and personal leadership.

Featured presenters include Paul Fricke, University of Wisconsin-Madison professor of dairy science, who will open the general session with management strategies to overcome the reproductive challenges many dairies are faced with. In a separate breakout session he’ll present case studies to help attendees pinpoint the key factors affecting fertility and equip them with specific tips to resolve reproductive problems.

Thomas Overton, professor and director of PRO-DAIRY at Cornell University, will discuss transition-cow care in a manner that enables participants to move beyond merely minimizing risks to capitalizing on opportunities.

Dr. Overton will share a 10-point checklist with those aiming for healthier more productive fresh cows. He’ll focus on the nutritional needs of transition cows in an afternoon breakout session, discussing topics such as energy, metabolizable protein levels, mineral balancing and other critical nutrition areas.

Trevor DeVries is a professor and Canada research chair in dairy-cattle behavior and welfare in the department of animal biosciences at the University of Guelph. He will help attendees understand why cows respond differently to the same rations, facilities

and basic protocols. In a breakout session, DeVries will dig deeper into how to appropriately care for dairy cows – when to feed, where to house and other critical management areas cows aren’t able to convey with words.

The first of the two conferences will be held Oct. 31 in Marshfield, Wisconsin. The second will be held Nov. 1 in Arlington, Wisconsin. Visit www.pdpw.org or call 800947-7379 for more information. A reduced rate is available for all additional participants from the same dairy after the first is registered.

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September 2018 • PDPW • Dairy’s Bottom Line

Stalled cycles call for financial strategies Gary Sipiorski

There’s no need to remind dairy farmers the industry’s in an ongoing season of stalled milk prices. Though it isn’t the first time farmers have been in a cycle like this, the current cycle is particularly challenging in that i t’s Gary extending into Sipiorski a fourth year.

Ignoring the facts only results in lost time when the focus should be on making adjustments.

At the current stage of the game obvious opportunities h a ve b e e n p u rs u e d a n d chronic problems have been addressed. In addition to the automatic go-to solutions in a down cycle, there are some actions available that may help work through the current economic environment.

• C o m m u n i c a t e w i t h suppliers. Dairy producers generally don’t consider the extent to which suppliers of feed, veterinary services or milking equipment – and a whole host of others – are also supplying the farm with unsec u re d b o r rowe d m o n ey.

Unless the service is paid for with a check or with an automatic payment, it’s common for many agricultural businesses to offer a 30- or even 60-day window of time before pay m e n t i s d u e w i t h o u t charging extra fees. But they also have payments to make and employees to pay. When the farmer’s checkbook is skinny it’s important to talk face-to-face with the supplier. If money is owed many are willing to work with farmers to establish a payment plan. The farmers who make a point to communicate with the suppliers are more likely to

h ave a d d i t i o n a l g ra c e extended to them.

• C o m m u n i c a t e w i t h lenders. Lenders supply the bulk of dairy financing. Large amounts of long-term money – commonly borrowed during a three- to 25-year period – is paid back with established payment amounts. Because lenders use deposits or bonds to fund their borrowing, they secure their loans with liens and mortgages. Lenders have many farms in their portfolios. They know cash flows are tight on farms; they may not know how tight the cash flow is on a particular farm. Make

September 2018 • PDPW • Dairy’s Bottom Line an appointment with a lender.

Bring in the latest cash-flow projections with a balance sheet and a realistic cash flow so a professional discussion can take place. To ease the money short-fall, consider asking for details on topics such as establishing addit i o n a l l i n e s o f c re d i t o r rescheduling loans by re-amortization or interest-only. A lender can only offer sound advice upon knowing details of a producer’s current situation. Ask the lender for suggestions; after all, he or she is working with many herds in similar situations.

• M aximize premiums.

Though premiums on milk checks may not be what they once were, there is still additional money on the table offered by processors. Milk with low levels of somatic cell counts is in demand because

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the milk stays fresher and cheese yields are better. Many cheesemakers are paying extra for additional protein and butter fat as well. Tweaking cow comfort, milking methods and feed rations can add a few valuable extra cents for each 100 pounds of milk sold.

• J oin a peer group of farmers. It may be uncomfortable to share personal

financial situations with other farmers, but when ideas can be shared and gleaned from others dealing with the same economic situations, solutions start to surface. Start by exchanging ideas and sharing real numbers. Avoid becoming fixated on the negatives. Trust and confidentiality is a must with those types of peer groups.

• I n c r e a s e f i n a n c i a l knowledge. The Professional Dairy Producers of Wisconsin have developed a financial-literacy program for dairy producers of all ages. Designed with three levels of training, the program was developed by dairy- and financial-industry people for PDPW members.

Take advantage of that and other financial training to better prepare for a future that will only demand increased levels of business understanding.

Milk-price cycles — the increases and the decreases — have always been a part of the dairy industry. It’s best to take an active approach in dealing with the current economics to be better prepared for what future cycles may bring.

Gary Sipiorski is a dairydevelopment manager with Vita Plus. Email gsipiorski@vitaplus. com to reach him.

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September 2018 • PDPW • Dairy’s Bottom Line

PEOPLE PERSPECTIVE

Leadership comes from heart Hank Wagner

Most people believe they aren’t leaders because they have no leadership positions or titles.

I strongly believe position or title has little to do with leadership. There are many people who have lofty positions or titles yet have little influence in the lives of others. They therefore do not possess much leadership. The opposite is also true.

I know of many people who are

great leaders, yet have no titles or positions.

To understand why there’s such confusion about Hank Wagner what makes a leader, let’s start w i t h a c l ea r definition of what true leadership is. In my opinion John C. Maxwell offers the simplest and clearest explanation.

“Leadership is influence; nothing more and nothing less,” he says.

When one is more aware of people every day, it will become apparent that there are servant leaders all around having major influences on their surroundings.

I believe leadership has everything to do with the heart condition. What we think or believe about others comes

from deep within our hearts. If we truly care about other people, that will be apparent in the words we speak and the actions we choose. We can try our best to hide what’s in our hearts, but eventually what’s in there will be apparent.

Many people think they need to be careful — or even crafty — with words they speak to others. Truly words can cause trem e n d o u s d a m a g e . I t ’s

September 2018 • PDPW • Dairy’s Bottom Line

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Parenthood is not just about passing down the farm or transferring assets. Have a plan to invest in the hearts and minds of the children. Prepare them to be leaders through the beliefs we’ve helped place in their heart and minds.

We all have influence — all day, every day. Therefore we are all leaders. Our farms, crops, cattle, environment and machinery are important, but none of those things will ever be more important than people. If we protect our hearts and have a plan to invest in ourselves and others, good things will happen — no matter what the milk price, or weather, news and politics might lead us to believe.

“Leadership is influence; nothing more and nothing less.”

J O H N C. M A X W E LL

important to be careful with the words we speak. But the secret to consistently having good things coming out of our mouths is to have good things in our hearts.

Consider that heart condition when interacting with employees. Instead of viewing them as workers we use to accomplish a job, we need to see them as people on our team who are able to think, problem-solve and create. We need to be interested in their ideas and dreams rather than only in how they do their jobs. It’s possible for us to accomplish our vision while also helping them with their

Contributed

individual dreams. Those considerations give us clues as to what’s in our hearts and hints at the type of influence we will have with those people.

Those concepts also apply in marriage. A close examination of our hearts reveals what we believe about our spouses. It doesn’t really matter who “wears the pants.” It’s more important that we’re both striving to be servant leaders who truly care about the desires and dreams of our mates. We need to help our s p o u se s b e a l l t h ey ca n become; we don’t want to hold them back. We must determine to be great listeners who not only intently listen but also perceive what’s not spoken.

Every spouse has an extremely important leadership role that we promised to fulfill; we need to give it our best.

Our children can be deeply rewarded — or damaged — by our heart conditions and the thinking we have as their parents. I believe being a parent is one of the most important leadership roles we’ll ever hold. Leadership is influence. Throughout our l ive s m a ny p e o p l e w i l l

influence us. But parents have the greatest opportunity and responsibility to lead their children.

Hank Wagner is a dairy producer and a John Maxwell Team teacher, mentor, speaker and coach.

Contact hwagner@frontiernet.net for more information.

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September 2018 • PDPW • Dairy’s Bottom Line

Benchmark to improve margin Matt Lange

Businesses benchmark to compare financial-analyses findings to those of other firms.

In doing so businesses have a clear picture of productivity and efficiency compared to peers and competitors. It also clarifies areas of opportunity and improvement.

A dairy business that regul a rly b e n c h marks against Matt Lange itself can meas u re p e r fo rmance and milestone achievements critical to improving margins. The real value lies in understanding the story the numbers tell so decisions can be made to create efficiencies across all systems on the farm.

Benchmarking serves a vital function any time. But it does especially during times of depressed margins. Minor adjustments can have substantial effects.

Compare dairy-to-dairy Peer-to-peer comparison is a natural starting point. The dairy-consulting team at Compeer Financial recently compiled its 2017 Annual Benchmark Report. The team used the Dairy Profit Manager financial

model as well as industry knowledge to analyze the performance of several Midwestern dairy businesses. The 2017 Annual Benchmark Report includes data from 65 farms representing 100,000 cows across Wisconsin, Minnesota,

Michigan and Ohio. The average number of cows on each farm was 1,526 in 2016 with a range of 280 to 13,000 cows.

Average Class III prices have varied.

• 2017 was $16.16 per hundredweight.

• 2016 was $14.86 per hundredweight.

• 2015 was $15.80 per hundredweight.

• Basis continued to decrease.

• 2017 was $1.58 per hundredweight.

• 2016 was $1.76 per hundredweight.

• 2015 was $1.99 per hundredweight.

The average mailbox milk price didn’t vary much during the three years. The year 2017 saw $17.74, which was greater than 2016 and close to the 2015 average of $17.94.

There were minimal to no gains in milk-marketing positions in 2017, from the 2016 price of $0.19 per hundredweight and the 2015 price of $0.18 per hundredweight.

The average basis was $2.12 per hundredweight in the benchmark. That larger basis was due to the fact that the top25 percent of dairies ship more combined pounds of fat and protein compared to the average producer.

M ilk prices rebounded slightly in 2017 from 2016. But cull-cow prices continued to decrease from $1,245 per cow in 2015, to $877 per cow in 2017.

Bull calves, heifers and steers also decreased slightly in revenue in 2017, limiting the

September 2018 • PDPW • Dairy’s Bottom Line increase generated by farms compared to 2016.

Total expenses remained stagnant compared to 2016, allowing margins to improve for most everyone — though not enough for average dairy farms to make a profit. For the third year in a row the average dairy operation in the benchmark was “in the red.”

Average accrual earnings have decreased.

• 2017 decreased by $0.31 per hundredweight or $84.32 per cow.

• 2016 decreased by $0.75 per hundredweight or $214 per cow.

• 2015 decreased by $0.14 per hundredweight or $39.79 per cow.

Still the top quartile of producers continues to find ways to generate earnings, with an average of $1.79 per hundredweight or $514 per cow for 2017. While one can be quick to say the larger earnings were a result of greater milk prices received by the top-25 percent, only a quarter of the separation can be attributed to milk revenue. The remaining 75 percent comes from a lesser cost of production.

Consider costs of production In assessing cost of production, the three largest cost drivers – not surprisingly – were found to be feed, labor and net herd replacement. Cost of production for the average herd in 2017 was $17.53 on an energy-corrected basis, compared to $17.06 in 2016.

Improve income as compared to feed costs For the purpose of the benchmark, feed expense represents all feed costs – including purchased and home-raised feeds.

Feed costs decreased by $0.21 per hundredweight, to $8.79 per hundredweight on average.

That marks the fourth-straight year of decreasing feed costs.

The dollar value of forages decreased, driving producers to include a greater percentage of

forage in rations. The top-25 percent of producers reduced costs to an energy-corrected feed cost of $8.30 per hundredweight for 2017.

For a subset of the benchmarked producers, income as compared to feed costs is calculated on an ongoing basis.

Income compared to feed cost is measured as: • milk income per cow per day • less feed cost per cow per day.

The result improved on average from $7.84 per cow per day in 2016, to $8.79 in 2017. That was driven by greater milk prices and lesser feed costs, which decreased from $6.50 to $6.11 per cow per day. Average ration cost of $0.099 per pound of dry matter decreased from the 2016 cost of $0.104 per pound of dry matter, while dry-matter intakes held steady at 58 pounds per cow per day.

See BENCHMARK, page 12

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Benchmark Continued from page 11

Labor costs critical to bottom line Labor costs in the benchmark include wages, payroll taxes and benefits paid to employees. Also included are salaries and benefits paid to owners, including wages shown as draws. Labor costs increased to $3.40 per hundredweight.

Hired-labor cost has held steady.

• 2014 – $2.87 per hundredweight • 2015 – $2.89 per hundredweight • 2016 – $2.85 per hundredweight • 2017 – $2.98 per hundredweight Owner draws varied during those years.

• 2015 – $0.46 per hundredweight • 2016 – $0.39 per hundredweight • 2017 – $0.42 per hundredweight The top-25 percent of producers had a labor expense of $0.51 less than average, which was $2.89 per hundredweight.

The top-25 percent had essentially the same

family-labor costs as the average, with the difference comprised almost entirely in the category of hired labor. It’s difficult to reduce wages and even owner draws. But maximizing productivity from all farm perso n n e l a n d fo c u s i n g o n employee retention was shown to yield gains in labor performance. That impacts the bottom line.

When benchmarking labor values, take into consideration the operation’s full scope and how it might be different from the farms included in this year’s benchmark. Dairies on which all the herd’s young stock are raised, and all forages and grains are produced, may have labor costs more than $3.50 per hundredweight.

Operations only producing milk should see costs less than $2 per hundredweight. It’s also important to recognize the difference between owner draws for personal, or for succession and transition purposes, versus owner draws for payroll. Owner draws should be included in labor expense.

Evaluate herd-culling program Net herd-replacement cost is calculated by the value of animals leaving the herd by means of culling, dairy sale or death,

less any revenue received for those removed animals.

Net herd-replacement costs have held steady.

• 2017 – $1.33 per hundredweight • 2016 – $1.33 per hundredweight • 2015 – $0.98 per hundredweight The top-25 percent of clients had a net herd-replacement cost of $1.16 per hundredweight due to generating slightly more value for cull cows as well as from culling less and experiencing fewer animal deaths.

Operations should target a cost of $1.50 per hundredweight or less in that category, though elite producers aim for $1.15 per hundredweight.

There are several key ways to reduce net herd-replacement costs.

• Cull animals when they’re at a prime level for generating cull value.

• Manage heifer inventories to adequately supply replacement needs without artificially inflating the replacement rate of the herd.

• Keep death loss at 5 percent or less.

Maintain strong working-capital position Capital costs also increased for 2017. The benchmark

average increased by $0.17, to $2.71 per hundredweight. Capital costs are comprised of depreciation, interest and leases. The cost represented by that category has increased about $0.40 per hundredweight during the past three years.

Importantly the value used in the benchmark report is management-level depreciation, not tax-level. But the increase in the benchmark number is not represented by the depreciation side as much as from interest. As the average herds in the benchmark have taken on losses and borrowed funds, the amount of interest expense has increased accordingly. With greater borrowing compounded with growing interest rates, capital costs continue to increase and are more difficult to decrease unless earnings are turned around.

After a third year of losses, the average balance sheet has lost 7 percent equity.

Working capital is a calculation.

• Add all current assets – cash, feed inventory and accounts receivable.

• Subtract that total from current liabilities – accounts payable, current portion and operating loans.

Wo r k i n g c a p i t a l h a d decreased from $1,287 per cow

September 2018 • PDPW • Dairy’s Bottom Line to $346 per cow by the end of 2017. Working capital is critical to the liquidity of a farming operation and its ability to service debt and pay bills.

Review dairy financial records Owner equity is net worth divided by assets. A standard target is 55 percent to 60 percent for an operation. During growth stages it can decrease to 45 percent to 50 percent. Ideally a lender shouldn’t own more of a business than its owner does.

To evaluate how well a business is structured for the near future, target a working capital per cow of at least $600. That helps ensure cash is available to maintain cash flow. It also enables a dairy to take advantage of prepayments, cash discounts or unexpected capital purchases that can improve the operation’s efficiencies. If a business is in a comfortable

owner-equity position, it can withstand erosion in working capital and earnings. Similarly a strong working-capital position can insulate owner equity against deterioration in down markets.

Work to survive sagging economy Despite the detrimental effects of sagging milk prices on the dairy industry, a few bright spots can be found in review of the 2017 benchmark.

Reaching primary targets is what separated the top-25 percent of producers from the rest of the crowd. Producers who want to reap those benefits should do likewise.

• Improve income as compared to feed costs.

• Control dry-matter prices, and maintain or increase dry-matter intakes.

• Aim to produce 6.25 pounds of combined butterfat and protein per cow.

• Target more than $8.50 per cow per day in income as compared to feed costs.

• R e-evaluate procedures and protocols among managers and employees to maintain consistency in systems, and maximize efficiencies and labor performance.

• Evaluate the herd-culling p rog ra m . A i m fo r a n e t herd-replacement cost of less than $1.50.

• M aintain a strong working-capital position to take advantage of opportunities that arise.

• Be mindful that excess feed inventories can inflate working capital and can be a detriment to the operation. Dairies maintaining a year’s worth of feed carryover should consider selling some feed inventory, planting more acres into cash crops, or sub-renting land to increase cash inflow and decrease outflow for crop inputs.

• Consider developing and

committing to a milk-marketing plan to protect the business and take advantage of market rallies.

• Maintain and consistently review the dairy’s financial records. Many dairy producers in the top-25 percent regularly designate time to review financial records and evaluate performance goals. They also meet regularly with their team and advisers to assess opportunities and areas for improvement.

B e n c h m a rk i n g d o e s n ’t answer every question or provide immediate solutions. But it certainly provides the opportunity to discuss ways to improve margins, create efficiencies and maximize opportunities for profitability.

Matt Lange is a dairy-business consultant with Compeer Financial, a mission sponsor of the Professional Dairy Producers of Wisconsin. Email matt.lange@compeer.com to reach him.

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September 2018 • PDPW • Dairy’s Bottom Line

Find tradeoffs in water-quality quest Amber Radatz

At University of Wisconsin-Discovery Farms discussing the topics of “tradeoffs” and “subtle balances” of different practices is common. One singular practice is rarely the answer for water quality. Because there are positives and negatives to each practice, the best way to continue to improve agriculture’s impact on water quality is to employ a blend of conservation practices that work together to cumulatively reduce loading of nitroAmber gen, phosphorus and Radatz sediment.

Let’s compare two farms. JF4 is a no-till farm in Wisconsin’s Driftless Area; the crops grown on the farm are alfalfa and corn. WF1 is a farm that utilizes conservation tillage in northwest Wisconsin; the farm grows corn and soybeans. The UW-Discovery Farms team monitored both farms for seven years. The resulting findings were surprisingly similar with only a few key differences.

Data showed the average annual

phosphorus loss was close to 1 pound per acre on both farms. That’s a good goal to set. It’s attainable for farms using a variety of conservation practices.

On both farms, particulate and dissolved phosphorus were lost but the type of phosphorus which represented the majority of each farm’s annual loss was different. On the JF4 farm, 65 percent of phosphorus loss was in the dissolved form. While at the WF1 farm 62 percent of the phosphorus loss was in the particulate form. If there was information only for WF1, a legitimate suggestion would be for that farm to implement a full no-till strategy to eliminate

September 2018 • PDPW • Dairy’s Bottom Line

phosphorus loss. But the data While the data may appear from the JF4 farm shows that to reveal a catch-22 situation, full no-till resulted in similar there are small tweaks each losses — albeit farm could consider While the data in the long term to in a different improve the amount form. may appear to and proportions of The difference between reveal a catch-22 phosphorus loss. seasons in WisThe no-till farm consin has a situation, there could consider using pronounced te c h n o l o g y t h a t effect on the are small tweaks allows for applicatiming and type of nutrients each farm could tion below the soil surof phosphorus l o s s. No - t i l l face without causing consider in systems in Wisadditional soil disthe long term turbance. That will consin offer a greater potenbe the key to striking to improve the a subtle balance of t i a l fo r d i s improving phosphosolved-phosamount and phorus loss rus losses without increasing either during the winproportions te r m o n t h s, dissolved or particuof phosphorus l a te l osse s. New along with a lesser potential te c h n o l og i e s a re loss. for loss of paravailable that allow manure to be incorticulate phosp h o r u s d u r i n g s u m m e r porated without soil disturmonths. In systems that utilize bance caused by heavy impletillage to incorporate nutri- ments. Additionally phosphoents, we see lesser losses of rus fertilizer can now be dissolved-phosphorus loss in banded or placed below the winter months, but greater seed with the right equipment. particulate-phosphorus loss For the tillage farm, conduring May and June when the tinuing to limit tillage in the soil is vulnerable to erosive rain rotation and avoiding tillage before and after soybeans will showers.

keep soil losses at a lesser amount. Because dry manure is used for a nutrient source, incorporating manure in a manner that least disturbs the

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soil is key.

Amber Radatz is a co-director of UW Discovery Farms. Email aradatz@ wisc.edu to reach her.

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September 2018 • PDPW • Dairy’s Bottom Line

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