March 14, 2022 at 6:16 p.m.
A future for small, midsize dairies
“I get asked this question a lot,” Salfer said. “And that’s a moving target, because how big is a small farm? How big is a midsized farm? It’s all relative, because the definition of a big farm is really one more cow than I’m milking.”
Salfer, a regional extension educator with the University of Minnesota, talked about the demand for dairy products and profitability on small and midsized dairies, strategies to improve profit and finding out what those strategies are during his presentation, “Is there a future for small and midsize dairy farms?” Feb. 21 at the Carver County Dairy Expo in Norwood Young America.
As the U.S. population continues to grow, so does the consumption of dairy products. Since 2000, consumers have eaten almost 100 pounds more of dairy foods, Salfer said. But for a dairy business to be viable in the years ahead, Salfer said it must not rely on increased consumption alone.
“Sustainability also plays a role,” Salfer said. “Consumers are much more demanding than they used to be. We can argue whether it’s right or wrong, but they are writing checks for our product so we better listen to what consumers have to say.”
Margin compression is also occurring as more technology is being implemented.
“This is the way all industries work,” Salfer said. “Doesn’t matter if this is the iron ore industry, corn, soybeans; in any commodity business, this happens.”
For the purpose of the presentation, Salfer referred to big dairies as those with more than 600 cows. Those farms tend to be either on the low or high end for gross farm income.
“If you’re a poor manager, you lose money in a really big hurry if you are a large farm,” Salfer said.
Unlike gross farm income, whole farm profit varies between farms falling in three categories: small (50-100 cows), midsized (100 to 600 cows) and big (more than 600 cows). Small and midsized farms come out on top, said Salfer.
“If you look at the median and average net farm income from 2015 to 2020, midsized farms averaged $180,000 net farm income,” Salfer said. “Even small dairies have averaged at $100,000 net farm income. There are farms doing OK, if this is OK according to your definition.”
Most businesses measure their profitability as a return on assets. Through his research, Salfer found most of these small dairies were getting an 8% return on assets.
“This is not a bad number,” Salfer said. “There are some of those small and midsized farms that are doing really well. Now we can argue whether that is going to go up or down, but this has been over the last five years.”
Salfer said these higher profit farms keep a higher percentage of every dollar of income. His research indicated small farms with higher profits are keeping almost 25% of every dollar spent.
“This is really the key and the number that drives the wagon on these farms,” Salfer said. “As you go down from 8% return on assets, those farms spend more than a dollar to get a dollar.”
The return on assets includes the operating profit margin and time asset turnover, Salfer said. Asset turnover is the amount of assets on a farm and the gross sales relative to that asset turnover.
“So, these small and midsized farms do a better job of efficiently managing their assets,” Salfer said.
Salfer found that in 1995 and 1997, the difference between the 20%-40% profit in the high profit farms was $2,700 per cow. From 2015 to 2016, he discovered this number was $908.
“It looks like milk per cow is a little less important,” Salfer said. “It won’t get you way ahead anymore.”
Industry practices have led to this change in profits, including better forages, marginal milk (milk produced after the fixed costs are paid) making more money, valuable components, not compromising cow health and knowing stressed immune systems use a lot of energy which results in higher feed costs.
“Interesting data from a study done by a colleague shows that cows with a really stressed immune system can use 4 pounds of sugar per day,” Salfer said. “If you got a lot of cows that are stressed that will make a heck of a lot of milk, but the average fat test coming into the processing plants is 4%. On farms today, I see a lot of 4.2% and 4.3%. So, farmers have to focus on components.”
Other standardizations are the cost of feed shrink and replacements, maintaining the pregnancy rate over 22%, keeping half of lactating cows pregnant, calving at 22-24 months, culling less than 5% of the herd and having good cow comfort.
Understanding this, Salfer challenged farmers in attendance to determine what their strategies are.
“You have to adapt and change,” Salfer said. “The more important those values are, the harder it is to change sometimes. You really have to look around at the industry, determine if this is a real trend or non-trend and how to adapt to it.”
In the future, Salfer said, there will be three types of dairies: scale adapted, traditional and niche adapted.
Scale-adapted farms will compete on the economics of scale; traditional farms will have off-farm income and compete from an established base of facilities and equity; and niche-adapted farms will do on-farm processing, farm cash crops, raise heifers or sell genetics to increase their profit margin.
Salfer encourages farmers to have good communication with their teams, look at combining and sharing resources with other dairy farmers, understand the economics of their business, invest in themselves and to not forget what is important − family, faith, health and attitude.
“Every farm has a strategy,” Salfer said. “Strategically think about what is your natural resource or skill advantage, and how are you going to take advantage of your skills? You have to figure out what you are really good at and do it well.”