Starting a dairy operation

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Jodi:

Welcome to the Successful Farming podcast, I'm Jodi Henke. The dairy business hasn't been kind to many producers over the past few years, but there are people who are looking to get into dairying, whether as continuing the family business or starting their own from scratch in this podcast episode, Successful Farming's, Mark Moore talks with South Dakota State University, extension experts, Tracey Erickson, and Heather Gassner about the nuts and bolts of starting a dairy.

Mark:

I want to get that broad brush look at it, not so much from the standpoint of yes, maybe someone joins their fathers or their parents operation, that's young versus starting in dairying, but looking more at the fact of you're starting fresh. Some things to think about some things to work on and one of the things too ... I talked with a producer, a younger producer yesterday. He's been as his parents operation or his dad and uncle for about 10 years now and when he started out, he typically wasn't like he didn't start fresh, but his dad went to him and said, "Okay, it's either the cows or crops. What do you want to do?" And this kid had his A.g. E.d. Degree and he studied it, did a spreadsheet, figured everything out and said, "Okay, we can make it work, but we've got to double the size of our herd" and do this and do that.

Mark:

He had all those specifics in mind, technically he wasn't starting a brand new dairy, but he was starting on a new path because he really pushed the pencil to it. So if you're beginning any business operation, you're going to push the pencil, but for dairy, maybe there's a another step that needs to be implied and done. I grew up on a dairy farm and I want to be a dairy farmer, but they may not have that all encompassing ideas that they need to have, especially in today's environment.

Tracey:

It's ironic Mark, that you mentioned that because I put together a few notes for our visit here this morning, right at the top, I wrote success with details and I think Heather would probably concur with this, that you got to have records and you've got to analyze them, you got to look at them and you got to put a business plan together and that I would agree with what that young gentleman is doing and in the direction that he's taken with trying to figure out how to get a vision and a plan in place.

Heather:

Yeah. A lot of what we talk about. So I'm working with some young producers that on a eight week program and we pretty much start at the very beginning and you've got to know what your goal is, so that you can then start and figure out if this guy's plan is to double his operation, how are we going to do that? And what's the financial steps and production steps that we need to take in order to make that happen.

Heather:

Especially for those kids coming into a new operation or creating their own farm, determining what they want to produce, how they're going to produce it, where they're going to sell it and putting those production goals together, combined with their personal goals of if I want to have a family a budget of $20,000 coming from the operation and then we've got off farm income that makes up the rest you need to know where that income is coming from.

Heather:

What's your streams of resources are going to be when cash is coming in, when cash is going out, so your financial statements and having all of those things put together and fixing the problems before you're able to go into a lender and say, "Hey, can you loan me money?" Their likelihood of saying, yes, increases if you don't have huge outstanding student debt remaining or bad credit card debt remaining, and those types of things. So looking at your operation before you I would take that step into financing and operation or buying ground, or buying a cow, knowing what your personal situation is. Is going to be very important to those kids, taking that first step and that might be some of their first goals that they have to implement.

Tracey:

And I'll agree with you, Heather just as you said, with that business plan, good credit rating, understanding those financial goals that you may have and putting them down on paper is really critical. The other piece that she mentioned too, which I absolutely agree with is finding a banker that understands agriculture and more importantly, understands dairy is going to be critical as you work into starting or growing a dairy operation.

Tracey:

The other piece before we get into technical things Mark is that putting a team together, but along with that at the top of that is communication between your team of experts or between your family or between people you're partnering with to start in dairy, or if you're starting where you're working on a dairy and gaining some expertise that way and you're trying to grow equity through maybe starting with cows, which is ... The best way to do it is to start with building a cow herd because there's no depreciation there before you start investing in machinery and buildings and facilities grow your cow herd partner with people, get that expertise, especially on a good dairy farm and put those things together as you put your business plan in place.

Mark:

Well, it's been to say the least a very difficult time for dairy production in the past several years. There have been glimmers here and there, but again, there are still producers that are actually doing well considering. Maybe not as good as they thought they could, but they're keeping their heads above water but for someone starting out, when they look at that situation are you seeing, are you getting those comments of people that they're still interested in saying, "Hey, this is what I want to do. How can I do it most effectively?"

Tracey:

Yeah, we are actually ... I had one here little over a month ago, contact me and look at his financials and business plan wanting to do a fresh start-up. Dairy obviously has been working in other areas, gaining income and supporting his family and stuff, but wants to start his own dairy. Yes, there are people out there that are wanting to do this and actually that's where the dairy industry is going to have to continue to look if we're going to be viable with people because there is a shrinking number of farms out there.

Tracey:

So that lends to less people coming back into the dairy industry to take over these operations, but it still requires labor and management. So we need to look outside of our traditional circle of regeneration. In other words, to people with limited dairy experience who are willing and have the desire and I underlined desire to come back into maybe be their own business managers in the dairy industry and the other thing is yes, dairy has seen some, I will call it really great highs and really great lows in the last 10 years in regards to milk prices and expenses and it's been a constant roller coaster.

Tracey:

So what Heather has referred to with financials and business plans is extremely important. You've got to know your cost of production. You've got to have those details and along with that, put together a risk management plan and take advantage of programs such as dairy margin coverage to help you ride out those times when the markets are in big swings and get through those financial rough spots.

Tracey:

It may require you as Heather will say, going in and getting a second job but you got to provide for cost of living, but you also need to have realistic cost of living and live within a realm that's affordable for your operation. Heather, other thoughts on that?

Heather:

Yeah and that's the big thing is when you're putting all those plans together is realistic numbers. Today a dairy cow might be worth $2,500. Tomorrow she might be worth $800 depending on what the market's doing back and forth. So you got to have those realistic figures in there and when you're trying to figure out your milk price even. Making sure that we're not dealing with inflated numbers or even in the high, third of the historical numbers for prices when you're putting your profits together, cause that's what really crashes in the 80's where, because people didn't put respectable numbers into their balance sheets and then when prices fell out of bed, they fell out hard.

Heather:

We'd like to produce a lot and we like to sell at high prices. So when we put our price forecasts and our budgets together, we like to guess that we're going to sell high and-

Mark:

It's like when you go to Vegas, you never talk about losing money. You always talk about winning, right?

Heather:

Right.

Tracey:

The other thing I might mention with that is as we look to successful dairy producers and also to successful farmers, we're all really good at production agriculture, which is growing crops or producing milk at high production levels we love to do it. Though the really successful farm managers are those that spend the time analyzing the data and the books and are also good if they have to hire help at taking the time to manage people.

Tracey:

Those aren't the fun tasks, but those are the ones ultimately that will make or break you in your operation a lot of times if you don't have a good checkbook, I'd start there balancing your checkbook is a very basic skill and keeping records of where you're spending those expenses invest in a software program, such as Quicken or QuickBooks or any financial management program for keeping records and start with that and then start building your skillset from there and if you don't have that knowledge, reach out to experts to get the help and get the skills to get from point A to point B.

Mark:

The producer that I was talking with, it was actually quite a eye-opening one is he mentioned that he has his book on when he did all the calculations on expanding the herd and he says, "I'm going to keep it because I worked on it a long time." But he even talked about having a spreadsheet that he's got all his expenses and things figured out to 2024. He said, "I'm a little anal that way." I'm like, "Well everybody should be that way." But he said, "I make changes. I adjust but I at least have some idea of where I stand at any given moment. Like business plan is not, you set it and you forget it, it's nurtured you have to adjust. But just having that roadmap tells you where you want to go. You may not use the same road that you started out on yet you know what your ultimate goal is."

Heather:

Having that cash flow statement laid out, he can make edits and adjustments to that cashflow. So feed price, corns went through the roof lately. So, that means his price of silage went up, his price of hay is going up, the price of corn and distillers and everything else that he's using on everything from baby calves to the slaughter steers price of producing each one of those goes up.

Heather:

He can now make more informed marketing decisions on or contracting steers or using any of the risk management tools for milk or raising calves or selling slaughter cows. The whole shebang, he gets a better grasp on because he knows what his expenses are and how much money he needs to come up with at the end of the day. So you could make marketing decisions and risk management decisions because you have a clue what's going on versus those guys that just grumble at feed store, "Oh, the price of feed went up again, darn it. The price of milk isn't going up. So I guess I just got to live with less money this month."

Tracey:

Heather's absolutely right. I don't know a banker, we're in farming ourselves, that you don't have to work with that doesn't require you to not only do a bounce sheet, but a cashflow, asset inventory, all of those things are done on annual basis, but more importantly, you need to look at them throughout the year, not just once a year, but throughout the year. Ask yourself about loans, what's your highest interest loan? What can you pay off to get less debt quicker to help you continue to move your business plan forward. But the other thing I like in it too, is that we really need to stop and think in agriculture and realize that yes, we are businesses.

Tracey:

Most people do realize that, but also knowing our cost to production is extremely important and if you liken it to any business such as a small business or even a big box store whatever, if you have products in that store, you darn well know they know what it's costing them to purchase them or produce them and to distribute them and what their margin is that they need for profit to be able to be fluid and have a positive cash flow.

Tracey:

We in agriculture have to continuously do that also and that's a very important task. So that young gentleman for having that forecast out for years, kudos and hats off to him.

Heather:

He would be the unicorn in the group.

Mark:

Well, I guess if that's part of the reason for this article is that I being from Wisconsin, obviously seeing things firsthand is eyeopening. Of course, everybody goes and does a story of woe is me, but they never talk to the producer who actually ... Yeah, they may grumble about prices. Well, who doesn't, but yet they're still profitable to a certain extent, but those producers as well, they'd be good managers of a car dealership or managers about, they just happen to be in agriculture their skillsets go on. I mean, just because you're good with cows does not mean that you're going to be a good dairy producer.

Heather:

You might be a good dairy producer. You're just not very good manager of your-

Mark:

Right. Exactly. Because it's difficult because you see some of these again, Wisconsin, when prices were at rock bottom the local newspapers obviously go out and they do the stories of the woe is me and then I talked to the more progressive producers and they pulled those articles out and they look at them and they said, "Well, look at this, why did they do this? Why did they invest this? Why did they-" They asked those questions it's not a slight on anyone, but it is the fact that you got to do your own work and especially now, because the price of land is higher, the price of inputs are higher, the price of everything is higher. But yet got to know how much it's going to cost for you per hundred weight and if you don't know that, how can you know, if you're making money or not?

Tracey:

Mark, one thing that, as I mentioned earlier, you have to have a good team and you have to surround yourself with good people who can provide you with good knowledge and advice, because we don't know everything. We can't physically know everything out there. So you need to seek out these experts and it may be even hiring someone if you're not good at bookkeeping and you know that's an essential thing. Then maybe you look to hire someone and build that into your budget, to keep your books and help you with the data on a daily basis.

Tracey:

But you need to commit the time then to go back and look at that data and understand it. But if those tasks, that's not something you enjoy, but you know what's necessary. That is something that could be built in good people and surrounding yourself with that knowledge and taking the time to analyze it and look at it, extremely important. So that helps for successful operations.

Mark:

If I'm going in besides the good business plan, what are some of the other things that I need to either be aware of or consider?

Tracey:

It depends upon the operation. You've got ones that are, maybe they're going to be growing up their operation within a family and I want Heather to visit about transition plans and things like that. The other thing which I can get into is some of the nuts and bolts of starting an operation that you need to consider along the lines of the regulatory waste management plans those other things so.

Tracey:

But Heather, why don't you talk about transition plans or if you're starting an operation from scratch, some of those things you might want to consider.

Heather:

Some of the first stuff, when you're looking at the multi-generational operation and you as an individual, there's a lot of income. So we're talking about transitioning assets and management and ownership. So we're looking at maybe a business structure. So maybe we set it up as an LLC. So you have the ability to transition the operation seamlessly from one generation to the next. Expenses are controlled by this LLC and you get your owner's draw from the LLC.

Heather:

But that provides you with a layer of security from any liabilities actions taken against you, if there's an accident or something, the operation or the business might struggle, but you as a person and your family are less financially impacted if there's a situation there, but when you put it into that LLC, that gives that transition control mechanism, an actual footing, and the management can then be transferred to that next generation kid that wants to come back to the operation because he who runs the checkbook basically runs the operation.

Heather:

And if you're working with dad as a sole proprietorship, and dad has the checkbook and had takes care of all the expenses and all the income comes into dad, basically dad makes all the decisions. So if we're looking at actual transition of that management and that finance situation, we're starting to make those decisions together and communication happens. It needs to occur between the two generations that are farming together to have that move forward.

Heather:

So you're looking at some of those transition mechanisms in that format so the LLC owns the cows, dad doesn't own the cows, I don't own the cows, but maybe dad maintains ownership of the barn or something like that. So, that there is that equity component tied into things. The big thing is you're starting out as an individual in addition to the regulations and stuff that you need to make sure you're setting yourself up as an LLC or some type of business structure, again, provides that safety net for the business, having a financial situation, not necessarily your family, having a situation, if something bad happens.

Heather:

So some of those types of things and looking really deep into what you want to have happen whether you're setting up a business, that's going to be a smaller, organic period that bottles your own you've got a whole different business structure then say and I'm going to set up a two to 3000 head dairy operation, and I'm going to sell it to whatever the biggest guy next to you. That's going to give me the best prices.

Heather:

Those types of structures and situations are going to have different financial requirements, different labor needs and resources that you have to really look into seriously, in addition to the regulation and all the different rules that you have to know for doing one or the other, or a combination of the two. So there's tons of things involved and it's really hard just to say, do this because everybody's operation is going to be so different that the steps are going to be very much on linear for whatever your goals are and what you want to have happened.

Mark:

When you think about LLC and business plans and even transition plans as well, think of, okay, it's the parents giving to the children, as far as the children coming back to the farm or something like that. That you're saying as well, these things need to be thought of, even if you're just starting out to make sure that you have that structure in place. That just probably make things a lot easier, not only from a financial standpoint, but also from if something happens to the farm or something happens, whatever that you're not only protected, but that you're secure as well.

Heather:

Yeah. Cause it provides a ... they call it a veil of separation between you and the business. So say you want to get started in dairying and you're going to start with 100 cows and you're going to bottle your own and you're going to add the agritourism part and you're going to bring busloads of students in, and you're bringing in nursing homes to come see the cows and whatever else your plan might entail. An accident happens and somebody is either really hurt bad and can't walk any more or God forbid, somebody dies and they sue you, they sue the business and not you. While it will hurt your business, they don't have access to your personal house or your wife's job or your private IRAs that you have set up from other jobs and stuff, because that's not part of the business.

Heather:

So it does require additional bookkeeping, which people don't necessarily like, but you have a set of books for the business and you have the set of books for you and when you buy groceries, you buy groceries with your checkbook and when we buy AI supplies, we buy them with the business's checkbook and keep those things very separate. You really are two different things. So we can go after this as part of our backup plan.

Mark:

Producers looking at more than just say, "Okay, I'm going to milk X amount of cows and I'm going to ship the milk off to wherever." Are we seeing a lot too of maybe organic? I know has been big, but the agritourism or the fact that we're going to make this a complete structure, not just a dairy farm, maybe not as big obviously, but they're able to have other areas of income or other sources of income without maybe having the investment in herd or parlor, all that that goes along with it.

Tracey:

Some of the things that we've been seeing is an increased interest in on-farm processing, especially in smaller operations, tying that in maybe with the robotic dairies, if you're a say a two to 400 cow dairy, somewhere in there, they're looking to add income where to grow in those regards, if there's a populous base or a way that they can market additional product out through on-farm processing and take advantage of those things.

Tracey:

So those have been growing recently. We also see dairies looking to expand too. Obviously it's all dependent upon consumer demand, but also tied into that is I'll mention some of the things that need consideration one checking into marketing your product. Well, it's really important to make sure that you've got a place to market your milk through and making sure that you have a processor that's willing to purchase your product and that has capacity to take on your product.

Tracey:

So make sure that you check with processors in addition to price and what their roles and contracts are for marketing your milk. So in addition to that checking with your local regulatory division in your state to find out what's all the rules and regulations are so that you can adequately follow the PMO when you're putting together your operation, if you're starting new, or if you're expanding.

Tracey:

Obviously if you're a part of something already, and you're say a father and a son or a daughter that's coming up through the ranks, the husband, wife, whatever it might be and working through that. Obviously that dairy probably is meeting those regulations if they're already marketing milk, but if you're looking to grow or expand your operation, once again, I go back to checking with your processor and see if they have the capacity to take on additional milk and that's going to be really important.

Tracey:

So those are some of the big ones. Oh, and the other one too, to think about is waste management because working with your local, either DENR or Environment and Natural Resources office, whichever it may be in your state and making sure that if you're expanding you know what those regulations are. If you reach X number of cows, what kind of plans are you going to have in place those types of things to meet all the waste management requirements.

Tracey:

And the other thing, the last thing I might mention is the F.A.R.M program, which is F.A.R.M, Farmers Assuring Responsible Management. Pretty much I think we're at about 95 to 98% of the processors now require all their producers, that follow that program to be able to market milk. So make sure that you're going to be able to meet those requirements as you market product, back to the processors.

Mark:

The innovation I guess there are some of the things that producers have come to you or you have seen as far as newer operations and, "Hey, I never thought of this." Or maybe again, the on-farm processing, I guess has always been a part of it. I know in Wisconsin, that's a huge thing that a lot of these smaller operations in fact, one by me that I've known for years, they started their own cheese and wine that basically got them through the past few years because it's done very well. So are you surprised at the innovation that you've seen as far as what some of these ideas that people have come up with in that they actually made them work.

Tracey:

And I'm going to let Heather also chime in on this, some of the things on the dairy side, because the on-farm processing has really started to take off here in the I-29 corridor and expand partly because for a while there was, limited processing capacity available and now that we've added processors, there's more market for the milk.

Tracey:

It's a chick and egg scenario. You got to have enough capacity to process milk, but also enough milk to keep processors growing too and so it's a fine line we walk, but we are now in the I-29 quarter seeing expansion on the side of on-farm processing, especially as populations concentrate in certain areas and also with smaller operations, looking to other ways to innovate and bring income back to the farm.

Tracey:

One of the things that I think has probably been the most unique we've got a couple of them in addition to doing on-farm processing. But as Heather mentioned, the side about the LLC, that's been really important to consider is a lot of those farms are also adding the on-farm experience to their business. In other words, doing farm tours, agritourism, things like that. That brings in a whole new realm of things to consider with your business plan. It can be very buyable, but it does take a lot of other considerations that people need to talk about. So Heather, I don't know if you want to follow up with anything there.

Heather:

Yeah, so well not last year obviously, because we didn't get to travel anywhere. So it must have been 2019. I was actually at some meetings in Madison, Wisconsin and we toured two or three farms that were in transitional stages. One of them was working on third generation. One was a new startup, they had added that agritourism component. So when they built the new parlor and put in the new robots, the two robots are in front of glass so that everybody can see and then they bring in all kinds of stuff.

Heather:

The number of visitors that they had every year was phenomenal. The baby calves are behind glass so that you can go see where the calves are nursed when they feed baby calves and those types of things, or watch a calf be born the whole shebang they've set it up specifically for that.

Heather:

And they were attributing some of their success and their ability to grow and keep the farming operation viable to that when milk prices were low because they could still charge however many dollars ahead and they brought busloads of people out during their fall extravaganza or whatever they call it.

Heather:

So there's a lot of those things that are happening and ice cream or cheese are our own bottling those are different ways that the mixed generation or the non-farmed kid can get started in dairy without having a monster situation, a monster business to grow into or start with you just got to make sure that you're watching all of those new regulations or different regulations that you might not even consider having to think about. Do you have your ServSafe Food license, if you're going to start making food for human consumption? It's not something people think about.

Heather:

We're just going to start bottling our own milk and selling it. Well, what are all the regulations in your state that are required? Can you ship it across state lines and how are you going to ship it and so that it stays cold and stays good and all those millions of different questions that need to be asked. So putting together your dairy business is easy, putting together your value added dairy business as a whole adds another set of things if you might not have considered so, lots of components and lots of moving parts in all of it.

Mark:

Do you guys have any other thing that you might want to add or any other thoughts or comments or?

Tracey:

Well, I'll summarize, one thing that is at the top of my list of things is one, again successes in the details, put it in writing, get a vision, and then make sure that you're communicating with your network of people to help you grow and be successful.

Heather:

That communication factor is going to be huge, especially if you're starting a brand new operation or you're going in for a large loan to redo a parlor or add an electronic milker, whatever you're trying to do, you need to communicate with your lender. You can't just be secretive about what you want to have happen or what you're doing. They need to be involved. Your accountant should be involved so that you can make sure that you're on the same page there. So whoever your team is and your team can be big or small, depending on what you feel your strengths are or where you prefer to work in.

Heather:

Maybe you like the numbers and you've hired somebody to manage the cows. It doesn't mean that you're not a dairyman because you're not out having cows or moving them into the milking parlor. Maybe you're the finance guy and you want to know what the numbers are. So communicating with all of those that are involved from hired men that do nothing but scrape manure all day to those that are your financial backers is huge.

Tracey:

Yeah, you got to know what you're good at and what you like doing.

Mark:

Listen you guys. Thank you very much for taking time with me today. I certainly appreciate it.

Jodi:

Thanks to Mark Moore for hosting this podcast and to Tracey Erickson and Heather Gassner for their expertise and thank you for listening for Successful Farming, I'm Jodi Henke.

Read Mark's article about how one young man returned to his family's Wisconsin dairy operation in the April 2021 edition of Successful Farming Magazine.