Dairy business planning
Post on 25-Feb-2016
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DAIRY BUSINESS PLANNING
Tim BeckDairy Business Management Educator
Parts of the Plan – Kurtz Example
“Owning” Your Plan• Does every farm plan have
this much information?– Company summary, Goals, S.W.O.T analysis,
Mission Statement, farm alternatives and Human Resource Plan already completed
– Preliminary Financial Analysis – spreadsheets with breakeven costs
• The Farm Manager needs to fully “own the plan” to manage it successfully in the future.
Key Financial Ratios• Term Debt Coverage (Repayment Capacity)
1.20 1.5015. Term-debt coverage ratio 2.71
Term-debt coverage ratio
- tells whether your business produced enough income to cover all intermediate and long-term debt payments. A ratio of less than 1.0 indicates that the business had to liquidate inventories, run up open accounts, borrow money, or sell assets to make scheduled payments
Key Financial Ratios• Current ratio (Liquidity)
Liquidity Vulnerable StrongBegin End 1.1 1.7
1. Current ratio 2.02
Your Farm
Current ratio:
measures the extent to which current farm assets, if sold tomorrow, would pay off current farm liabilities
Key Financial Ratios• Farm debt-to-asset ratio (Solvency)
Begin End 60% 30%4. Farm debt-to-asset ratio 53 %
Farm debt-to-asset ratio:
is the bank’s share of the business. It compares total farm debt to total farm assets. A higher ratio is an indicator of greater financial risk and lower borrowing capacity
Key Financial RatiosCost Market Per Cow
7. Net farm income 318,430$ $ 652$ 637$ 4% 8%
8. Rate of return on farm assets 8.4 %
Net Farm Income: (Profitability)
represents return to 3 things:• Your labor,• Your management and• Your equity,that you have invested in the business
Key Financial Ratios• Loan Payments per Cow (Risk Tolerance)
145 Farms (2013 Cash Flow Plans):
– Average $665/cow/year
– Range $132 -- $1,697/cow/year
Financial Ratios—Before/AfterTiestall & Rented
FarmTiestall, Rented Farm & Robotics
Goal
Term Debt Coverage .50 1.52 > 1.25
Current Ratio 1.04 3.00 > 1.5
Debt-to-asset Ratio 43.9 60.3 Comfort < 30Caution 30 - 60
Net Farm Income/Cow $186/cow $596/cow $400-$800/cow
Rate of Return on Assets 1.8 7.3 8.0
Loan Payments/Cow/Year $695/cow $756/cow $400-800/cow
http://www.finbin.umn.edu/
Unique Considerations:Robotic Systems• Hired labor should be lower per cow, loan
payments per cow may be higher– Trading capital investment for hired labor cost
• Debt per cow high compared to historical standards:– Look more closely at loan payments/cow– Milk sales/cow—evaluate adequacy of the
revenue to service debt
Environmental Costs & Funding• Required manure handling, storm water and
site improvements can cost $200K - $700K per project– Seek the support of environmental professionals
to explore grant funding for these projects• The financial viability of your expansion plan
may depend on grant funding– Be prepared to revise your plan as funding is
confirmed
Plan Risk Assessment• Ratio of Cows to Crop Acreage• Current production and management
compared to plan estimates• Historical proof of business performance• Risk assessment:
– Milk / Feed Prices– Milk Margin– Environmental
2013 Summary – Cash InflowAll Breeds 17% 21% 15% 13% 20% 13%
Breakeven Milk Price
Dairy Summary per Cow < $16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 AverageTotal Number of Cows 77 131 149 231 169 90 141 Number of Cows Milking 69 114 132 206 145 76 124 Percent in Milk 89% 87% 88% 88% 86% 85% 87%Milk Sold per Total Cows 22,561 23,281 23,103 22,454 21,541 18,053 21,832 Milk Sold per Milking Cow 25,458 26,860 26,359 25,637 25,086 21,155 25,093 Average Lbs Milk per Day 70 74 72 70 69 58 69 Average Milk Price Planned $ 19.15 $ 20.13 $ 19.92 $ 20.19 $ 20.11 $ 20.74 $ 20.04 Milk Inflow $ 4,320 $ 4,672 $ 4,602 $ 4,529 $ 4,351 $ 3,693 $ 4,361 Cull Cow Sales $ 199 $ 193 $ 225 $ 253 $ 200 $ 231 $ 217 Bull Calf Sales $ 42 $ 38 $ 39 $ 51 $ 36 $ 42 $ 41 Misc. Dairy Sales $ 58 $ 31 $ 111 $ 92 $ 214 $ 91 $ 99 Non Milk Inflow $ 306 $ 259 $ 376 $ 370 $ 327 $ 330 $ 328 Total Inflow $ 4,925 $ 5,192 $ 5,352 $ 5,294 $ 5,127 $ 4,388 $ 5,046
143 farms
2013 Summary – Feed CostsAll Breeds 17% 21% 15% 13% 20% 13%
Breakeven Milk PriceDairy Summary per Cow: < $16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 Average
Milking Cow Home Raised Feeds $ 502 $ 658 $ 682 $ 704 $ 644 $ 753 $ 657
Milking Cow Purchased Concentrates $ 1,008 $ 1,044 $ 1,115 $ 1,203 $ 1,180 $ 1,126 $ 1,113
Milking Cow Purchased Forages $ 273 $ 224 $ 152 $ 103 $ 166 $ 415 $ 222
Heifer and Dry Cow Home Raised Feed $ 93 $ 63 $ 214 $ 91 $ 101 $ 119 $ 114
Heifer and Dry Cow Pur Concentrates $ 237 $ 279 $ 337 $ 305 $ 323 $ 322 $ 301
Heifer and Dry Cow Pur Forages $ 144 $ 82 $ 170 $ 130 $ 86 $ 181 $ 132
Total Feed $ 2,258 $ 2,351 $ 2,669 $ 2,537 $ 2,500 $ 2,915 $ 2,538
Percent of Milk Inflow (Milking Cows) 41% 41% 42% 44% 46% 62% 46%
Home Raised Feeds $ 595 $ 721 $ 896 $ 795 $ 745 $ 872 $ 771
Purchased Concentrates $ 1,245 $ 1,323 $ 1,452 $ 1,508 $ 1,503 $ 1,447 $ 1,413
Purchased Forages $ 418 $ 306 $ 321 $ 233 $ 252 $ 595 $ 354
143 farms
Spent $500 less purchased feed/cow vs.
2013 Summary – The Bottom Line
All Breeds 17% 21% 15% 13% 20% 13%
Breakeven Milk PriceDairy Summary per Cow: < $16 $16-$18 $18-$19 $19-$20 $20-$22 >$22 AverageGross Milk Price Farm Breakeven $ 14.28 $ 17.06 $ 18.47 $ 19.39 $ 20.81 $ 25.61 $ 19.27 IOFC Breakeven $ 5.17 $ 6.96 $ 7.87 $ 7.70 $ 8.26 $ 8.21 $ 7.36 Gross Margin to Guarantee $ 7.46 $ 9.50 $ 10.88 $ 10.95 $ 11.96 $ 14.20 $ 10.83 Total Inflow - Total Outflow $ 475 $ 320 $ (383) $ (379) $ (228) $ (1,501) $ (283)
143 farms
Working with Your Lender• Involve your lender early in the process• Plan at least 1 year before any proposed start• Be flexible and open to lender requests and
bank standards• Expect plan revision requests• Be persistent and willing to redesign your
plan if the first edition isn’t considered fully viable
Tools for Plan Development:• Penn State Cash Flow spreadsheet:
– http://extension.psu.edu/animals/dairy/business-management/financial-tools/cash-flow-planning
• FINPACK software– http://www.cffm.umn.edu/FINPACK/
• AgPlan Web Site:– https://www.agplan.umn.edu/
• “Full Version” of Adobe Acrobat
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