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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 .

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 .Long-Run Investments Income generating Dairy cows Land Financial assets (stocks.

Land. 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. $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. and Financial Assets Cows vs Land In general. Thus investing in cows and land is generally preferred to investing in financial assets.Choosing Between Dairy Cows. .

00 1972. Cow Useful Life is 3 Years. Milk Income ( 20.34% .Rate of Return On Dairy Cow Added to an Existing Dairy Enterprise For a Case Where: Purchase Price of a Cow is $1.00 490.00 708.00 2680.87 Rate of Return 26.13 611. Slaughter Value is $400. and Tax Rate is 35%.00 1042.000 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 80.300.00 25.00 96.00 415.

92 36.23 34.14 $13.000 23.93 .Potential Returns on Dairy Cow Costing $1.82 23.000 26.00 20.800 With a Productive Life of Three Years Annual Milk Production Rates of Return on Investment (%) When the per Hundredweight Price of Milk is: $12.000 1.000 29.00 10.00 20.01 13.70 $14.54 48.95 36.80 60.26 24.28 47.

80 7.72 38.47 $14.08 17.000 29.67 49.00 13.00 20.00 4.43 27.000 -3.25 .100 With a Productive Life of Three Years Annual Milk Production Rates of Return on Investment (%) When the per Hundredweight Price of Milk is: $12.72 25.72 37.37 $13.Potential Returns on Dairy Cow Costing $2.58 27.92 16.000 26.000 23.

To overcome theses resource constraints farmers turn to cost saving or production enhancing investments.Labor and capital constraints that make it difficult for farmers to add cows and/or land to their operations. .

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 .

65% 43.83% 12.94% 45.40% 34.16% 34.20% 49.13% 28.50% 54.000 Parlor Investment Over 10 Years.00% -7.38% 43.85% 32.51% 29.16% 35.87% 25.12% 29.27% 15.11% 58.07% .58% 61.45% 25.70% -0.38% 42.19% 0.28% 1.76% -6.5 Cows per Hour.71% 51.13% 28.Rates of Return on $100.62% 17.05% 57.32% 28.93% 2.64% 2.32% 27.98% 18.44% 36.80% 40.69% 25.16% 35.07% 51.78% -1.21% 45.22% 14.97% -0.13% 27.21% 5.61% 6.59% 68.97% 7.92% 54.48% 48. and the Tax Rate is 35%.26% 9.31% 46.29% 61.64% 4.65% 9.50% 21.09% 64.56% 38.22% 15.33% 13.33% 12.92% 50.48% -4.69% 32. Cows 6 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 -9.26% 11.91% 41.94% 39.31% 46. Parlor Throughput is 64 Cows per Hour.45% 24.43% 40.69% 38.50% 21. When Stall Throughput is 22.43% 18.97% 6.31% 11.30% 32.63% 20.87% 20.27% 14.48% 48.85% 32.19% 37.63% 21.30% 31.92% 55.20% 22.44% 37.19% 8.62% -3.54% 35.91% 42.20% 24.12% Hourly Wage Rate For Labor ( In Dollars ) 7 8 9 -8.98% 17.44% 10 -6.

and the Tax Rate is 35%.79% 14.74% 1.64% -3.62% 19.69% 9.01% 1.79% 13.61% 16.55% 3.79% 5.11% 27.49% -1.42% 6.24% 9.82% 12.5 Cows per Hour.92% 20.81% 7.38% 21.79% 5.56% 24.02% 3.98% 18.83% 23.37% 15.62% 6.55% 2.42% 9.53% Hourly Wage Rate For Labor ( In Dollars ) 7 8 9 -5.77% 9.75% 15.22% 17.15% 16.75% 14.47% 13.44% -1.97% 22.96% 8.86% -2. Cows 6 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 -5.22% 17.58% 0.24% 9.16% 12.52% .06% 15.69% 8. When Stall Throughput is 22.42% 6.12% -4.82% 2.80% 20.82% 6.81% 11.Rates of Return on $250.95% 14.32% 19.06% 1.58% 7.25% -2.84% 10 -4.33% 12.27% 24.43% 18.47% 11.81% 10.000 Parlor Investment Over 20 Years.00% 16.79% 14.06% 2.32% 19.22% 15. Parlor Throughput is 64 Cows per Hour.07% 2.36% -4.82% 12.21% 5.96% 8.17% 0.92% 17.70% 4.61% 16.58% 8.58% 0.43% 18.47% 10.92% 4.65% 20.97% 22.28% 18.81% 11.69% 15.13% -1.27% 23.21% 5.66% 11.83% 11.16% 12.69% 26.92% 4.79% -0.

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

35 117.65 Rate of Return 6.00 80. Net Operating Returns Taxes Net Annual After-Tax Returns 66.46% . Returns on Investment: Milk Income ( 55% of 1000 lbs @ 12/CWT) Labor Savings ( 5 Hrs @ $10/Hr.200 for 20 Year Useful Life.00 146.Rate of Return On Dairy Cow Housing Investment of $1.00 28. and 35% Tax Rate.

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 .