|Missouri Dairy Business Update|
|Volume 1, Number 3|
State Dairy Specialist
University of Missouri
A catchy quote goes like this: "Would you work for you??" This question deserves a second thought. What are you asking this employee to do on your dairy and second, can the employee meet their basic needs for a living?
A written job description is helpful to both the employee and to the employer. It forces the employer to think through what is expected of the employee. What types of skills are required to carry on the tasks at hand? Is experience necessary or will training be provided? Most likely a drivers license is required. Is this job very specific or will the person be expected to do many of the tasks about a dairy?
Working in the parlor requires attention to details. The milker must be aware of correct milking procedures and the consequences of improper procedures. If someone answers your add for a job, likely they enjoy being around animals and working in the country.
A job description should include many of the following:
Recruiting the right person involves evaluating the labor pool available. Turnover is costly! Minimum wage likely will find those at the lower rung of the ladder. If you feel you cannot afford any more it may require evaluating your business. Size might be an issue. Adding a new employee may require adding more cows.
Milk production, calving interval, days to first breeding, culling percentage and somatic cell level all are factors associated with profitability. Here is a quick evaluation of partitioning dairy income. Feed cost should be 35-50% of the milk check. (Feed cost includes that expensive machinery to harvest your hay or silage) Variable costs such as teat dip, electricity, vet costs and semen for AI should be about 20% of the milk check. What is left should be available for interest, principal, depreciation and labor (which includes your own).
Assuming we have hired our dairy employee, initial training and feedback is essential. Be sure the manager (this may be you) is involved in teaching how you expect the cows to be milked. This includes why the unit should be attached within 90 seconds from the beginning of stimulation. Next includes "when is a cow milked out" and finally how do we teat dip. Spraying at the teats could easily set you up for a disaster in 2-3 months. How does this farm handle fresh and treated cows? Do all employees know how treated cows are identified?
Our new employee has started with enthusiasm. The next article will discuss employee motivation
University of Missouri
Time to play defense again! That's the message the class III milk futures are sending to dairy producers. According to USDA's November 2, 2001 Dairy Product Price Report, the price of cheese fell 15 cents last week to $1.40 a pound for 40 pound blocks and the price of butter dropped 14 cents to $1.32 a pound. Milk prices are headed south.
Looking forward, the CME Class III Milk Futures are trading at levels for the next twelve months that equate to levels barely above breakeven for many Missouri dairymen. The graph below depicts what players in the futures markets are expecting milk price to do over the next twelve months and how that would affect Missouri milk prices.
Note: Graph prices for MO SE Order reflect the Atlanta 3.5% Uniform Price minus the (Class I location differential X the % class I utilization). Graph prices for the MO Central Order reflect the Central Order Uniform Price at Jackson County Missouri. CME futures prices are as of the close of trading 11/01/2001. Future estimated basis levels are $1.70/cwt for the MO SE Order prices, and $.70/cwt for the MO Central Order prices
Every time milk prices tumble, some people become concerned that prices will go lower and stay there. The historical chart below depicting BFP/Class III prices since 1988 gives one some confidence that these extremely volatile prices are just a way of life in the today's dairy industry. Highs follow lows, but the volatility can be dramatic.
Once November rolls around farmers begin thinking about income taxes. Here are the highlights for 2001. More information is available from Parman Green's Ag Tax Tidbits web site. The site also contains a worksheet for estimating 2001 Income Tax.
|Standard Deduction Married filing jointly||$7,340||$7,600|
|Section 179 election to expense||$20,000||$24,000|
|Tax Rates: Married Filing Jointly||up to $45,200||15.0%|
|$45,200 to $109,250||27.5%|
Missouri dairymen had a good year this year with seven months of excellent milk prices. Many farmers will make new capital purchases in order to take advantage of the Section 179 election to expense up to $24,000 of qualifying capital purchases in the year of purchase, in order to lower taxable income.
Looking at the lower milk price futures for next year, perhaps a better income tax avoidance strategy would be to use income averaging and to prepay operating expenses instead of buying new machinery. Prepaid operating expenses are tax deductible this year and will help avoid cash flow problems coming with next year's lower milk prices.
Lower interest rates have convinced many farmers to consider refinancing some of their dairy operation. Depending upon the circumstances, refinancing can be a good way to decrease the need for cash for debt service and thus decrease the overall risk of the farm.
This is particularly true for dairies with over $2000 debt per cow, where that debt is at relatively high interest rates and short terms, like machinery and cow notes.
The "Impact of Debt Structure upon Dairy Cash Flow," spreadsheet below, (Download), details the impact that different debt structures and debt loads have upon the cash needs of a dairy. By varying the four numbers in the yellow block, (short term interest rates, short term amortization period, long term interest rates, long term amortization period), one can quickly see how the necessary principal and interest payments vary on a per cow basis.
A few words of caution are in order. First, bankers want the life of the loan to match the life of the underlying asset that serves as collateral for that loan. In other words, don't expect your lender to cheerfully set up a cow loan on seven year terms because the cows won't last that long.
Second, ideally one wants to structure the debt on a dairy to give the business the smallest debt service and thus the maximum amount of breathing room to survive poor milk price periods. However, if one uses this risk management strategy it becomes critically important to maintain the self-discipline to prepay payments and build equity quickly during periods of good profitability. Otherwise, the dairy just makes payments year in and year out and never builds any equity.
Central Order Pooling Hearing November 14th
A public hearing will be held to consider proposals that would amend certain pooling and related provisions of the Central federal milk order. The hearing will convene at 8:30 a.m. on Wednesday, November 14, 2001, at the Kansas City Airport Hilton Hotel. More info is available at the Central Order Milk Marketing Administrator's web site, under FO Issues.
Dairy Profit Seminars, Week of February 18th, 2002
Missouri Dairy Association will again sponsor the Dairy Profit Seminars around the state during the week of February 18th, 2002. Watch for details on locations and topics.
Dairy Cattle Markets
Looking for more websites with updates on cow and heifer prices from around the country? Try these sites:
Ag Marketing Service Cities Reporting Livestock: (Springfield MO, lists Blasit)
Progressive Dairymen (Western Markets)
Prepared by Joe Horner, Dairy and Beef Economist, Commercial Agriculture Program, University of Missouri. To contact Joe, call 573-882-9339, or e-mail firstname.lastname@example.org. All copies of this publication are accessible through AgEBB.
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