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7/27/2019 Dairy Spending Decisions
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Where is the best place to put profits?
Goals of BusinessProfitabilityLiquidity
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Profitability
Interest Savings Through Debt Reduction
New Investments
Liquidity
Build Savings
Build Credit Reserves
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Which takes priority?
Short-run vs Long-run needs
Short-runSurvival
Long-run
Profitability and Security
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First Priority
Liquidity Then Profitability
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Build Liquidity
Save Profits
Build credit reserves for short-run
(operating credit)
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What is Liquidity?
Ability to get cash needed to fund operations
Measures:Cash savingsWorking capital
(Current assets – Current liabilities)
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ow much liquidity?
Working capital equal to one year family living expenses
Allows family to cover living expenses withouttapping into credit reserves
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Choosing Between Dairy Cows, Land, and Financial Assets
Cows vs LandIn general, $1500-$2000 invested in an excellent dairy cow will result in higher cash flowsand 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.
Cows or Land vs Financial AssetsInvesting in financial assets generates income for the current household but it fails toexpand the holding of farm assets such as cows and land so that family member may become a part of the family business. Thus investing in cows and land is generally preferred
to investing in financial assets.
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Rate of Return On Dairy Cow Added to an Existing Dairy Enterprise For a CaseWhere: Purchase Price of a Cow is $1,300; Slaughter Value is $400; Cow UsefulLife is 3 Years; and Tax Rate is 35%.
Milk Income ( 20,000 lbs @ $13/CWT ) 2600.00Calf Sales 80.00Total Income 2680.00
Feed Costs 1042.00Other Variable Costs 490.00Death Loss 25.00Labor Costs 415.00Total Costs 1972.00
Net Operating Returns 708.00
Income & SE Taxes 96.13
Net Annual After-Tax Returns 611.87
Rate of Return 26.34%
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Potential Returns on Dairy Cow Costing $1,800 With a
Productive Life of Three Years
Annual Milk Production
Rates of Return on Investment (%) When the per Hundredweight Price of Milk is:
$12.00 $13.00 $14.00
20,000 1.01 10.82 20.23
23,000 13.26 23.95 34.28
26,000 24.92 36.54 47.80
29,000 36.14 48.70 60.93
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Potential Returns on Dairy Cow Costing $2,100 With a
Productive Life of Three Years
Annual Milk
Production
Rates of Return on Investment (%) When the per
Hundredweight Price of Milk is:$12.00 $13.00 $14.00
20,000 -3.80 4.92 13.72
23,000 7.08 16.58 25.72
26,000 17.43 27.72 37.67
29,000 27.37 38.47 49.25
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Labor and capital constraints that make it difficult for farmers to addcows and/or land to their operations.
To overcome theses resource constraints farmers turn to cost savingor production enhancing investments.
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Rates of Return on $100,000 Parlor Investment Over 10 Years, When Stall
Throughput is 22.5 Cows per Hour, Parlor Throughput is 64 Cows per Hour, and theTax Rate is 35%.
Cows Hourly Wage Rate For Labor ( In Dollars )6 7 8 9 10
25 -9.48% -8.62% -7.78% -6.97% -6.19%50 -4.70% -3.28% -1.93% -0.64% 0.61%75 -0.64% 1.21% 2.97% 4.65% 6.26%100 2.97% 5.19% 7.31% 9.33% 11.27%125 6.26% 8.83% 11.27% 13.62% 15.87%
150 9.33% 12.22% 14.98% 17.63% 20.20%175 12.22% 15.43% 18.50% 21.45% 24.32%
200 14.98% 18.50% 21.87% 25.13% 28.30%225 17.63% 21.45% 25.13% 28.69% 32.16%250 20.20% 24.32% 28.30% 32.16% 35.94%275 22.69% 27.12% 31.40% 35.56% 39.65%300 25.13% 29.85% 34.44% 38.91% 43.31%
325 27.51% 32.54% 37.43% 42.21% 46.92%350 29.85% 35.19% 40.38% 45.48% 50.50%375 32.16% 37.80% 43.31% 48.71% 54.05%400 34.44% 40.38% 46.20% 51.92% 57.58%425 36.69% 42.94% 49.07% 55.11% 61.09%450 38.91% 45.48% 51.92% 58.29% 64.59%475 41.12% 48.00% 54.76% 61.44% 68.07%
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Rates of Return on $250,000 Parlor Investment Over 20 Years, When StallThroughput is 22.5 Cows per Hour, Parlor Throughput is 64 Cows per Hour, and theTax Rate is 35%.
Cows Hourly Wage Rate For Labor ( In Dollars )
6 7 8 9 10
25 -5.64% -5.25% -4.86% -4.49% -4.13%50 -3.44% -2.79% -2.17% -1.58% -1.01%75 -1.58% -0.74% 0.06% 0.82% 1.55%
100 0.06% 1.07% 2.02% 2.92% 3.79%125 1.55% 2.70% 3.79% 4.82% 5.81%
150 2.92% 4.21% 5.42% 6.58% 7.69%175 4.21% 5.62% 6.96% 8.24% 9.47%200 5.42% 6.96% 8.42% 9.81% 11.16%225 6.58% 8.24% 9.81% 11.33% 12.79%250 7.69% 9.47% 11.16% 12.79% 14.37%275 8.77% 10.66% 12.47% 14.22% 15.92%300 9.81% 11.82% 13.75% 15.61% 17.43%
325 10.83% 12.95% 15.00% 16.98% 18.92%350 11.82% 14.06% 16.22% 18.32% 20.38%375 12.79% 15.15% 17.43% 19.65% 21.83%400 13.75% 16.22% 18.62% 20.97% 23.27%425 14.69% 17.28% 19.80% 22.27% 24.69%450 15.61% 18.32% 20.97% 23.56% 26.11%475 16.53% 19.36% 22.12% 24.84% 27.52%
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Housing investment – Free-stalls
Greater cow comfort
Higher milk productionLower health costs
Improved labor productivityLess time feedingLess time cleaning barns
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Feed storage and handling
Improved feed quality
Higher milk productionReduced purchases of supplements
Improved Labor Productivity
Less time mixing and handling feed
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Manure storage and handling
Less labor requirementsSchedule manure applications when labor and/or land availablePotential source of income
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Dairy Replacement Enterprises
Custom Services vs Stand Alone Enterprise
Custom Services – Advantage
Reduced labor requirementsReduced capital requirementsReduced management strains
Custom Services – DisadvantagesBio-securityReliance on another manager
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Cropping Machinery and Equipment
Higher feed costs if machinery and equipment not used to capacity
Labor required to operate machinery and equipmentRepairs and maintenance costsTechnical obsolescence and capital losses on investment