AgDM newsletter article, July 1998

Critical success factors for dairy expansion

Ron HookBy Ron Hook, Extension Farm Management Specialist, 712.754.3648, rhook@iastate.edu

Who should embark on the path of beginning or expanding a dairy operation?† To answer this we must identify the qualities, characteristics, and capabilities that an individual or a group considering dairy expansion should possess.† Below are seven critical success factors that are essential for successfully beginning or expanding a dairy.†

Leadership

To ensure success, someone needs to take charge and insure that things are accomplished in a timely manner.† The wheels of progress turn slowly in these situations so it is difficult to keep the momentum going.†† In the case of a family business, look for someone who has the desire to make the contacts necessary to complete a successful change.† Leadership is even more important in a group situation because it is so easy to let someone else do it.

Spokesperson
It is better to have one spokesperson for the whole group rather than a group of spokespersons.† The individual who becomes the spokesperson needs to be able to communicate the vision of the dairy project to groups outside of the organization.†

Goals

The individual or group should have established realistic goals of where they are headed with their operation and what they want to accomplish.† A mission statement, achievable goals, and a strategic plan for how this will be done are essential.†

A family operation decided to expand their business so that their children could return to the farm if they desired.† Because of their successful track record in milk production and a clearly defined set of goals of what they wanted to achieve they are in the process of completing a five-fold increase in their dairy operation.

Management

It takes good management skills to successfully complete an expansion project.† Several types of management skills are needed.

Production management
Good herd production levels before expansion is likely a result of good management practices already in place.† The trick is to carry these production levels over into the expansion phase.† Expecting an expansion to cure existing production problems is a mistake.† An expansion will only serve to compound your production problems.

Managing people was the most difficult aspect of his expansion project.

Personnel management
One of the operators that I have worked with indicated that managing people was the most difficult aspect of his familyís expansion project.† Learning by trial and error may be a frustrating and costly way to develop personnel management skills. The skill of effectively dealing with different types of people is extremely important and should be acquired or updated as part of the expansion process.†

Commitment

Total commitment by members of the family or group is essential for the successful completion of the project.† Two types of commitment are especially important.

Time
First, a dairy project will take a lot of time and effort to accomplish.† Those involved must be willing to set aside time for committee and subcommittee meetings.† There will be time spent with consultants, lawyers, and lenders.† These meetings and the decision making that accompanies them may even take place during crunch times like planting and harvest.† Those who get involved canít expect someone else to do it.

Money
Second is the commitment of money.† Dairy expansion will take a sizable commitment of money.† Facilities, equipment, and new breeding stock will be expensive and it may take a couple of years before a return is realized.

Capital

Modern dairying is extremely capital intensive.† Expansion hopefuls must be willing to face the possibility of large investments.†

Investment capital
It is not uncommon for a dairy to have an investment of $2,200 per cow in buildings and equipment.† In addition, the cows will cost† from $1,100 to 1,400 each.† When the investment in the land needed to raise the feed is included, the total investment may run as high as $7,000 to 8,000 per cow.† See Table 1 for some investment estimates you can use when doing initial budgeting for a dairy expansion project.† Of course, actual investment projections for your specific project should be used when developing a business plan.

Table 1.† Estimated dairy investment requirements (per cow)

 

150 cow or less

500 cows

1,000 cows or more

Land (site only)

$ 300

$ 200

$ 100

Buildings

2,800 - 3,000

2,100 - 2,400

1,800 - 2,000

Livestock

1,100 - 1,400

1,100 - 1,400

1,100 - 1,400

Machinery & Equip.

1,400 - 1,600

700 - 950

400 - 650

Working Capital

590 - 650

440 - 530

340 - 420

Total

$6,190 - 6,950

$4,540 - 5,480

$3,740 - 4,570

The cost for buildings may be reduced in smaller expansions if existing buildings are remodeled rather than new construction.† Used equipment can reduce the amount spent on machinery and equipment as well.

Equity capital
Almost without exception, dairymen who have expanded tell me that it is essential to have sufficient equity in the operation after expansion.† Most recommend 40% or more if possible.† It is possible but not recommended to complete a successful expansion with as low as 30% equity (post-expansion).†

Working capital
Another important factor is to have sufficient working capital for the project.† This will allow for cost overruns and other unexpected expenses or opportunities that may come up.† A comfortable working capital allowance should be from 10-40% of the amount invested in the expansion project.

Financial projections

Financial projections are necessary to determine the financial feasibility of an expansion project.† In addition, a sensitivity analysis should be done to determine how vulnerable the operation is to changes in prices paid for inputs and prices received for products sold.† Projections using a combination of different milk and feed prices has been very helpful to dairymen I have worked with as they contemplated an expansion decision.

Financial projections can easily be done using a computerized financial analysis package such as FINPACK.† This program allows you to estimate the expected profitability and solvency of the project after the expansion is fully implemented.† It also allows to you create detailed estimates of the cash-flow requirements during the start-up phase.

During the past couple of years I have used FINPACK to make financial projections for several dairy expansion projects.

During the past couple of years I have used this program to make financial projections for several dairy expansion projects.† Several of these projects have gone on to complete their expansion plans.

Flexibility

Most of agriculture, and that includes dairying, is in a constant state of change.† As a result those producers who are successful in expanding their operation must be flexible.† The ability to deal with changes in financial circumstances, personnel matters, and the industry environment is essential to successful expansion.† It is important that you try to anticipate these changes in advance rather than waiting for them to occur and then reacting to them.†

The ability and willingness to learn new skills is important when adjusting to change.† This allows you to use change to your advantage rather than being a victim.

 

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