AgDM newsletter article, June 1997

The dairy expansion decision

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

Many Iowa dairy producers are considering expanding their operations.† However, the decision will be different for every producer.† Below are ideas you should consider to help you make your decision.

Why are you expanding

Before you start laying-out blueprints for a new dairy barn, you must carefully examine why you are considering expanding.† Are there specific goals that you want to achieve such as increasing income or bringing a child into the business?† Also you must examine whether these goals are consistent with those of other family members.† The wishes of each family member should be considered before making a major expansion.

Types of Expansion

Usually, when we talk of expanding a dairy operation, we think of erecting new facilities.† However, expansion can involve any change that will increase milk production.† Below are three ways of expanding a dairy operation.

Increase production per cow
It may be possible to expand production and increase net income without increasing herd size and/or expanding facilities.† A careful examination of your production records may indicate that you can do a better job with your present operation.

Generally, the milk production per cow of Iowa herds is below the national average.† So there is room to increase milk production without increasing the number of cows milked.† For example, if you have a herd average under 18,000 pounds per year, you should take a hard look at ways of increasing production.

There are many ways you can increase production per cow. For example, cows standing in mud up to their hocks, lying in a poorly ventilated barn, or waiting in a holding area for several hours to be milked should be capable of greater production if cow comfort is improved.† In addition, the feed ration may not provide the energy necessary to achieve the desired milk production level.† Also, the current herd genetics may not be capable of producing at the desired level.†

Increasing herd size and/or expanding facilities should not be considered until efforts have been expended to increase production per cow.

Increase herd size (intensification)
Intensification involves evaluating your exiting facilities to make sure that maximum use is being made of them.† The best way to make full use of existing facilities and equipment is to milk as many cows as possible.† Milking parlors should be used 16 to 18 hours per day before a larger parlor is considered.† Adding part-time employees to do the milking will be more cost effective than building a new parlor.

You should not consider expanding facilities until your existing facilities are being fully utilized.

Expand facilities (capacity expansion)
Capacity expansion involves expanding both the facilities and herd size.† A key decision is how much to expand.† Conferring with your lender will allow you to expand to a size that is in line with the debt carrying capacity of your operation.† It is advisable to visit other similar size dairy farms to make comparisons.† Important questions can be answered by those who have experienced the expansion process.†

Capacity expansion of a dairy operation is very capital intensive.† The total investment will often run between $7000 and $8000 per cow.† It is common for total debt per cow to go from less than $2,000 before expansion to $3,000 or more after expansion.† Net worth as a percent of total assets may fall from 70 percent before expansion to 40 percent after expansion.

A long term business plan and budget should be developed to include the cost of new facilities and the milking center, along with any renovations needed for the original buildings.† In addition, cash flow projections should be developed for two or three years with special attention given to the transition time as the expansion plan becomes fully operational.

Cash flow statements should be based on conservative estimates of current production and expected milk prices.† Using conservative prices will give you some slack if things donít go as planned.

If new facilities will be built, you must consider how best to utilize existing facilities.† Usually existing facilities are used for heifers, springers, and/or dry cows.† The additional space may save having heifers raised by someone else and will probably improve conditions for the springers and dry cows.† A new building would be built for the milk producing unit rather than trying to renovate the existing one.†

Before you consider building new facilities, you should thoroughly investigate and implement ways of increasing production per cow and increasing the utilization of existing facilities.† Capacity expansion will not solve production problems.†

Assemble a team

The decision to engage in a major expansion is an important one -- one that requires information and assistance from many sources.† That is why it is a good idea to establish a team to help you sift through all of the possibilities.† By relying on a team of individuals with different areas of expertise a sound decision and plan of implementation can be created and followed to successful completion.†††

This team should include, but is not limited to, a veterinarian, nutritionist, banker, extension specialist, and tax consultant.† If the expansion decision includes adding new facilities, an engineer, equipment dealer (for milking, feeding, and waste handling), building contractor, and milk inspector should be added to the team.

 

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