An Investment Opportunity?

By John S. Hibma

For many years I've invested in the stock market with the long-term goal that I could accumulate a nest egg for my retirement. During the past decade, I've watched as my portfolio increased in value only to see much of that value disappear when the U.S. economy collapsed. Today, the value of my investments has recovered nicely, but I have a long way to go before I get to that magic number at which I can retire. Even now I watch as my net worth sometimes fluctuates significantly over the course of a week based on a sputtering world economy as well as other people's greed and ineptitude messing things up. Like many, I balance and rebalance my portfolio and look for other investment opportunities that will make me lots of money with minimal risk. I try not to let the uncertainty of the markets bother me too much, and I stoically maintain confidence that the world economy won't completely tank before 2020.

No matter what industry we're in, we all must deal with uncertainty and the ever-increasing level of volatility with regards to the cash flow and profitability that are necessary to stay in business. The most effective way I can manage my investment portfolio is to consult my financial advisor and listen closely to his advice. Over the years we have taken the approach that a diversified portfolio with a varying mix of stocks and bonds is the best way to deal with the volatility in the markets and the economy.

Just as any positive performance in the stock market is difficult to predict, it's nearly impossible to know when low milk prices or high production costs will erode away profits in a dairy business. In order for any business to remain profitable, revenue from sales must always be greater than the costs of production or services. At the core of successful dairy farming is the production of milk. The trick, of course, is to figure out how to make that milk in a volatile economic environment that sends the milk price plummeting one year and reaching record highs the next, and do it surrounded with the uncertainty of increasing production costs.

According to the 2010 Northeast Dairy Farm Summary, compiled by Northeast Farm Credit, feed and farming costs for Northeast dairy farms range between 38 and 40 percent of total operating costs - the single largest expense on the typical dairy. Nothing on a dairy farm will dig a financial hole faster than out-of-control feed costs. Dairy farms that invest heavily in growing their own forages and grains have traditionally had the potential to increase net profits by decreasing their purchased feed costs. A good dairy farmer who is also a good farmer can maintain a herd average well over 20,000 pounds with high-quality forages.

What about 2011? Fuel costs have jumped significantly, adding to the cost of growing crops. In some New England areas a wet June delayed corn planting, and then the summer turned hot and dry, affecting growth. Then Hurricane Irene came along and knocked down many hundreds of acres of corn in southern New England, reducing yields by 25 percent. A week later, Tropical Storm Lee did a number on crops farther north. Some places in the Northeast got close to a whole year's worth of rainfall in two weeks, and the floods that resulted were devastating for many. Typical of New England, making good hay has been a challenge again this year. Sadly, for some dairy farms this may be the last straw and they will have to call it quits. For sure, though, most dairy farmers are resourceful and resilient and will figure out a way to recover from any setbacks.

One of the most interesting trends that Farm Credit tracks is profitability per cow relative to milk produced per cow. There are some dairies that make as much money per cow per year producing only 15,000 pounds of milk as another dairy does producing over 20,000 pounds of milk per cow per year. Making money on a dairy doesn't necessarily mean making lots of milk per cow - even though producing milk is what dairy farming is all about. Maximizing milk components, no matter what breed of cow you prefer, can quickly add a couple bucks per hundredweight to your milk check.

The key to profitability is management - management of all resources such as capital, feed and labor while operating the business as efficiently as possible. The 2010 Northeast Dairy Farm Summary categorizes dairies according to a variety of different management styles. They are:

I've spent most of the past two decades advising dairy farmers on how best to feed their cows and to improve their financial bottom lines by improving milk production and other on-farm efficiencies, such as forage quality, reproduction and calf raising. I'm a staunch believer that, in most cases on a dairy farm, shipping more milk fat and protein per cow usually puts a farm in a better financial position than settling for less milk.

Ultimately, the path a dairy farm chooses needs to be based on what your market is going to be. Will it be a niche market focused on retail pricing that adds value to your product, or will it be through traditional marketing channels? Farm sizes must be based upon how many people the farm will have to support. How many cows must be milked to support those people? And, how many pounds of milk do the cows have to produce every day to keep the cash flowing? Then feed availability and costs along with land base must be factored in when determining if a certain herd size is viable.

Even though we can't control all the variables and risks associated with running a dairy business, there are many things that, if properly planned for, will help keep the business profitable through more years than not. And maybe, just maybe, your investment in dairy farming will get you a better return than the stock market.

The author is a dairy nutritional consultant and works for Central Connecticut Farmer's Cooperative in Manchester, Conn.