A young livestock producer, in this case a dairyman, asked a very good question in our Farm Credit University online Ag Biz Planner course for young farmers. “What can we do to control expenses?” This question is very pertinent to the livestock industry that is reeling from the dramatic increases in costs, which has resulted in margin compression and in many cases negative margins. Let’s provide some insight.
First, let's get to the basics of budgeting. One of the best tools I have used in our dairy business is budget variance analysis. Each month, the management team monitors projected costs compared to actual costs. Once a quarter, our management team sits down with our advisory team, which includes our veterinarian, crop and livestock consultant and an Extension specialist, to discuss blind spots and alternatives that will improve the long-run effectiveness of the business. Strategies developed in this meeting have specific metrics and timelines, as well as someone held accountable for the strategy’s completion.
Next, focus on the big four or five expense lines. For most livestock producers, this will be feed cost, crop expense if forage crops are raised, labor, repairs and maintenance, etc. Too often when cost-cutting procedures take place, there tends to be a focus on the minor costs, such as testing, genetics, etc. which may not have a major impact on total expenses. Evaluating the large expenses can have the most impact on the bottom line.
However, the impact of testing should not be understated. Soil and forage testing along with livestock testing and monitoring become very critical in a systematic approach to cost cutting. For example, soil testing can influence fertilizer costs, which can be a huge expense for a cropping enterprise.
Next, become very proactive. Economic cycles in the agriculture industry are going to continue to be very volatile, extreme and unpredictable. Risk management requires a three-pronged approach that includes revenue, expenses and interest rates. A sound, well thought-out risk management plan with targeted metrics based upon costs, breakeven levels and profit benchmarks will not be an option but a requirement. In the profitable part of the cycle, hold cash and working capital to allow you to not only navigate through the down cycle, but also position your business take advantage of buying and capital investment opportunities on the other side.
Finally, at least once a year establish your goals. Often in this topsy-turvy world, it is easy to lose your focus psychologically because of all the “noise” in our information-packed society. Goal tracking can be an effective strategy used to monitor business progress.