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Dari-Trends |
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In each issue of Dari-Trends magazine we feature a dairy producer who has recently constructed a new parlor. In this issue you'll meet Jon and Linda Greenwood who completed a freestall barn and double-16 Xpressway parallel parlor near Canton, New York, in September 1997.
While these profile articles typically concentrate on life after the project is finished, there's a lot of planning that goes into a facility before any dirt is moved. Some of the very first questions during planning focus on financing. Unless you have a degree in finance, or know someone who does, you may not know where to begin when it comes to planning the financial aspects of an expansion. That's where professional financial consultants can help. A consultant can identify and locate decision making information. He or she can evaluate and interpret information and proposed impacts as well as add a different perspective to the decision-making process. A consultant can also help determine the management level of a producer. The basic premise behind expansion is really modernization, says Roger Palmer, Dairy Systems Management Specialist in Madison, Wisconsin. Palmer identifies modernization as implementing TMRs and drive-by feeding, flat feed storage, freestall housing, milking with automatic takeoffs, labor-efficient manure handling, production enhancement products (bST) and computerized records. "Modernization often leads to herd expansion because the labor efficiency gains allow more cows to be managed with the same labor," he says. "Often there is also a need to spread the modernization costs over more cows. Plus, modernization allows the producer to gain employee specialization advantages." By adopting modern technology dairy managers can operate with lower investment per animal, improve labor efficiency and profitability, and improve the quality of life for dairy farm owners and workers. WHAT CAN I AFFORD? A lot of decisions go into an expansion, or modernization, project. How many cows? What style of parlor? How big? What type of freestalls? Flush system or scraper?
Before any of these questions can be answered you need to ask yourself: "What can I afford?" and "How much debt am I comfortable with?" To determine what you can afford you have to tally what you have. Determine your current status on assets (include land, buildings, equipment, livestock and investment capital, i.e. savings), liabilities and equity, or net worth. This information will help determine the financial status of your business (i.e., profitability, solvency, liquidity). It also gives you the ability to monitor progress over time and to determine the feasibility of different strategies. Most importantly, it will determine your borrowing capacity, or how much a lender will lend. Typically, banks will loan an amount that, when added to your original assets, brings your equity to a minimum of 35 percent and as high as 50 percent (see loan potential calculation example). Now that you know how much a bank may loan, you can plan how to allocate the money. Consider costs for cows and heifers, freestall barn, parlor, manure storage, feeding system and excavation/roads (some average costs are listed in the dairy herd economics table). Explore your strategies, Palmer encourages. "You may determine you can't afford a brand new, fully automated parlor with a top-of-the-line freestall barn and feed and manure handling systems," he says. "Maybe the first step is building a freestall barn and switch milking. Or maybe it's building a flat barn parlor or installing used equipment. Or, initially put more money into cows and housing, and less into feeding and manure handling, then upgrade those systems later. These options may give you the ability to build up more equity for that new facility in the future." As you determine how to spend the money consider the priorities: Which assets are a must (cows, etc.)? Can you expand on the initial purchase (i.e., add side walls to a silage pad)? What is the expected return from your investment? What is the tradeoff of labor vs. capital? What is the life expectancy of your decision? How long before it's obsolete? Another option may be to partner with someone else to combine assets. And don't be afraid to expand in phases. WHAT ARE YOU COMFORTABLE WITH? In the modernization plans you also have to consider your personal comfort level. Even if the bank will loan you "x" amount of money, how comfortable are you taking on that amount of debt? "In other words, how much debt you can sleep with?," he asks. Consider family goals, the number of family members, age of family members, management desires, geographic area and current facilities. "Characteristics of successful expansion include the owners' ability to make the transition from worker to manager," Palmer says. "Owners of successful operations also have financial staying power and avoid cost overruns. Their facilities are well-designed (i.e., labor efficient with desirable working conditions and cow comfort). And they maintain good records." Palmer also offers these thoughts about modernization: • direction is more important than speed • understand where the industry is going • evaluate your family's goals • get opinions from other people • develop a list of possible strategies • keep an open mind • evaluate each strategy • make the best decision for your farm "Whatever your decision, it boils down to the economics of dairying," he says. "And whatever the size of your dairy, you have to be able to compete to stay in the dairy business." |
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Seehafer Refrigeration, Inc. |
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