Profit Growth Drives Business Changes

Profit growth drives business changes

With the market setting milk price, producers must find ways
to offset the impact of inflation

By Jason Karszes and Wayne Knoblauch

		In 1981 the U.S. government moved the dairy industry off the path of parity pricing and started it down the road of free markets to set the price for milk. The implication of this change is significant. When the price of milk was near 75% of inflation, the milk price increased as the costs of buying goods rose. This made it possible for dairy families to maintain their standards of living through consistent, small increases in production. With the milk price tied to markets, dairy profit margins on a per unit basis have remained relatively flat while the costs of goods and services necessary to
*Know your management skills and goals before you make a decision to get better or bigger.*

support a family have continued to increase. (See graph.)
Now, for a family to maintain or increase its lifestyle or net worth over time from its business, profit growth must occur.
Profit growth is the increase in returns to the family for labor, management and capital over time. Profit growth may not happen every month or year due to strategic decisions by management. But it must occur over time for businesses to meet their objectives and to offset the impact of inflation.

Source: Business Summaries New York, 1986 - 1999
2000 Data, Profit per cow estimate by Jason Karszes
Inflation Adjustment to Family Living, Federal Reserve Bank of Minneapolis Website: woodrow.mpls.frb.fed.us/economy/calc/cpihome.html

Better Or Bigger
A dairy business can do two things to promote profit growth:
1. Get better. A dairy can improve its profit-generating ability by getting better in business aspects such as:

More milk sold per ton of feed.
More milk per cow.
Lowering costs.
Adapting technology new to your business such as rotational grazing.
Improving labor routine.
Developing niche markets for products.
Decreasing financial risk and exposure.

Some examples of practices to get better include management-intensive rotational grazing, producing organic milk, and installing tunnel ventilation, mattresses or sand bedding.

2. Get bigger. A dairy can improve its profit-generating ability by increasing the size and scope of the business. By doing so, the dairy has the possibility to generate increased revenues and spread fixed and family costs over more units. Adding more cows isn’t the only way to get bigger. Other ways to generate profit growth include:

Offering custom crop production or machinery services to others.
Offering custom management services to others.
Diversification outside of agriculture.

Don’t Forget Goals
Getting better and getting bigger don’t guarantee profit growth. Your goals, mission, vision and management style are important when deciding what approaches to take to generate profit growth. For example, if the owner of an 80-cow dairy loathes labor management, the person would be better off looking at something like rotational grazing to get better instead of increasing cow numbers.
That’s why any business change – whether to make you better or bigger –begins with assessments of yourself, your family and your business. Periodic, on-going assessment helps you to see how well you’re doing at meeting your goals and expectations.

Purchasing power
Inflation means that more dollars are chasing the same number of goods. Put another way, inflation decreases the purchasing power of a dollar. Ten years from now $10,000 will not buy as many goods or services as $10,000 will today.
Government tracks inflation by comparing the prices for the same basket of goods and services over time. It’s generally reported as the consumer price index (CPI).

FYI

Jason Karszes is a farm business management specialist with PRO-DAIRY at Cornell University.
Wayne Knoblauch is a professor of agricultural economics in the Department of Applied Economics and Management at Cornell University