Rising Labor Costs: Strategies and Approaches

Cornell PRO-DAIRY. By Jason Karszes

Cornell’s PRO-DAIRY Article

Jason Karszes
Jason Karszes

Editor’s note:  Jason Karszes (jk57@cornell.edu) is Senior Extension Associate, Dairy Farm Management PRO-DAIRY, Department of Animal Science, College of Agricultural and Life Sciences, Cornell University, He has released this white paper with strategies and approaches to rising labor costs.

As dairy farms have increased in herd size over time, hired labor has become a key management component of the farm, and a larger expense. Hired labor is the second largest expense item on many farms. With this increased reliance on hired labor, the impact that changing labor costs can have on the profit of the dairy business is substantial. Currently a number of factors are likely to put upward pressure on labor costs and lead to significant changes in dairy farms’ labor expenses. Some of these are:

  • Raising of the minimum wage
  • OSHA Regulations
  • Increased competition
  • Immigration reform
  • Health Insurance
  • Compliance with labor regulations

 

These factors have already impacted the cost structure of dairy farms. Table 1 highlights selected factors associated with labor for the 136 dairy farms that participate in the Dairy Farm Business Summary and Analysis Project through Cornell University from 2010-15.

Table 1

Table 1 Recent Labor Trends
*Dairy Farm Business Summary and Analysis Project, New York

Hired labor costs per worker equivalent increased from $35,386 to $40,849, an increase of 15% over 5 years. On a per cwt basis, the costs increased by 16%. This equates to an annual increase of 3%, compared to a 1.7% increase in inflation as measured by the Consumer Price Index (CPI) for the same period. Considering the number of factors placing pressure on labor costs, the annual increases over the next five years may be higher than this, putting pressure on the profitability of dairy farms. In an analysis of the impact on minimum wage increase on dairy farms in New York, the percent change in labor costs through 2021 was projected at 34%, a doubling of the increase that has occurred. This leads to a projected decrease in net farm income of 33%, a decrease two-thirds higher than what would be projected without the minimum labor increase. This increase in labor costs is projected to decrease the economic value added, or the profit generated after all costs are accounted to near zero for larger farms and to negative for smaller farms that use hired labor. The impacts of these changes are before any management responses by businesses to the increased costs. Minimum wage increases are predicted to lead an increased focus of management on labor costs and efficiencies, and may also accelerate long-term trends towards large and more productive farms and/or capital-intensive or labor-saving production methods.

Strategies and Approaches

With labor costs increasing at a faster rate, and the impact that this will have on farm earnings, the labor question is becoming an increasing important focus of management. Many questions have been asked at meetings over the last few years about where the labor hours are used, how to decrease the number of hours required, and how the business can afford to pay more. From these questions, five areas are identified that can change the impact that rising labor costs will have on the dairy farm:

  • capital investment,
  • lean manufacturing,
  • labor effectiveness,
  • custom services, and
  • joint ventures/collaboration.

As farm managers think about what management changes to make, a key question is where labor hours are used on the farm. During the summer of 2016, 36 farms participated in a PRO-DAIRY study (Howlett & Karszes) on allocating labor hours to different activities across the farm. Table 2 and Chart 1 summarize some of the preliminary data from this study. While not representing labor use for all dairy farms, the data does provide descriptive measures for what time was spent performing different activities across these farms. The mature dairy herd, or taking care of the milking and dry cows every day, used 63% of all labor on the farm. The milking process was the largest individual use of labor, representing 50% of the labor used within the mature dairy herd, and 32% of all labor on the dairy farm. By identifying where labor is used on the farm, appropriate management strategies can change the impact associated with raising labor costs.

Table 2

Table 2 Labor Allocation Report Summary

Chart 1

Chart 1 Mature Herd Labor Allocation

Capital Investment

Investing capital to replace labor is a historic strategy used in agriculture, starting when domestic animals pulled farm implements and carried products and supplies. Investing capital in machinery, equipment, facilities, and technology impacts labor costs in different ways.  The total number of hours of labor needed may be reduced, or the amount of work or output that is performed by the labor hour increases, leading to increased output for the same number of labor hours.  Some investments may accomplish both. Examples of capital investments that farms have made to change labor requirements include:

 

Automatic Milking Systems

 

Oversized Milking Parlors

Automatic Calf Feeders Free-choice Mob Feeders
Larger Feeding Equipment Automatic Scrapers
Larger Harvesting Equipment Manure Irrigation Systems
Larger Planters/Spring Tillage Equipment New Barn Designs for Animal Handling
Activity Monitoring Systems Grain Bins

Capital investment impact the cost structure on the farm by increasing certain cost categories, such as depreciation, interest, maintenance, and insurance. As labor costs increase, the potential to decrease the total cost of labor by decreasing the number of hours, or decreasing the labor cost per cwt. by increasing efficiency, can offset or justify higher levels of investment. Management time spent planning and budgeting the capital investment and changes in operations is critical to control labor costs.

Lean Manufacturing   

A major focus of manufacturing firms is the continuous improvement of the manufacturing process. One management approach to improve the process is Lean Manufacturing. Lean Manufacturing is defined as: “A strategy, which strives to embed a culture of continuous improvement, whereby everyone seeks to identify and eliminate waste, enabling the business to deliver customer expectations at a minimal cost and lead time.” Many tools and processes are associated with Lean Manufacturing, but a key component is the active assessment of activities and the formal design of workflow, protocols, and standard operating procedures to remove waste and improve output. While certain areas of the farm have structured routines that were developed over time to achieve certain goals, such as milking routines, many other activities performed may never have been actually designed. There may be an opportunity to study different activities on the farm and by making changes to workflow, protocols, and standard operating procedures, the same task may be accomplished with the same, if not better performance, with fewer hours of labor and potentially less waste of other supplies and products. With a focus on improving the process, this may lead to additional capital investment also. With a management focus on lean manufacturing, some of the key questions about specific activities are:

  • How long does the current activity take?
  • What are the protocols and standard operating procedures for the activity?
  • Are the protocols and operating procedures being followed?
  • Could the amount of time be decreased while achieving the same or better results? For example:
    • Placement of tools and supplies
    • Order of tasks and procedures
    • Training of staff
    • More or fewer tasks and procedures
    • Different tools or supplies

While the focus of lean manufacturing is to improve the current systems, additional costs may be associated with management. The time spent by management observing, timing, developing, testing, and training of new protocols and standard operating procedures can be a significant expense.  Additional investment and different tools and supplies may also increase the cost structure.

Labor Effectiveness

A relatively new concept that has appeared in the manufacturing world, labor effectiveness, centers on the impact that the labor force has on productivity and costs, and the corresponding impacts on profitability. Labor effectiveness isn’t the same as labor efficiency. For a dairy business, this is not measuring cows per worker or milk sold per worker, but it does focus on unnecessary expenses or disruptions to activities, which impacts costs and output. Applying this concept to a dairy farm and milk production, how well are the proper things done in the proper order every day? Any disruption can increase costs and decrease performance. Some questions to assess labor effectiveness on a dairy include:

  • How often are cow groups mixed up due to improper gate opening and closing during movement of groups?
  • How often is equipment or facility repair due to operator error?
  • How often does daily routine change due to someone being late or not able to work that day?
  • How often is equipment left idling for no reason?
  • How many tools are lost and need replacement?

To improve labor effectiveness, management focus is on decreasing disruptions, decreasing the waste of inputs and supplies, and improving performance. What can be done with employee hiring, training, process, protocols, tools and equipment to minimize disruptions, lower costs, and increase performance? This leads to increased focus on human resource management for the business and how well leadership, communication, and training can build a culture within the workforce. If higher labor effectiveness can lower costs and improve productivity, the business may be able to support higher wages.

Custom Services

A fourth area that can impact the labor cost on the farm is the use of custom service providers, which may decrease the amount of hours hired by the farm. With custom services, other aspects will impact farm performance, including the quality of job done, other cost savings, and the opportunity to reduce capital investments. If some aspect of the business is inefficient, custom services might be a wise decision as the cost savings in labor may offset much of the custom service bill. Many businesses currently use custom services for different activities on the farm, including preparing taxes, repairing equipment, spreading manure, cropping activities and trimming feet. With labor costs increasing, custom services may be used even more.

Joint Venture/Collaboration

Joint ventures and collaboration can provide opportunities to reduce labor costs on the farm. By collaborating with another business, or forming a joint venture, the business may be able to access technology or equipment, or size to perform tasks more efficiently. As with custom services, other aspects besides the impact on labor efficiency need to be evaluated to determine the total impact of on the business. Examples of joint ventures and collaboration are:

  • Owning large specialized equipment between farms (drill, roller, bale grinder)
  • Heifer raising operation
  • Joint hiring of professional staff (veterinarian, reproduction specialist, chief financial officer, human resource management specialist)
  • Forming a crop operations company to conduct crop operations across participating farms