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Three farms outline costs of feed, labour, equipment and debt

Progressive Dairyman Editor Karen Lee Published on 30 April 2019
Jeff Stewardson, Melanie Trottier and Daphne Holterman

Following the theme of the 2019 Progressive Dairy Operators (PDO) Triennial Symposium, “Managing disruptors on the dairy farm,” three dairy producers shared the methods they use to manage in this changing industry.

The symposium took place March 4-6 in Toronto, Ontario, and the panelists included:

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  • Daphne Holterman, who farms with her husband, Lloyd, and two non-family business partners, Jordan Matthews and Tim Strobel, at Rosy-Lane Holsteins near Watertown, Wisconsin. The farm has grown in size, land base and facilities to now encompass 950 milking cows and 1,800 acres of farmed land.

  • Jeff Stewardson, who owns and operates Stewardson Dairy in Thedford, Ontario, along with his wife, Brenda; their son, Dylan; his wife, Carley; son, Dan; and daughter, Nicole. They milk 270 cows 3X to fill a quota of just over 400 kilograms of butterfat. They also own and operate associated businesses including a veterinary clinic, a cropping operation and a broiler facility.

  • Melanie Trottier, who along with her husband, Jason, and her parents, Peter and Louise Sommers, own and operate Newbrabant Farms Ltd. in Lancaster, Ontario. It is a 700-cow dairy with 660 replacement animals and 2,120 acres of haylage, corn and soybeans.

What has the potential to financially disrupt your dairy in the next five years?

HOLTERMAN: The inability to buy or having to pay too much for farmland that’s adjacent or close to the farm, the declining number of milk buyers in Wisconsin and whether or not a milk processor would take more milk if they wish to do a farm expansion.

“The biggest disruptor I see would be public opinion. Farmers need a social license to operate these days, and all it will take is one small incident – not even on our farm, perhaps on a neighbour’s farm or in our county that could smear a lot of dairy,” she said.

STEWARDSON: Lack of growth in market or lack of growth in income, which could come from any direction, whether it be trade deals, the government, animal rights groups, consumer preferences or extra regulations.

“We need that growth,” he said. “In particular, it’s going to affect us from a succession standpoint and retention of employees as well.”

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TROTTIER: High interest rates, milk price cuts and quota cuts. “We mitigate these by locking in some of our debt long-term. We make sure we run a lean operation. We also use any opportunity that arises to increase our income, if it’s raising heifers, selling fresh cows, doing custom work, etc.,” she said.

How do you measure feed costs?

HOLTERMAN: Last year, their feed cost was $19.97* per hectolitre of milk produced. It was $26.33 with heifers and calves included. They also monitor feed cost as a percent of milk income, which can range from 45 to 60 percent depending on the year; feed cost as a percent of total income (40 percent last year), purchased feed cost per hectolitre and feed efficiency with a goal of 1.7 kilograms of milk for every kilogram of dry matter fed.

STEWARDSON: For the milk cows, their purchased feed cost is $6.40 per hectolitre of milk produced, and homegrown feed costs are $7.36 per hectolitre. They use this measure because it is a common benchmarking tool, and it also reflects other aspects of the farm, like days in milk, reproductive program success and other overall measures.

With a fairly narrow solid non-fat (SNF) ratio of 2.3 to 2.4, he said they don’t get a lot of fluctuations, and that’s why they don’t use feed costs per kilogram of components.

For heifers and dry cows, they watch feed cost per head per day, which was $2.07 and $3.21, respectively.

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TROTTIER: Her preferred measures are purchased feed per kilogram of fat produced. In the prior fiscal year, their whole herd purchased feed cost from calves to dry cows was $2.58 per kilogram of fat produced.

She noted this number was high due to some custom-raised heifers, beef cows and fresh cows that were sold off the farm.

For homegrown feed, they use opportunity cost, not actual cost. They like for this to average $825 per acre. This way when the nutrition program is tasked with generating a least-cost ration, they can see when it might be more profitable to use purchased feeds instead of homegrown. Homegrown feed costs were $3.42 per kilogram of fat produced in the prior fiscal year.

What is your approach to reduce or optimize feed costs?

HOLTERMAN: The farm’s new self-propelled mixer has saved around $27,000 in labour, eliminated the operation of four or five pieces of equipment and is more accurate. They focus on forage quality and minimize shrink by covering the bunker within hours of packing.

For purchased feeds, they try to buy large quantities, contract purchase feed ingredients and shop around with two or three suppliers.

They also feed to the most efficient cows they can with good breeding and maintaining herd health.

STEWARDSON: They focus on quality forage and like to have minimum 60 percent of dry matter in the ration as forage. Good bunker and ration management are also important.

Feed additives are carefully evaluated for payback. Commodities are purchased in trailer loads. They will book soybean meal when prices are low and buy hay and straw in-season.

They aim to feed healthy, fresh cows for optimal feed use.

TROTTIER: Depending on the time of the year and quota situation, they will push for extra milk or back down and not push as hard. To reduce costs, they increased use of distillers grains in the ration and feed soy straw and corn stover to dilute heifer and dry cow diets instead of wheat straw.

Commodities are purchased by tractor-trailer load and forward contracted when they can. Their large land base also helps stabilize the farm’s feed costs.

How do you measure labour efficiency on your farm?

HOLTERMAN: They look at milk sold per worker (544,310 litres last year) and aim for labour to be 15 percent or less of net income (14.76 last year).

“I think it’s also a gut feel on our farm,” she said. “Are we getting things done to standard most days? It’s not going to be every day, but if you can get it nearly every day of the week, depending on the week and the weather, we feel like we are getting efficient labour.”

In addition, they try to cross-train so employees can fill in elsewhere if needed or have a greater awareness in what needs to happen in other areas of the farm.

STEWARDSON: For benchmarking purposes, they look at total labour cost per hectolitre of milk. In a simpler format, they look at number of hours worked per month per hectolitre as well as compare labour hours spent versus what was scheduled for preset tasks.

TROTTIER: Labour efficiency is measured by kilogram of fat produced in the previous fiscal year. Last year, hired labour was at $1.77 per kilogram of fat produced. All cropping and manure handling is included in these numbers, as they don’t hire out custom work.

What kind of compensation model do you use with your employees?

HOLTERMAN: “How easy do you make my life? I’m going to pay you for that,” she said. They also compare their wages with county and state averages for agriculture and other industries and try to pay on the high end of average.

Everyone on the farm is considered for a raise or bonus twice a year but only granted if earned. Raises can also be given at any other time of the year to reward those employees that excel in their position.

STEWARDSON: With today’s labour market, they are making a concerted effort to compensate employees very well within the market, which he said has been successful for them.

Benefits are fully funded and include vacation, time-and-a-half for statutory holidays, harvest meals, continued education, etc.

TROTTIER: They pay according to level of skill and responsibility, and conduct yearly employee evaluations.

Editor’s note: The hourly wage including benefits across the three farms ranged from $14 to $30.

How do you see labour changing in the future?

HOLTERMAN: She foresees having to pay higher rates per hour and needing to consider raises and bonuses more often.

They are also looking at revamping their benefits package and re-evaluating health care, as it is costly and not everyone takes it. They might switch to a cafeteria benefit plan, allowing employees to select from various offerings to suit what they value most. This could include matching deposits for investment funds, paid health or nutrition classes, or paid time off for community service work.

Younger employees are asking for more time off, and they are trying to find that balance with jobs like milking cows and feeding calves that have to get done.

STEWARDSON: “We made a change and we hire on attitude as opposed to experience,” he said, noting it has worked well and is something they will continue into the future.

They want to develop more individual skills to displace more expensive outside services in farm equipment repair, welding, plumbing and milking equipment repairs.

Other areas they are watching are safety – both physical and psychological – and compensating employees for accuracy and efficiency based on computerized reports for feeding and milking.

They have also applied LEAN assessments to review protocols and make tasks more efficient and the KOLBE test among family members to understand how each person on the team instinctively works. They are considering using it for non-family employees too.

TROTTIER: She sees changes coming with cost of living increases and more compensation needed for highly skilled labour and management.

“We have had experience with hired labour for many years, and we found money isn’t the only motivator,” she said. They make sure everyone has at least one or two days off per week to maintain work-life balance.

They started just over six years ago with hiring temporary foreign workers. “I think this is a great asset to the agricultural community, especially for these lower-skill positions,” she said. “It’s a very stable workforce. These guys are happy to be here, and they are reliable.”

What experience do you have with paying for education?

HOLTERMAN: Their goal is to send each staff member to a meeting at least once a year. This could be a day at the World Dairy Expo or another trade show, an educational session on feed waste, a hoof trimming school, etc.

“We try to look for things to promote to our staff or we say, ‘If you have something just bring it to us,’” she said. They pay for all of their expenses to go to it.

STEWARDSON: While there are traditional courses available for topics like A.I. and hoof trimming, he finds there isn’t a lot of training offered on what they need for equipment operation and repair.

TROTTIER: They will pay for various educational opportunities. Both she and their herdsman attended a herdsperson training with PDPW in the U.S.

What is your overall approach to optimize the expense of machinery and equipment?

HOLTERMAN: They have a certain percentage of their budget for equipment and keep a strict rotation on what is needed each year to regularly replace equipment. “We really truly believe you pay for it now or you pay for it later,” she said.

While they have bought some used equipment through the years, depending on what they need, it is usually purchased new. Skidloaders are traded every two years, tractors are used at least 800 hours a year, and the milking parlour runs 24 hours a day with a lot of preventative maintenance done.

They are also looking to maximize their farm shop. It is used heavily in the winter but then mostly sits empty many days of the year. They are considering hiring a mechanic for more pre-emptive repair work and possibly offering perks to employees to have their personal vehicles serviced.

STEWARDSON: Their dairy enterprise has a limited amount of equipment, including skidloaders, a loader, TMR and a couple of tractors. The skidloaders run under warranty because they are costly to repair, while the tractors are older with 15,000 to 20,000 hours on them.

For the cropping enterprise, they not only compare cost of ownership to cost of hiring it done, they also factor in timing, yield and crop quality. For example, they hire out manure application by liquid drag hose because they can better stir the sand-laden manure and apply with less compaction, which improves crop yields.

They were also sure to stock up on equipment when the Canadian dollar was strong. It was at a discounted price then compared to now.

TROTTIER: They purchase as much good, used machinery and equipment as available because it is more cost- effective to operate. When they buy new equipment, they try to keep it as long as possible.

They try to avoid trading equipment often and perform their own maintenance and small repairs.

They consider depreciation as an additional expense and figure $1.30 to $1.50 per kilogram of fat produced is required to sustain equipment and depreciation.

What strategy do you use to manage debt?

HOLTERMAN: They are not afraid to borrow money and typically pay off debt in seven to 10 years, or up to 20 years, depending on the purchase.

When they started farming in 1981, they paid 18 percent for interest; now they are paying around 3.5 to 4 percent. A couple of years ago, they shopped around and changed lenders.

For operating money, they have a sweeper loan set up through a chequing account. Money deposited sits there and covers what it can. Additional cheques written are covered by the loan until more money comes in. They can know where they are every day, and it has helped them pay less interest overall.

Another tool they have is a pre-approved loan ready to buy real estate or machinery. With this, they can take advantage of opportunities as soon as they arise.

STEWARDSON: They stay in close communication with their lender and regularly track the farm’s debt and asset ratios. A healthy bottom line gives them a low risk rating, which gives them better interest rates.

They closely watch economic indicators and monitor their short-term rates.

TROTTIER: Profitability is this farm’s best strategy for managing debt. In doing so, they have more leverage and options when working with their lender.

In addition, they use swaps and banker’s acceptance to lower interest rates. They lock in some debt for 10 years or more and float a portion of the debt to potentially lower the cost of interest.  end mark

PHOTO: Jeff Stewardson, Melanie Trottier and Daphne Holterman shared each of their farm’s strategies for managing through a disruptive time in the dairy industry. Photo by Karen Lee.

The panel presentation was moderated by Richard Cantin of CanWest DHI.

*All U.S. monetary values shared were converted to Canadian at an exchange rate of CA$1 = US$0.75

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