Program for Expansion

A week seldom goes by without a dairy farmer talking to me about the merits of expansion. To assess the financial impact of expanding your operation, you need hard, accurate numbers to determine the feasibility of your plan. A new computer spreadsheet, developed by Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) staff, can quickly and easily provide those numbers.

To illustrate how this dairy expansion program works, I’ve used an actual farm as a case study. This family is seriously thinking about building a new barn and asked for my opinion. They’re milking 40 cows in an old, labour-intensive tie-stall barn in desperate need of upgrading. Despite this drawback, production is above average.

However, this family has been culling a higher than normal percentage of cows because of injury. Their plan is to build a new 70-cow free-stall barn, parlour and manure storage. As well, they have projected the purchase of 20 kilograms of quota and 20 cows. Heifers from the existing herd would also contribute to the expansion.

Table 1 outlines the cost of the expansion proposal and Table 2 summarizes debt-servicing requirements. Note the repayment scheduling on the various loans. I often tell producers to be cautious about expansion when annual principal and interest payments exceed 20 cents per litre of milk sold. As you can see from this proposal, debt servicing per litre of within-quota milk sold is 18 cents, two cents below the 20-cent benchmark.

Table 1: Expansion Proposal

Table 2: Debt Servicing

Table 3 outlines the economics of expanding from 44 to 70 cows. Based on the projected income statement and debt-servicing capacity, this operation would appear to have the option to expand. However, it’s important to realize the cash surplus, shown at the bottom of Table 3, must provide for income tax, family living and savings. Personal expenses generally run around $2,000 a month for a typical farm family. This can be a major outlay, particularly when the business supports more than one family.

Table 3: Expansion Economics

You can download the dairy expansion program from the Web site listed at the bottom of this page.

Here are some other important points to consider if you’re considering expansion:

Sacrifices: be prepared to make sacrifices, particularly when starting up or expanding. Budget accordingly. The price of success has to be paid before it can be collected.

Risk: remember, if everyone agreed about everything, the opportunity for profit would quickly disappear. There will be people who question what you are doing.

Spouse: make sure your spouse is part of the decision making on spending, saving and investing.

Debt: debt is not necessarily bad. When you’re green, you’re growing. Consider weekly instead of monthly payments, if possible, to reduce the amount of interest you have to repay over the life of your loan.

Vision: no one plans to fail, but many fail to plan. Dreams are important. Goals are important. Write them down.

Attitude: Life is 10 per cent what happens to us and 90 per cent how we react to what happens. Attitude is more important than anything else. Be prepared for a higher level of stress while the expansion is in progress.

Related Links

• Dairy Expansion Workbook