Impact of Robotic Milkers (and other capital purchases) on Equity

Robotic milkers are increasingly in the news as producers continue to struggle with labor issues.  One often-overlooked concern is the initial impact on owner's equity that follows a large capital purchase - be it robotic milkers, buildings, machinery, feed or manure storage, or anything else that depreciates in value.  

Here's an example:  A 240 milking cow dairy invests in four robotic milkers with a purchase price of $210,000 each.  That's a total of $840,000 for the robots.  We'll disregard the extra investment needed to accomodate the robots, like building modifications, concrete and electrical work, feeding and milk transfer changes, etc.  

What's the value of those robotic milkers once they're installed and put to use?  That question can only be answered by selling them - but they're certainly worth less than their purchase price.  We're all familiar with the "drive-off the lot" depreciation of a new car or truck.  Same situation here - are those robots worth 20% less the day after they're installed?  30%?  40%?  The market for used robotic milkers is pretty slim, so it's hard to know for sure.  

In our example, let's assume 30% initial or drive-off depreciation on the $840,000 purchase price.  This equals $252,000.  On paper that money comes out of owner equity.  The robotic milker company was paid.  The lender is secured and will get paid.  The producer is on the hook for that $252,000.  This won't be an issue if the robots are kept in operation for their expected 10-15 year life.  It is an issue if sold for any reason prior to their end-of-useful life.

Robotic milkers can be a sound investment - just remember to take drive-off depreciation into account as you do your planning.  Be prepared for the potential hit to your equity upon the event of a forced or unexpected sale.

Lee Gross

A Story of Profit

Lee’s idea:  As an economist working in dairy I like to start with IOFC (Income Over Feed Cost) when looking for profit.  It’s the power equation of (Milk Price x Milk Sold - Feed Cost) and just happens to include the three factors most in a dairy producer’s control.  Knowing IOFC on a daily or weekly basis keeps a key profitability measure front and center, and be helpful when making decisions on marketing milk, buying feed, and making cow management decisions. 

Walt weighs in:  So right now you might be thinking — “great, I’d like to monitor this, but I don’t know how”.  How do I proceed?

Lee, put on the spot and being a smart-aleck and shameless self-promoter says:

  1.  Take today’s near-month Class lll futures price, add or subtract your dairy’s average basis for this month, multiple that times the pounds of milk per cow you shipped today, and subtract from that today’s average cost to feed your milking and dry cows.  Convert that to the CWT equivalent and there’s your IOFC per CWT. 
  2.  Or do it the easy way.  Download our free FYP Consulting’s Dairy app.  It's right here:    GET THE APP

Dave, being the voice of reason offers this:  If a dairy can stay out of the ditches and head pretty much down the middle of the road they will make steady progress.   A measurement can be used effectively if it is persistently, consistently and honestly evaluated and then reevaluated and adjusted with the knowledge of what has worked well in the past.  

So, IOFC is a number that if calculated the same each week and if overall profitability is consistently and critically measured these two could do much to get the dairy further down the road and out of the ditches.   Changes need to be methodical with a clear standard to measure success. 

And Robin will not be left out:  Producers do the best job of managing price risk when they are confident of their cost of production.  Monitoring IOFC is a good start but I’d recommend they learn their true cost of production and choose marketing strategies based on that number. 

Our cast of characters from FYP Consulting:

Lee Gross - Economist

Walt Ogburn - People Development

Dave Prigel - Vet Diagnostics

Robin Schmahl - Risk Management

Helping New Managers Succeed

It’s common for high potential employees to be promoted to positions in which they manage people.  Often the people they will manage were former co-workers.

I’ve spent my whole career watching and coaching new managers.  I’ve also been on the other side when a co-worker is promoted to be my manager.  What I’ve learned about the challenges faced by new managers can be condensed down to three key messages.

1.     The skills of managing are different than the skills of “doing the job” and must be learned and practiced.

2.     The people you manage must trust and respect you, but they don’t have to be your best friends.

3.     Your employees need and want feedback on their performance quickly and routinely.

You might be thinking now; “I understand that, but how do I put these tips into practice?”  Here are some ideas: 

  • Define the management roles in your business.  Be clear on the expectations of each position.  Create brief job descriptions for each role.
  • Use these job descriptions to define the skills the new manager needs to be successful, and to develop a few tools to help them learn these new skills.
  • Consider starting a mentor program that pairs the new manager with an experienced person - long enough to help with the transition to their new role. It's best to assign a mentor that was not the new manager's old boss, and be a person committed to helping the new manager succeed.
  • During the on-boarding process include a discussion about the difference between a friend and a trusted and respected manager. 
  • Consider implementing an "immediate feedback" process for all managers and employees.  Have managers look every day for opportunities to give feedback, focussing on "good behaviors" vs "bad behaviors".  Ask each manager (as well as the top-level managers) to keep a notebook, or a place in their phone to jot down quick notes about feedback they shared with employees.  Share these notes with each employee for a quick monthly check-in conversation. 

The bottom line is to ensure that new managers understand what good supervision looks like.  Don't expect them to know!  Offer examples of good leadership by providing a mentor and the tools necessary for the new manager to do their job well.

Walt Ogburn

 

Why We Started FYP Consulting

Roxanne and I grew up on mixed-enterprise farms in the non-glaciated NE corner of Iowa.  Our families made good livings and, like farm families everywhere, lived with lots of stress and uncertainty.  Were we going to have a crop?  Were the yields going to be good or poor?  How were the cows going to milk this year?  What was the price of hogs going to be?  What was the corn price for those bushels, if any, that we could sell?  Could we afford to make improvements?  How much risk could we manage?  Where should we invest our limited capital?

Those questions and more came with the uncertainty of farming.  Many, but not all of those variables were out of our control.  At the time, we lacked the skills and tools needed to manage information, monitor profitability, and manage risk.  Like many businesses we farmed by the checkbook.

On top of economic uncertainty, we faced the same family/people issues as all families that work together:  Was anyone having fun?  Was the work satisfying or only frustrating?  Were Dad and/or Mom willing to share decision making with the next generation as they came of age?  Was there enough income to support two families or was everyone expected to "tighten their belt"?  Who's in charge of what?

Those questions were present when we farmed together and are present in every farm business today.  The questions and challenges remain the same regardless of decade, enterprise, or size of operation. 

We started FYP (Find Your Profit) Consulting to help farm businesses answer their questions and address their challenges.  We are extremely pleased to have assembled an outstanding team of people that want to see farm families succeed.  We do that by offering unbiased and easily accessible expertise to farms of all types.  Our work with farm businesses begins with a joint understanding of that business's goals and objectives.  We identify how we'll measure progress towards those goals, and then place a value on reaching them.  Our final step is to use those values to determine fees.  When we agree on fees, we begin  our work.

Contact us when you want to discuss your objectives.   

Lee and Roxanne Gross