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Farmers for the Future: Financial challenge leads to a firm foundation

09/09/2010 @ 2:09pm

There are plenty of adages and axioms about how opportunity can spring from adversity. Perhaps this one best fits the Phillips Dairy: The only thing that can overcome hard luck is hard work. From grandparents to grandkids, that’s the model for this Mayetta, Kansas, family.

In 2004, Ralph Phillips and his wife, Phyllis, were confronted with a cash flow challenge that threatened the existence of their 40-year-old dairy. The economic forces gnawing at their 160-cow operation would, from 2000 to 2010, ultimately drive 30% of dairies similar to theirs out of business. Add to that the challenge of adding a second son to the business and the need to begin transitioning the operation to the next generation, and it’s easy to see how pressure was building.

Six years later, it’s now easy to see how hard work – along with a strong family and careful business planning – has proven that old proverb true. With production ramped up to 205 cows, Ralph, Phyllis, and sons Russell and Ryan survived even tougher economic conditions dished out to dairy operators last year. Meanwhile, they’ve put the farm on a financial footing worthy of going through a business transition.

“We’re still in the early stages of a transition, which we expect to take 10 years, but we know where we’re going and how we intend to get there,” says Ralph.

To get to that point, the family sought help through Kansas State University’s Farm Analyst Program. The program uses fellow farmers and ranchers with extensive training in business analysis to provide intensive one-on-one consultation. That consultation centers on the use of FinPack, a computerized financial planning and analysis system designed to help farmers understand their financial situation and make informed decisions.


Becoming more competitive

“The FinPack program pointed out that we needed to grow in order to become more competitive,” says Ralph. “We were milking 160 cows at the time, and the analysis showed we needed 200. Increasing the size of the herd made a big difference in the amount of income generated. The program showed that it’s better to be bigger because fixed costs can be spread across more animals, so the profit from each of them can be increased.”

Besides increasing the herd size, the Phillipses also boosted productivity. “Our goal was to increase our rolling herd average from our 21,000-pound average in 2004 to 24,000 pounds. We shot right by that though, and within three years we were averaging 27,000 pounds. And we’ve been able to maintain that level over the long term,” says Ralph.

Farm Analyst Program coordinator Duane Hund, who ranches nearby at Paxico, Kansas, worked with the Phillips family. “They needed more capital to upgrade their facilities and to add the equipment needed to increase production. In order to do that, the bank needed everyone involved to understand the dynamics of a family operation and for the two sons to make a long-term commitment to it.”

“All of that happened,” says Hund, “and the result is a perfect example of what occurs once everyone sees the direction the operation needs to go. The expense wasn’t minor and the challenge wasn’t small, but the whole family rolled up their sleeves and got going. Consequently, they’ve become very competitive against other family dairy farms. You don’t often see a dairy operation increase production per cow while also increasing capacity.”


Dreams vs. reality

Hund says the four analysts in his program work with about 120 farm families a year. “These are families encountering a variety of challenges. Like the Phillipses, succession planning is a common factor. Typically, the parents are enthused to hand the operation off to some of the kids. But when you analyze the financial situation, it reveals that the transition just won’t work like they’d hoped.

“Estates are often challenged by debt and that’s often a problem,” says Hund. “Another frequent financial stumbling block is that the older generation has problems comprehending the increased living expense that confronts young families today.”

Hund also says it’s often difficult for those involved in a family farm transition to focus on basic business fundamentals. “The participants typically fantasize about how good it will be for a new generation to take over – especially if the farm has been in the family for several earlier generations. But you’re not doing anybody a favor by giving them a business that’s not profitable and lacks a competitive opportunity. There’s little chance it will be able to survive,” he says.
 

Stepped up production

There are management factors that have contributed to the climbing productivity putting the Phillips Dairy – and Ryan and Russell’s future – on a firmer footing. They pride themselves on the day they shipped over 100 pounds of milk per head; they usually average around 90 pounds.

“Our crossbred cows (Brown Swiss and Montbeliarde) are part of it. Their feet and legs hold up longer, and their udder quality is better,” says Ryan. “The steer calves are also worth $20 more per cwt than Holsteins.”

“We don’t skimp on AI bulls, and we do work closely with a nutritionist,” says Russell. “Adding whole cotton seed to our ration jumped the fat content of our milk almost overnight. We also rely on Sweet Bran rather than wet distillers’ grain because it doesn’t spoil as fast.”

After the family laid out their financial plans, the dairy upgraded its milking parlor by renovating a double-5 arrangement to a double-10 design. “We milk three times a day. This changed it from a five-to-six-hour job to two to three hours,” says Ralph.

Production also comes from supplying cows with quality feed from the dairy’s 500 acres of row-crop production. “We’re focused on growing quality corn silage and harvesting it in a timely manner,” says Ralph. “We have trouble doing that with alfalfa because the weather interferes, so we buy nearly all our hay to reduce risk and to ensure quality.”

Hund says, thanks to a financial plan with access to adequate capital, the Phillipses have found the niche where they can compete. “Their lender is impressed with the progress in solidifying the base of the business,” he says.

“Being on a first- name basis with our lender is a big help,” says Russell. “We’re not afraid to see him pull into the yard.”

“We’re thankful for a solid relationship with our local bank,” says Ralph. “There’s never a need for us to shop around for a better interest rate. Like us, they know that economical and cheap aren’t the same.”

Though Ralph, Phyllis, Ryan, and Russell manage the dairy, there’s plenty of involvement from other family members. “We’re blessed with another son, Rodger, and two daughters, Lisa Haverkamp and Melanie Woltje, as well as a host of grandchildren, who all help milk, feed the cows, or take care of the calves. None of them is afraid to work,” says Phyllis.

“There are three generations of family members (and one part-time employee) who work on this farm, and they all know the role they play is important to the dairy’s success. Even the youngest ones catch on fast, and they’re often the most observant,” says Ralph.

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