Millionaire Dairy

Dubuque, Iowa
http://www.extension.iastate.edu/NR/rdonlyres/7164A3CF-7B36-4928-BE51-F5D2378729BB/46812/MillionaireModelFarms.pdf

Overview

Special Note: This case study represents the stories of several “model farms” who adopted a university-designed business plan. Some specific details from particular model farms are included in this case study. The business plan is publicly available.

In 1993, Iowa State University launched the Millionaire Model Dairy Farm project to demonstrate the potential for young dairy producers to achieve success—$1 million net worth—by milking 80 cows on 80 acres in a 20–25 year timeframe. Using the model, producers implemented a combined strategy of labor efficiency, cow comfort, low-cost facilities, rotational grazing, and careful financial management. Four of the five participating dairy producers in Iowa and Wisconsin achieved millionaire status within 17 years, while the fifth (which began later, in 2003), attained $300,000 of net worth in seven years. The five participating farms, which were analyzed financially in 2002, 2004, 2007, and 2009, each grew bigger than the 80-cow model over the years and their profitability has also proved to be higher than that of the model. Despite the fluctuation of milk prices, notably in 2009, these farms continue to be lucrative. The Millionaire Model Dairy project proves that, contrary to widespread belief, dairy farming can be quite profitable, and it provides benchmark targets and a blueprint budget for other farmers interested in making the model work.

One producer couple, milking 80 cows in a 52-cow stall barn, implemented the model in 1999. Their first step was to reduce the labor of crop work and swine enterprise through pastured grazing in order to increase capacity to add more cows. By 2001, the couple was milking 115 cows in the stall barn. Next, at a cost of $38,000 in 2002, they converted the stall barn to a low-cost swing-16 milking parlor. This modern milking parlor design reduces physical stress on operators’ knees backs, and ramps up labor efficiency, allowing as many as 60–80 cows to be milked per person/hour, rather than the 25–40 cow capacity of a stall barn. Thus, the annual labor cost savings of milking in a well-designed parlor can be realized in less than one to three years.

In 2003, they focused on “cow comfort” as the next step to improve profits by increasing production per cow. In prioritizing “cow comfort,” the millionaire dairy model acknowledges the many economic and value chain benefits associated with “nontraditional” dairy farming; cows fed on pasture and milked laying down produce more milk and reduce labor costs. The model also emphasizes the importance of dry matter intake: “proper feed bunk design, feed quality and type, lighting, ventilation and good quality and quantity of water means profit as each pound of dry matter intake above maintenance is worth 2.5 pounds of milk.” Cows in this model are treated like employees, who will produce quality product more efficiently with shrewd investment and proper care. This farm couple was able to increase milk production from 16,555 pounds per cow in 2003 to 19,450 pounds per cow in 2004. The result was 186,200 pounds more milk from 11 fewer cows, with feed cost savings estimated at $11,880 and the additional milk worth $30,146. They made $42,026 more for milking 8% fewer cows. The milk production level subsequently dropped, however, as more cows were added.

Substantial investments in both family living and non-farm assets would be over and above the net worth represented in this chart. It is important to note that land appreciation accounted for $561,700 or 58% of this growth. The 137 acres of owned land was valued at $1,900 per acre in 2001 and at $6,000 per acre in 2010. 

By 2010, the couple was milking around 170 cows and had achieved the million-dollar goal. Management-intensive pastured grazing, labor-efficient parlors and low-cost facilities, crossbreeding, and careful annual financial analysis were all critical to their success.

Business Structure

The model does not specifically address how the various participating dairy farms incorporated their business entity.  The model could work across a range of business structures.

Markets Served

The model focuses on achieving operational efficiency as a way to generate wealth while operating a dairy farm. The milk produced is marketed into conventional market channels by the model dairy farms. Additional value-added revenue could be achieved by others who implement this model through alternate marketing approaches such as on-farm processing and retail. The operational focus of this model demonstrates that good stewardship and sound management can contribute to thriving farms as part of the new American foodshed. 

Advisors

The Millionaire Model Dairy Farm Project, supported by the Leopold Center at Iowa State University, was designed and headed by Dr. Larry Tranel, ISU Extension Dairy Specialist for Northeast and Southeast Iowa. Additionally, the project benefitted from lessons of the dairy producers who shared their financial data for the benefit of beginning farmers.

Food Value Chain

The Millionaire Model Dairy base business, according to Dr. Tranel, is guided by a long term vision and mission: “to achieve long term financial security while conducting our affairs in stewardship of our faith, family, friends and farm” and “to operate a simple, enjoyable dairy operation managed by1 to 1.5 persons, which provides sufficient income for:

1) living expenses, so we can enjoy quality of life, without off-farm income;

2) profitable investment, so we can retire comfortably and assist next generation;

3) all farm capital, so we can develop farm more profitably and efficiently;

4) all farm expenses, so we can remain liquid and solvent during operations.”

The operational focus of this model demonstrates that good stewardship and sound management can contribute to thriving dairy farms as part of the new American foodshed. 

The value chain of this model follows Pasture -> Cows -> Milk -> Ship to Dairy/Milk Consumers

Programs

The Base Millionaire Model Dairy Plan is published in a series of four bulletins. Part I focuses on the model beginning dairy producer, Part II defines the financial model and shares the results of the five Millionaire Model Dairy Farms, Part III describes the reasons for success and production practices of these model dairy farms, and Part IV (and the data from Part IV) offer a 10-year overview case study and gives considerations for the future.

Key components of the program include:

1)      Labor efficiency

Labor efficiency begins with the cows and the milking parlor. The Millionaire Model Dairy Farm producers increased their realization over time that dairy cows are employees and that more dairy cows put on a tract of land can increase labor efficiencies for that land and labor unit if there is a labor-efficient milking parlor, feeding system, and housing facility. Increased labor efficiency brings increased profits.

2)      Cost effective parlors and facilities

Reducing investment cost per cow is an important goal, while balanced with the priorities of maximizing cow comfort, dry matter intake, and labor efficiency. Depending on available financial resources and the state of the original tie stall barns, conversion to well-designed milking parlors can increase efficiency and reduce labor cost savings. The relationship between labor efficiency and cost-effective facilities is very important.

3)      Management intensive grazing

Management intensive grazing is a labor- and cost-effective means of feeding dairy cows. Quality pasture increases the yield and quality of forage, and decreases the amount of inputs required by other means of feeding . The Millionaire Model Dairy Project outlines the following grazing plan:

•  Keep the pasture vegetative at a height of 4–14 inches.
• Graze the pasture quickly with 12 hour breaks in milking herds to maintain forage quality.
• Do not allow re-growth to be grazed as that further depletes root reserves.
• Rest the stand to allow time for re-growth—that may take 12–18 days in the spring and 30–45 days in late summer.
• Maintain flexibility as each grazing event and season is different.
• Feed the cows well; there is no such thing as free milk.

4)      Cross-breeding

The model farms have implemented cross-breeding programs—mostly with Holstein, Jersey, and a Holstein-Jersey cross—to meet the goals of herd health maintenance, better production, and longevity. The resulting low cull rates led to the significant overall profitability of the model farms.

5)      Semi-seasonal calving

The model farms aimed for around two-thirds of their cows to calve in the spring, starting in late February or March, while the one-third remaining would be targeted to calve in September and October. Model farms remain in a modified seasonal system, in which calving occurs within the targeted periods, which is possible due to hybrid vigor from cross-breeding.  

6)      Dairy Total Return Analysis System (TRANS)

Much of the Millionaire Model Dairy Farms’ success can be attributed to financial planning and benchmarking guidance provided after an annual financial analysis by Dr. Tranel. By using Schedule F data and an accurate beginning and ending net worth statement, the Dairy TRANS (Total Return Analysis System) analysis identifies strengths and weaknesses to help the dairies attain higher financial performance.

Finance

The business base model started with the following financial details:

• Cows, 80 at $1,500                 $120,000
• Machinery: total                           15,000
  • Tractor   $4,300
  • Skid Steer   $3,600
  • Manure Spreader  $3,000
  • 4 Wheeler    $1,200
  • Rake  $500
  • Haybine  $2,400
• Capital Improvements               $5,000
  ___________________________________________
   
• Total Capital Needed              $140,000
   
• Capital on Hand                      $30,000

Goal < 80% Borrowed

As an example of the applied model, one farm producer started out in 2003 as a share-milker with $0 net worth, earning 25% of the milk check in return for his first year’s labor. In the first and second years, the producer took ownership of the cows on a note from a private lender. A projected budget was created for 2003, but that start-up year was not analyzed. Milk prices faired well from 2003–2008; however, they dropped significantly in 2009. As a result of the grazing and crossbreeding systems, the cull rate averaged less than 20% per year, earning the producer an average of $23,033 in breeding livestock gains per year. Labor earnings averaged $27.37 per hour, ranging from a low of $3.12 per hour in 2009 to $44.69 per hour in 2007. The operating profit margin averaged 20% and the asset turnover ratio averaged 110%. This dairy increased its net worth from $0 to well over $300,000 in a seven-year period, while providing for family living and reducing debt to below $7,000. The producer did receive rental assistance of $3,000 per year from established fair market value rental rates; but, at the same time, this young producer gave valuable sweat equity to the landlord and helped modernize a small dairy farm.

Additionally, the producer benefited from $2,000 per year from a private financier who took a risk by allowing the producer to begin with limited equity. However, even when accounting for this assistance and relatively good milk prices, the farmer still made great strides toward becoming a millionaire producer.

This farm’s example demonstrates that the millionaire dairy farm is a realistic model that can be successfully implemented, although not all attempts have been successful.

Key Learning

The Millionaire Dairy model farms demonstrate that, with careful planning and management, dairy farming can be a profitable venture, despite setbacks like the poor milk prices of 2009.

Controlling costs and understanding profitability were paramount to the success of farmers who achieved their millionaire-status goal by following this model, which outlines a low-risk path to attaining financial security while maintaining an enjoyable quality of life. While every farm requires a plan tailored to its unique situation, the model establishes a base business plan and offers benchmarks to assist young dairy farmers in setting achievable, incremental targets from the outset. The model prioritizes cow comfort to maximize milk output, labor efficient practices and low cost facilities, and rotational grazing on pastured land to maximize resources. These priorities, coupled with smart financial management and a structured, long term breeding program, were critical to the success of making dairy farm millionaires.

Links

• Millionaire Dairy Model
• Dr. Larry Tranel's Dairy Resources