Missouri 3,500-Cow Dairy Business Plan

Missouri3,500-Cow DairyBusiness PlanA financial model of an integratedmodern dairy system: Rotary parlor Sand bedded, tunnel ventilatedfreestall housing Passive sand and manure separation Irrigated forage productionNovember 2020

The following report was commissioned by the Missouri Dairy Industry Alliance board to prepareproducers for the next generation dairy business models in the state. Funding was provided by MissouriAgricultural and Small Business Development Authority through its Missouri Value-Added GrantProgram. A special thanks to Steve Bodart with Compeer Financial for his review and feedback to theproject team.Authors of this report:Joe HornerState Specialist, Agricultural Business and Policy, MU ExtensionRyan MilhollinState Specialist, Agricultural Business and Policy, MU ExtensionJoseph ZulovichAssistant Professor, Agricultural Systems Management, MU ExtensionTeng LimProfessor, Agricultural Systems Management, MU Extension

Missouri Dairy Plan – 3,500 Cow DairyContentsINTRODUCTION . 11. PRODUCTION AND OPERATION PLAN . 41.1Production assumptions . 41.2Capital investments . 51.3Markets and prices. 71.4Feed cost and management . 81.5Labor cost and management. 101.6Other operating costs . 111.7Land, crops and nutrient management . 131.8Organizational structure . 152. FINANCIAL STATEMENTS AND ANALYSIS . 162.1Cash flow statement . 172.2Profit/loss statement . 192.3Dairy enterprise summary . 202.4Balance sheet. 222.5Financial ratios . 242.6Sensitivity analysis. 252.7Risk management . 263. IMPLEMENTATION PLAN . 313.1Timelines . 313.2Site selection . 323.3Permits and regulations . 343.4Consultants . 36

IntroductionThis dairy farm business plan demonstrates one path forward for the next generation of Missouri’s dairyfarmers. This path involves producing milk in Missouri with a 3,500-cow single site dairy, a capital andlabor efficient scale. This dairy plan gives Missouri dairy producers a vision of a new scale and style ofdairying common in growing dairy regions.This report is designed to guide planning a completely new dairy. The dairy model uses next generationconfinement housing solutions: freestalls with sand bedding and tunnel ventilation to improve cowcomfort and cooling. A 72-cow rotary parlor is used to milk the herd three times per day. This modelserves as a complete business template for starting a new greenfield dairy. Capital investments, operatingcosts, production plans, rations, forage systems, housing systems and manure systems are designed asintegrated systems.Currently operating dairies seldom start a greenfield dairy by designing a completely new dairy system.However, this strategy can be an option for a group of crop and dairy farmers jointly planning totransition to the next generation of dairying by pooling resources and forming a new entity. This templatecan also be helpful for existing dairy producers evolving on-site in their current facilities as they examinevarious technologies for the dairy’s expansion path.This model uses a systems approach to integrate cropland planning, irrigated forage production, specificrations tied to production, comprehensive nutrient management, labor-efficient facilities and modern cowhousing solutions. This integrated system reduces obstacles to higher milk production at scale.These production practices and management techniques, along with the economic analysis, can be appliedto other herd sizes. Dairy producers can use these plans to establish production goals and to evaluate howthe various performance measures influence their financial statement. Financial statements show howvarious components of the dairy operation impact the cash flow, the income statement and the five-yearbudget.A comparison of key system components and financial indicators for the dairy model can be found inExhibit A1. This model represents a dairy using 100% equity financing with no debt. Althoughunrealistic, this simplifying assumption allows lenders to quickly analyze the free cash flow to determinehow much debt the operation could service.1

Exhibit A1. 3,500-cow dairy model examination.Component3,500-cow modelMilking centerHousing systemManure handling system72-cow rotary parlorFour row, tunnel ventilated freestall housing facility with sand bedding forcows (milking, dry and special needs)Passive manure/sand separation with storage basins and earthen lagoonTotal capital investments 50,788,606Total acreage(includes crops, farmstead and waste acreage)Dairy jobs (full-time equivalents)Annual net income (five-year average)Annual net cash flow (five-year average)Return on assets (five-year average)4,66043.0 2,938,925 4,036,6795.9%The following key assumptions are included in the model: All heifers are raised on-site by the dairy operation.All corn silage, alfalfa hay and haylage needs are produced on owned and irrigated land operatedby the dairy enterprise; however, planting and harvest functions are outsourced to custom hireoperators. Land investments are based on the minimum acreage required to meet forage production needs,plus twenty percent more acres to accommodate farmstead, feed storage, roads and unusable landtypical to Missouri dairy farms. Freestalls with sand bedding in four-row, tunnel ventilated cow housing barns are used foroptimal cow comfort. Adequate bunk space and water troughs are provided. Head catches and manure flush systems are included for labor efficiency.Heifer housing includes individual hutches for small calves, a mono-slope heifer barn with feedalley that can be scraped, feed rail, and multiple bedded pack pens for precise grouping. Manure handling systems include recycled lagoon water towers flushing to a sand separation laneand then to passive manure solids separation basins, where the liquid fraction weeps into anearthen lagoon.Economies of scale drove the U.S. dairy industry to consolidate toward fewer, larger farms. The midpointsize of U.S. dairies in 1987 was 80 cows, according to USDA. Thirty years later, the midpoint herd size in2017 was 1,300 cows.2

Well-managed larger dairy operations with tight standard operating procedures have a financial advantageover smaller operations. Larger dairies can spread initial investments over more cows, thereby reducingcapital investment per cow and fixed costs per hundredweight of milk. Improved operating efficiency andspreading fixed costs over more milk production can ultimately result in significantly lower milkproduction costs. Larger dairies may also have increased bargaining power with suppliers, which mayreduce operating costs per unit purchased.The future of the Missouri dairy industry depends on how well producers can use technology to intensifymanagement to handle larger-scale operations; these employ more outside labor and expertise. The nextgeneration of dairy managers must learn to create and manage standard operating procedures (SOPs) toeffectively manage scale and use evolving technologies, equipment and management information systems.While long common in manufacturing industries and other livestock sectors, SOPs on dairy farms wereadapted this century by emerging larger dairies. SOPs help management effectively train and monitorlabor, develop personnel skills, maintain a healthy and consistent heifer and cow herd, and ensureenvironmentally compatible manure management systems. Now common across larger dairies, simple buteffective dairy farm SOPs can be found from public sources, developed from scratch, or borrowed andcustomized from another dairy. Dairy consultants or specialized veterinarians can draw on theirexperiences across farms to continually refine and improve a dairy’s SOPs.Exhibit A2. Dairy standard operating procedures (SOPs).3

1. Production and operation plan1.1 Production assumptionsMilk productionEstimated annual milk production and rolling herd averages are shown in Exhibit 1.1.1. Milk productionlevels are based on a herd of purchased Holstein cattle. Milk production per cow gradually improves asthe herd matures. Only 2.5 percent of total milk production is not sold and is used to feed calves. Dairyproducers can increase cash flow and make substantial economic gains by focusing on improving milkproduction.Exhibit 1.1.1. Milk production assumptions.Year 1Daily milk production per cow, poundsRolling herd average, pounds of milk per 365 days76.023,750Year 2Year 380.025,000Year 481.025,31382.025,625Year 583.025,938Turnover and reproductionCows will leave the herd based on involuntary factors (death,disease, problem breeders, etc.) and voluntary factors (low milkproduction). A 28.5 percent annual cull rate is assumed in themodel. Annual death loss is estimated at 6 percent. Together, theserepresent a 34.5 percent yearly replacement rate. Other assumptionsAssumptionsCull rate: 28.5 percentDeath loss: 6 percentCalving interval: 12.8 monthsAverage days dry: 56 daysinclude a 12.8 month calving interval and a 56-day average days dryperiod for the herd. These calving intervals require tightly managed reproductive protocols and animalhealth SOPs. Heifers born on the farm would be raised as replacements or sold when heifer numbersexceed the number of replacements needed.4

1.2 Capital investmentsDairy investments are categorized as real estate, machinery and equipment, and livestock. Exhibit 1.2.1details investments for the 3,500-cow model. Freestall housing costs are calculated on a per stall basis for3,150 cows. Barns are assumed to be overstocked by 10 percent to reduce capital costs without impactingcow comfort or bunk space.Exhibit 1.2.1. Capital investments for the 3,500-cow model.ItemREAL ESTATE:LandFreestall (tunnel ventilation, loops with sand)Rotary milking parlorOffice, milk house, utilities, conference roomHeifer barn (post-hutch to pre-calving)Sand separation apron and padPassive manure separation/storage basinsAnaerobic lagoon (365 days of storage)Calf hutch dry manure & bedding storageDry manure/bedding storage (seven days of storage)Hay and equipment storageSilage storage system pile base (eight acres)Commodity shedSupplement binsTruck scaleSite preparationAll-weather driveway (gravel)Wells and/or water impoundments, linesElectric connection (three-phase power)Units# of Units /UnitCostacrestallstallsquare foothead capacitycubic yardcubic footcubic footsquare footsquare footsquare footcubic ,7494,0004,00030,000348,480105 3,530 2,555 42,000 50 750 200 2 0.12 12.00 12.00 10 2 22,000 20,000 16,449,011 8,048,250 3,024,000 180,000 1,987,500 300,600 892,900 2,956,611 48,000 48,000 300,000 696,960 220,000 100,000 75,000 250,000 369,600 250,000 250,000 36,446,432SUBTOTAL5

Exhibit 1.2.1. Capital investments for the 3,500-cow model (continued).MACHINERY & EQUIPMENT:Skid steer loaderMixer wagon and four automated feed pushersPayloaderTractor, 225 horsepower, newTractor, 100 horsepower, usedStandby generatorFlush towersRecycle pump & pipeLiquid manure pumpIrrigation (160 acres - machine, generator and pad)Solid manure spreader truckLivestock chute with scaleCalf hutchesLivestock trailer, newFlatbed trailer and miscellaneous rolling stockPickup truck, usedSilage truckLawn care equipmentHigh-pressure washerOffice equipmentOffice furnitureSilage rakeLIVESTOCK:Dairy cowsHeifersTOTAL INVESTMENTSINVESTMENT PER COWeach2 35,000eacheacheach224 140,000 233,637 50,000eacheach208 12,000 8,250pivoteacheacheacheach22121161 169,500 80,000 3,500 400 25,000eacheach31 25,000 75,000each3 500headhead3,5002,800SUBTOTAL 70,000 560,000 280,000 467,274 200,000 30,000 240,000 66,000 35,000 3,729,000 80,000 7,000 46,400 25,000 22,500 75,000 75,000 7,500 1,500 10,000 2,000 15,000 6,044,174 1,600 960SUBTOTAL 5,600,000 2,688,000 8,288,000 50,778,606 14,5086