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«David Alvis A 2008 Oxford Farming Conference / Nuffield Farming Scholarship Trust award Thanks and acknowledgements I would first and foremost like ...»

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Across the border in Ilderton Ontario, we visited Stanton Bros, a recently completed stae of the art 2,000 cow capacity dairy and home to the renowned Stanton’s herd of pedigree Holsteins. http://www.holsteinworld.com/stanton

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Currently the dairy is home to a milking herd of 700 pedigree Holsteins which included Crockett-Acres Mtot Elly, formerly the number 1 genetic merit Holstein cow in the world.

Nine years old at the time of our visit, the now deceased, Elly had been purchased as a mature cow two years earlier from the US and now lived in her own loosebox at Stantons where she was being kept dry and regularly flushed for embryos to sell.

Elly has a number of high ranking sons in AI in Canada and the US and her daughter Crockett Acres Elita and granddaughter Wabash-Way Emily Ann, sired by the British bull Picston Shottle, have both subsequently held the distinction of No.1 Genetic merit animal in the breed. Emily Ann has since been acquired by the Stantons to replace her grand-dam as the star addition to their herd.

Whilst there were only 700 milking cows, the remaining 1,300 spaces on the unit were full with pedigree young stock and commercial heifers used as embryo recipients for the elite animals, which are on regular flush programmes.

Selling pedigree stock and embryos is a key part of the Stanton’s business and the unit was designed to be able to show cows and heifers at their best in a light, airy & pleasant environment that hopefully would encourage prospective buyers to dig that little bit deeper!

The dairy features an novel design of anaerobic digester called an IBR or induced blanket reactor, developed by Andigen (www.andigen.com) a US based business which used a series of modular upright vessels and claimed to offer faster cycle times and increased gas yields than the more traditional plug flow designs seen on many US dairies. Laurie Stanton was very optimistic about the prospects for the digester and was working closely with Andigen and researchers from the University of Guelph, to develop the concept. They were looking to incorporate municipal food waste as a co-feedstock to increase Biogas yield from manure and also had a plan to develop an algal biodiesel production facility on the farm using digestate from the AD plant to feed oil producing algae in large out-door tanks.

Unusually for the normally conservative world of pedigree cattle breeding, Laurie Stanton and his sons were clearly focused on the future and determined to ensure that every aspect of their business was ready to embrace the challenges of life after quotas. They were investing heavily in both state of the art technology and elite genetics to ensure that they remained competitive...and they had a beautiful herd of cows.

The Mid West, September & October 2008 California and New York had given me a an insight into which direction the US dairy industry was moving, and while I had seen some excellent dairy businesses I was still looking for the ‘killer business model’ that would work in the UK.

The Nuffield network proved a useful source of contacts to supplement my own research. I was conscious that Nuffield dairy scholars have beaten a well trodden path around the world and wanted to strike out and claim some new territory, but equally there’s nothing like a bit of local knowledge to help you on your way.

For that I am particularly grateful to Paul Fox for putting me in touch with Professor Dave Wieckert at the University of Wisconsin and with Jay Waldvogel, a director of Dairy Farmers of America, both of whom proved invaluable sources of information and contacts and in the case of Dave and Joan Wieckert, extremely generous hosts during the week of the World Dairy Expo when every hotel in the city was fully booked.

Thanks also to Kevin Bellamy at the Global Dairy Platform in Chicago, my first point of contact in the US who provided me with some excellent leads, not least the contact with Tom Gaughan at Downes O’Neill, who gave me a great insight into the world of dairy commodity risk management and organised an unforgettable tour of the trading floor of the Chicago Mercantile Exchange.

World Dairy Expo The World Dairy Expo (WDE) is the world’s largest dairy event held every year at the Alliant centre in Madison, Wisconsin, with every major company in the global industry represented and some of the finest cattle from all over North America on display. There was a particular buzz among the pedigree breeders in 2008 as the Canadians were back after a long period of BSE enforced exile and promised to raise the standard in the cattle lines.

During the week of expo I stayed with Dave and Joan Wieckert, who were charming and generous hosts. They are long time friends of Nuffield and were happy to invite yet another in a long line of scholars into their home.

It was a particularly proud week for Dave as his protégés, the Crave Bros, were being honoured by WDE as Dairymen of the Year. Two of the four brothers, Tom & Charles, had studied under Dave at UWis in the 1970’s and had subsequently started out in dairy farming in 1978 with Dave acting as their mentor, business partner and financial backer. I was flattered to be invited as a guest of Dave and Joan to the awards dinner that week where I enjoyed a great evening in the company of many leading figures of the US and international dairy industry.

Crave Brothers, Waterloo, Wisconsin Dave had taken me to see the Crave’s farm at Waterloo Wisconsin, earlier in the week. The four brothers have built up an impressive business milking 1,200 of the highest yielding cows in the state, averaging 90lbs (41Kg) of milk per day without BST. In 2001 they built a cheese dairy and were manufacturing a successful range of award winning artisan cheeses (www.cravecheese.com). The dairy capacity was significantly increased in 2008 to meet growing demand for their product The farm is recognised as one of the best performing dairies in Wisconsin and the brothers are quick to acknowledge Dave Wieckert’s invaluable support in the early years of their business. Dave pointed out that the farm was a great example of a successful dairy business that had utilised external capital funding, i.e his! to get started.

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The standard of husbandry at Craves was exceptional and the herd certainly confounded the argument that high yields means unhappy, unhealthy cows. This herd was as comfortable and relaxed as any I have seen and was happily averaging over 13,000 litres of milk a year.

The Crave Bros model was working well. Each of the four bros had specific and complimentary areas of responsibility and as a result the whole was greater than the sum of the parts. Charles the eldest was responsible for business management, George ran the cheese dairy, Thomas the field and cropping operations and the youngest brother Mark was responsible for the cows.

They were continually improving the buildings on the farm with a view to expanding cow numbers and had recently built an anaerobic digester to process manure and generate electricity. Crave bros was a great example of a successful family dairy business that has, by adding value to their product, created a solid platform for future growth.

Spring Grove Dairy, Brodhead Wisconsin.

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The Kasbergens provided $2million of the $6million required to finance the business in 1999 (roughly half of what it would cost today) and borrowed the remainder, with the debt secured against their Californian diary and other real estate assets.

Dan and Mary provided 5% of the equity in the business which increased to 20% on a profit share basis over 4 years. They project managed the build of the dairy and are responsible for its day to day management.

The herd was managed very much on an intensive Californian style system. All cows were treated with Posilac (rBST) from 60 days in milk, which according to Dan was worth 7-8 lbs of milk per cow per day. No visual heat detection was practiced at Spring Grove, with all cows on an ‘Ovsynch’ synchronised oestrus programme. Scheduled breeding was done once a week on a Wednesday morning by an Alta breeding technician.

Whilst one might question the consumer acceptability of such a system, you could not argue with the results. Spring Grove Dairy was maintaining a rolling herd average yield of over 30,000lbs (13,500 litres) per cow per year milk sold with a calving interval of 400days. Herd annual replacement rate was running at 35%, with 50% of the cows holding to first service and a pregnancy rate of 23%.

However at this level of production the cows were vulnerable to metabolic heat stress and related lameness issues, especially in the summer months, necessitating a regular two day a week visit from the foot trimmer.

Until 2008 all forage crop production was outsourced to local farmers, but the business had recently purchased 2,000 acres of irrigated cropland. Dan had engaged a neighbouring farmer to act as principal contractor for all cropping operations effectively bringing forage production in house and was working closely with Pioneer, the plant breeding division of Dupont to improve the yield and quality of Maize and Alfalfa (lucerne).

The land acquisition had cost $10million made up of a $3million down payment & $7million mortgage. US tax laws allow them to defer tax liability on the dairy profits by offsetting them against future interest payments, thus reducing the effective cost of the land and the subsequent cost of producing forage.

Dan and Mary Monson run a tight ship. They have earned a significant equity share in a profitable and expanding business from a relatively small upfront stake. Their expertise and hard work has created value for them and their investors and I felt that this model could be readily adapted to work in the UK.

Holsum Dairies, Chilton, Wisconsin “We want our dairy to be an example of agriculture contributing positively to the community. We have developed strong links in our community, economically, environmentally and socially.” - Kenn Buelow, Holsum Dairies, LLC At first site, Kenn Buelow is an unremarkable character;

modest, softly spoken and self effacing, his outward demeanour belies a great vision, intellect and sharp commercial mind that has made him one of the most respected dairy farmers in the state of Wisconsin if not the entire United States.

A native of Calumet county, Kenn studied veterinary medicine at the University of Wisconsin, Madison before working for 15 years in large animal practice in the Mid West and in New Mexico, where he formed a 10 dairy management group specialising in herd health, nutrition and fertility management.

One of his clients in New Mexico was a family trust with a diversified portfolio of investments from dairy farms to property & broadcast media. When the trust divested itself of a majority stake in a local TV station for $60million in the late 1990s, Kenn seized the opportunity to realise his long held ambition of starting a dairy business back in his home state of Wisconsin Kenn had for some time been concerned about the future profitability of dairying in the South Western states, due to rising cost of feed relative to the value of milk and longer term concerns over the availability of water, so he put a proposal to the trust to invest some of the proceeds of the sale of the TV station in a state of the art dairy in the Mid West, where there was a stronger market for milk, feed costs were lower and water abundant.

The business model was a simple one; to sustainably produce quality milk at the lowest possible financial and environmental cost per litre. This would be achieved by focusing management activity on the core value drivers for the business, outsourcing of non-core activities, exploiting the potential value of waste streams and effectively managing risk.

The trust would act as sole financier to the business, providing both debt and equity at commercial rates, avoiding the need for bank finance in the capital structure of the business and all the issues that that would entail. The investors had confidence in Kenn’s ability to manage a large dairy business and thus the counterparty risk to them was considerably reduced.

The proposed model separated infrastructure and operations with the business divided into two separate corporate entities; a property company that would own the site and the dairy infrastructure and an operating company that would own the cows and be responsible for all dairying operations.

Kenn’s initial equity stake would be 3% of the operating company which he would manage in return for a salary and a bonus of 5% of all operating profits over $1million per year, with the option to convert that bonus into equity in the operating company, up to a maximum of 20%.

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Milk is sold locally to a cheese manufacturer supplying cheese to the pizza market.

Supplying a commodity market enables the business to accurately hedge the value of its milk sales as the contracted milk price is linked by a transparent mechanism to the value of cheese and cheese derivatives traded on the Chicago Mercantile Exchange (CME).

The only land that the business owns is the 75 acres that the dairy buildings, feed pads & digestate lagoons stand on. All non-core operations i.e. forage production, harvesting, calf & heifer rearing, milk haulage and manure spreading, are outsourced to local farmers and contractors.

This approach significantly reduced the amount of capital required to establish the business as it avoided the substantial outlay required to purchase land for forage production. The rationale behind this was that, provided input price risks were adequately managed, the core dairying activity offered a significantly higher return on investment than holding land did. The trust had a sufficiently diversified investment portfolio to carry the managed risk associated with outsourcing of feed production.

The success of this strategy was contingent on the establishment and maintenance of strong relationships with local farmers and contractors with clear pricing mechanisms for contracted crops that allow all parties to hedge their positions, as required, in a fair and transparent way.

Consequently Kenn developed a pricing mechanism that links the price paid for Corn (Maize) silage and Alfalfa (Lucerne) haylage to the market value of Dry corn and Soybeans respectively, which the contracted growers would otherwise grow.

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