No family ties for this young
Steve Vandendool used a U.S.-style partnership agreement and rented quota and facilities to start dairy operationBY DON STONEMAN
Growing up on a Huron county pig farm, Steve Vandendool had no opportunity to take over dad's farm, the conventional route into dairying. He found a different way to do what he wants - making a living by milking cows. The path he took gives new hope to producers daunted by the seemingly insurmountable costs of getting into the dairy business in Canada.Vandendool, 28, is the principal in a partnership with Oxford county's Don and Mark Lazenby and milks cows in a Spartan new three-row freestall dairy barn just north of Woodstock.
Vandendool and the Mark developed a rental scheme when they were University of Guelph students. On graduation nearly five years ago they started milking 20 cows in a rented tiestall barn near Embro, using quota rented from Mark's father, Don Lazenby, a well-known Ontario Dairy Herd Improvement official.
Vandendool and the Lazenbys scanned advertisements in newspapers, choosing the Embro barn, says Vandendool, because of its "good-sized stalls" and a TMR mixer. There was room for 50 cows and half of the young stock.
Don Lazenby's cow herd and quota became the core of the operation. For use of the quota, the elder Lazenby is paid six per cent of its value annually. The partnership bought more quota, borrowing money based on their track record in the barn.
"We had to prove to the bank we could do it," says Vandendool, who majored in agriculture economics at Guelph, studying dairy production in his elective courses.
Vandendool handled day-to-day management, discussing larger decisions with his partners. Both of the Lazenbys worked full-time off the farm and were paid for relief labour when Vandendool took time off.
In four and a half years the partnership has accumulated 40 cows and the quota needed to milk the animals. By last year Paradigm Holsteins boasted a 230 combined breed composite average, with daily production averaging 35 litres per cow.
But growth brought its own set of problems in the rented tiestall barn. The partnership bought forage at going rates. Dry summers and winterkill in recent years boosted prices beyond acceptable levels.
"You have to have a source of reasonable cost forages. It really hurt us," says Vandendool. With feed costs eating profits and hindering their ability to expand, they decided to come back to Lazenby's farm.
Steve and his wife, Julie, bought 80 acres adjacent to Lazenby's farm. The partnership rents buildings from them. The new free-stall barn belongs to Don; the cows and quota belong to the partnership. Mark has stepped away from the operation, and Don Lazenby now fills in with chores when necessary.
Vandendool stresses that there are clauses built in that take into account a partner wanting out of the business. "We had a partnership agreement right from the start," Vandendool says.
In the U.S., there are a lot of partnerships like this, but there are relatively few in Canada. "We have to start looking at this more," Vandendool says.
"If you want to milk cows you have to start with cows and quota, not land at $4,000 to $5,000 an acre."
Vandendool opted for a slatted floor in the new barn. "In the long run it is as economical as any system," he says. An earthen lagoon was out of the question, because the farm is situated on gravel, near Pittock Lake.
With the eight-foot-deep pit underneath the building, it counts as a covered pit, so minimum distance separations to other buildings are reduced.
The barn itself is simple. "It's a drive shed on top of a manure pit," Vandendool says. The barn itself is 165 x 62 feet. with 62 freestalls. The feed alley is 17 feet wide, a bare minimum, Vandendool says. There is no crowd gate, or heat in the parlour; the only automatic feature is the takeoffs.
At the start, Vandendool concentrated on putting in the features that counted. There was no scrimping on stall size, and the double-six parlour will comfortably handle as many as 100 cows. The barn is sited on a hilltop, where it is exposed to summer breezes, and can be expanded to hold more cows. There are now 55 cows in the stalls. Expansion came with cows from two closed herds, avoiding staph aureus mastitis and strawberry foot rot.
Cost of the barn and feed bunkers is about $365,800, with final excavation still incomplete. Cows moved into the barn in December.
The parlour and freestall areas are under the same roof. The barn has a conventional roof with flat trusses, and six 3x3 foot chimney openings. Ten-foot curtain walls open manually.
Cows lie on rubber-filled, waterproof Pasture Mats. There are no head gates except in the sand-bedded maternity pens.
"Don't scrimp on stall size," Vandendool says. Most other features can be installed in the barn when more money is available later. He points out that when he started dairying four and a half years ago there were predictions that quota would disappear in five years. But quota's value has since risen, not fallen.
Vandendool admits it was easier to buy quota at first. He purchased used quota on the provincial exchange. That option was phased out as a daily quota system became part of the provincial scene almost two years ago. But he thinks it's still possible for young farmers to break into the business.
© copyright 1999 Agricultural Publishing Company Limited.
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Investing in the next generation
You can invest in mutual funds or you can invest in people, says Don Lazenby, well-known to the province's dairy community as manager of planning and development for Ontario Dairy Herd Improvement.More than five years ago Lazenby decided to help his son Mark and friend Steve Vandendool get into the dairy business. It's a scheme that Lazenby thinks more aging farmers should consider as they look at getting out of the industry. It's also a business arrangement he expects will raise eyebrows across Ontario.
The three formed a formal partnership, with the younger partners, recent University of Guelph graduates, feeding and milking cows, while shipping milk through the elder Lazenby's licence.
Lazenby had sold his family's quota when son Mark returned to school. He bought back as much quota as he could to launch the partnership. The re-purchase allowed for less production than before because the value of quota had appreciated, and also because of the 15 per cent assessment on sales to other than family members.
Lazenby's presence as owner of the quota, and the license to market milk through Dairy Farmers of Ontario, was necessary to get Steve and Mark into the business. Without Lazenby owning quota to secure a market for the milk, lenders wouldn't give the young farmer wannabes a second glance. There is no provision in Ontario for a producer to rent his quota to another. Nor is it possible for two producers to have their name on one milk licence.
Mark and Steve paid Lazenby six per cent per annum on the value of the quota, an amount equaling the return he would have gotten if he had invested in a more conventional scheme.
"From Day One they have paid the carrying costs of the quota," Lazenby says. "In terms of managing the business, they did that on their own. That's the point we don't want to lose sight of.
"They started almost with nothing as far as assets," Lazenby says. The young farmers borrowed money to buy more cows. Because they rented a barn, they had no capital assets. It was particularly hard to borrow money to buy equipment.
In four and a half years they were able to pay that off the cows and equipment, Lazenby says.
The tough part is for young farmers to prove themselves to borrowers, Lazenby says.
"They can manage cows," but it's difficult to build a track record and gain experience. "If they didn't have quota behind them, the banker wouldn't have talked to them at all, Lazenby says.
"I could have invested my money somewhere else, or I could invest it in two young guys and let them grow their business. The only difference is the risk."
The risk that Lazenby faces is that quota value could tumble as trade concerns ebb and flow. He expects "a blip" in the value of quota as decisions on the trade challenges from the United States and New Zealand draw near. Other than that, he expects to see quota prices hold steady.
Last year, Lazenby financed the construction of a new barn on his farm so that Vandendool could continue with a herd expansion. The construction "was riskier," says Lazenby, who relief chores in the new facility. "I think there is more risk in the capital investment than in the quota." - Don Stoneman
© copyright 1999 Agricultural Publishing Company Limited.
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Buy quota, not land
Tradition says that farming requires land.Tradition needs to change, says Dennis Martin, Clinton-based dairy cattle specialist.
A farmer with $16,000 in his pocket in western Ontario might buy four or five acres of crop land, perhaps a few more acres somewhere else in the province. Or they could buy quota to produce a kilogram of butterfat and pay for it over five to 10 years.
Martin's point is that even at current prices, buying a piece of the market for butterfat makes more financial sense than buying land. There isn't a legal crop that will bring the same kind of return, he says, even when crop prices are relatively high.
A kilogram of quota represents the production from one cow producing 9,550 litres of milk at 3.82 per cent butterfat.
The net return is about $5,200 a year.
At $16,110 for quota on the first exchange of the year, that quota can be paid off in between seven and 10 years while still contributing to the farmers' bottom line, says Martin.
Shipping a large percentage of over-quota milk doesn't pay, says Martin. Nor does financing a quota purchase over a short period. Quota purchases must be financed over at least six years to give a better return, he says.
But more quota isn't going to pull a farmer out of problems caused by high production costs, Martin warns. A herd manager must focus first on low production costs, and then consider the economics of buying quota.
Martin advises farmers to expand only for the right reasons; Children can change their minds about taking over the family farm, he says.
Farmers also must consider if debt is manageable? Martin looks at key financial benchmarks: No more than $1.35 in total debt per litre of milk sold; principle and interest payments should not exceed 20 cents per litre of within-quota milk sold.
But these are just benchmarks, he stresses. Exceptionally good managers may be able to push debt loads beyond those benchmark limits. - Don Stoneman
© copyright 1999 Agricultural Publishing Company Limited.
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WTO decision goes against Canada
By DON STONEMAN
The Canadian dairy industry has lost two World Trade Organization (WTO) dispute settlement panel decisions, but dairy industry leaders are minimizing the damage.The WTO panel has declared Canada's classified pricing system is a subsidy that distorts export decisions made by farmers. Canada also had its knuckles rapped for failing to administer a tariff rate quota (TRQ) system that would allow 64,500 tonnes of fluid milk into the country from the U.S. annually.
The decisions appear to be flawed and Canada will appeal each one, says Richard Doyle, executive director, Dairy Farmers of Canada. Even if the panel decisions are upheld, they will not have a drastic effect on the incomes of dairy farmers, he says.
On the issue of Canada's classified pricing system, challenged by the U.S. and New Zealand, only milk sold through classes 5(d) and (e) are affected, Doyle says. Class 5(d) covers planned exports to traditional markets - for example, milk targeted to the U.K. at $38 a hectolitre and produced within Canada's quota system. Milk produced in class 5(e) reflects within-quota production that can be used to meet domestic market growth or exported, Doyle says. Over-quota milk is also exported under 5(e).
"There is no government funding involved," Doyle stresses.
The trade panel's decision sets a precedent. It declared that provincial marketing boards are government agencies, and the price of milk that a producer gets is hidden because it is shipped through these government agencies and the producer is not able to make a decision on whether to export.
"The panel is saying individuals should make the decision, not the system," Doyle says.
About 9.5 per cent of Canada's dairy production is exported. Doyle says only half of that is affected by this decision. Because that milk is of a lower value, only two per cent of farm gate receipts come from those exports.
Optional exports, where individual farmers decide to sell into export markets, are still possible, Doyle says. But returns there are bleak. "There aren't tons of producers rushing to produce $22 [per hl] milk," Doyle points out.
If the decision on the fluid milk imports from the U.S. is upheld, Canada will be forced to try to count the fluid milk that comes into Canada. Under the last trade agreement, Canada agreed to import 64,500 tonnes of fluid milk under a tariff rate quota and asserted that cross-border shoppers were already importing that much milk, closing the door to commercial imports. Canada's estimate of U.S. imports were based on surveys during the late 1980s, when cross-border shopping was rampant.
"People jump to the conclusion that we will see on the shelf all kinds of fluid milk products from the U.S. It isn't necessarily so," Doyle says.
A way will have to be found to administer the tariff rate quota. "How it is administered is up to Canada," Doyle says.
The 64,500 tonnes of fluid milk under the TRQ is equal to about eight tenths of one per cent of annual Canadian dairy production.
Canada still can't export a carton of milk to the U.S., because the United States doesn't recognize Canada's inspection system. Doyle says the only way that Canada could ship to the U.S. is if the health standards on every farm in the country were approved by an American inspector. That amounts to a non-tariff barrier, Doyle says.
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