For dairy producers across the U.S., 2017 has the potential to be a year of growth and opportunity – but financial success hinges upon four key factors. “The best time to grow is when everybody else is hunkered down,” Mike Boehlje, Purdue agriculture economics professor, told dairy producers at the 2017 PDPW Manager’s Academy held in San Diego, California, earlier this year.

Coffeen peggy
Peggy Coffeen
Coffeen was a former editor and podcast host with Progressive Dairy. 

There will be “good buys” on land and opportunities for marketing products, Boehlje predicted, but dairy producers will have to figure out which opportunities to pursue and which to let pass by them. Evaluating these four factors can help make those decisions: working capital, cash availability, repayment capacity and solvency.

1. Working capital

According to Boehlje, there are two numbers every producer needs to know when talking to their lender: cost of production per hundredweight and working capital.

Working capital acts as the “first line of defense against financial stress,” providing a “buffer” to ensure money for paying bills. Boehlje set the goal for working capital to be equal to 30 percent of gross revenue, claiming a dairy operation cannot get by with any less than that. But hitting that mark may not be easy.

“Unless you are unique, you’re going to burn up working capital this year,” he warned, calling out a specific caution to dairymen who dabble in cash crops. “You are going to burn up working capital this year if you have a portion of your operation in the grain business,” he added.

Advertisement

2. Cash availability

“Cash is what protects you from bad stuff and what gets you good deals,” Boehlje said. Those particularly at risk for operating losses this year are renters, who have a higher cash cost.

Cash may also be tight come tax time, when the taxes that have been put off for the past three years must be paid and depreciation has been used up.

When it comes to expenses, Boehlje suggests breaking out cash and non-cash costs, and counting all resources – including your time – as part of that. And proceed cautiously with expenditures. “Be very careful not to get seduced into buying equipment when you don’t have cash,” he said, noting machinery leases may be an alternative that offers a lower cash payment.

3. Repayment capacity

Many dairies are in a tight situation due to reduced cash flow combined with short repayment schedules on equipment and land loans.

“We’ve put too much debt that we’ve borrowed on too short of payment schedules,” Boehlje said, explaining the 10-year terms for land are much shorter than the 30-year terms once commonplace.

Now may also be a good time to look at options for lending institutions. “Loyalty is important,” he said. “But don’t be afraid to check out other lenders.”

Boehlje offered three tips for working with lenders for a little more give in repayment schedules: Negotiate terms first, and seek the longest terms available to free up cash in the short term. Negotiate for a no-prepayment penalty. Discuss interest rates last.

4. Solvency

Evaluate the debt load. More than likely, reducing debt needs to be the focus right now. Take a look at equipment and determine how to get the most value out of it. This may mean seeking out opportunities for custom work to create a revenue stream or selling off under-utilized implements for cash and to decrease debt.

Despite tight times, Boehlje does not expect to see a flush of bankrupt farmers; the ones who will be forced out of business, he said, will be renters and people who do not own their farms.  end mark

Peggy Coffeen