With a new dairy market era emerging, Farm Credit East staff offer potential actions producers, consultants and lenders can take to drive dairy farm and financial management during this industry reset. One overarching theme: Waiting for a highly profitable year to recover finances is not a viable strategy.
Farm management
- Understand and manage your net cost of production. Keep accurate financial records and benchmark net cost of production against industry standards to identify areas for improvement.
- Question why “we’ve always done it that way.” Rethink some of the “sacred cows” in your business strategy, including the cost of raising heifer calves; cropping distant, rented acreage; or feeding for maximum production rather than for optimal cost.
- Make the most of underperforming resources. Enhance performance of these resources or let them go.
- Re-balance your dairy operation. Key resources – cropland, parlor capacity, barns, feed storage, heifers, etc. – can get out of balance due to the stepwise nature of expansion. Maxing out current resources is key to diluting fixed costs and enhancing cash flow.
- Take full advantage of outside professional advisers. Nutritionists, veterinarians, agronomists and financial experts can offer expertise and perspective.
- Compare “essential” versus “nice to have” capital spending. With today’s level of mechanization and technology, there is almost always some essential capital spending, but go on a disciplined, multi-year capital spending diet.
- Monitor family living withdrawals from the business. Those who raised their standard of living in good times may now need to reduce family living draws until prices and profitability re-balance.
- Use accurate, real-time financial records. Real-time financial information enhances the ability to make appropriate business decisions.
- Don’t let tax management drive the bus. Profitability creates the opportunity to use capital spending as a means for deferring income tax liability. In the current dairy climate, that strategy may need to be adjusted to preserve cash flow, repayment capacity and debt capacity.
Financial and credit management
- Preserve your remaining debt capacity. Resist using available lines of credit for anything other than essential replacement purchases and meeting current operating expenses.
- De-lever your balance sheet. Actively reduce debt – not only to get through the current correction phase but also for sustained long-term success.
- Defer “nice to have” capital spending. Evaluate equipment replacement, land purchases and facility expansion plans.
- Sell unproductive assets. Consider selling unessential assets.
- Be careful about repayment: Be cautious in reducing breakeven milk price by lengthening the debt term or terming out operating losses over an extended period. Avoid making payments on fully depreciated assets when that cash flow is needed for future business opportunities.
- Consider equity investment. Equity might be invested by nonfarm relatives, friends or others who might be interested in providing “patient capital.”
- Keep options open. It’s important to have a Plan B if actions do not result in sustainable profits, especially if a prolonged downturn impairs asset values or the purchasing power of likely buyers. Options might include selling a satellite farm or the sale/leaseback of cropland, especially if it is less critical to concentrated animal feeding operation permitting/nutrient management.
- Ask yourself: Is this the right time to exit? Sometimes the best strategy is to make a planned exit from active dairy farming while preserving accumulated wealth. Do not wait until equity is mostly gone, and sell assets in a manner that manages income tax liability.
- Talk often with your loan officer. Ongoing, honest communication is more critical than ever.
