When times get tough, it’s time to sharpen your pencil and dig in. It’s no secret the dairy industry is in a downturn; we’re facing low prices and increasingly tight margins. Young and beginning farmers who may not have a lot of experience with volatility can be even more vulnerable to industry downturns.
Those who are just starting out haven’t had as many years to build their balance sheets. They are likely going to have smaller net worth and less working capital. In addition, they probably have smaller land base and more variable costs. The combination of these factors can limit their options (compared to a veteran farmer) when cash-flow shortages arise.
The good news is: There are ways every dairy producer – regardless of operation size or years in the business – can better position their operations for long-term success. We work with some of the best managers in the industry who’ve identified best practices and strategies to stay at the top of their game.
Consider adopting or enhancing the tactics listed below. They are good reminders for all – but especially important for beginning farmers to put into practice.
1. Know your cost of production. I may sound like a broken record, but this cannot be emphasized enough: Know what it costs you to produce a hundredweight of milk. Information is power and, without it, you’ll just be shooting from the hip. To determine your cost of production, you must have detailed, accurate financial records. This includes both earnings information and fiscal year-end balance sheets.
It’s important to analyze your financial position on an accrual basis, as year-end tax planning can greatly skew costs from year to year. If you know your cost of production, you’ll be able to use that information to make decisions. That knowledge will also assist you in developing a risk management strategy.
2. Complete a monthly budget. Keep it front and center as you make decisions. As you communicate with your lender or other business partners to determine your financial needs for the next year, this is a great tool to have at your disposal. It will assist you answering questions like: Will you have enough cash or operating funds? Are you able to stay current on your bills?
How does a purchase or expansion impact things? Once you complete the budget, make sure you continue to monitor it with a budget to actual report. This tool does you no good sitting in a drawer somewhere; use it as a point of reference and keep it up-to-date.
3. Develop a risk management plan. Once you have your financial records in place and know your breakeven, you can better manage risk on your operation. Put together a marketing plan, and remember to focus on the margin. Review your levels of insurance and participation in the Margin Protection Program for Dairy.
If you’re not strong in this area, find an expert who can help you. Be sure you get the plan down in writing, to act as a point of record and hopefully make it more difficult for you to go against it.
4. Build working capital. When you are in a downturn, it can be extremely difficult to build working capital, at least through profits. Working capital is your best defense against a cash-flow shortfall. It’s the difference between your current assets (cash, inventories, prepaids, etc.) and current liabilities (accounts payable, operating debt and current portion of any term debt).
A good management target is at least $500 per cow. If you have other enterprises, such as beef or grain, you’re going to need additional cash flow. Part of preserving working capital is to limit capital expenditures. Prioritize your needs and stick to your budget. Also analyze the assets you have and, if they are not providing an adequate return, perhaps now is the time to let them go.
5. Bank on the basics. Nothing can replace cow comfort and high-quality feed. Are you maximizing your basis with good components? Make sure you have protocols in place when dealing with sick cows and herd health records are up-to-date. Be sure to maximize non-milk income by culling cows in good condition.
Focusing on these five areas will allow you to really understand your business and make strategic decisions to help your operation withstand the challenges. Not only will you be effectively managing through the tougher times, you’ll also be better positioned for long-term success.
Remember to reach out to your peers and industry experts, and discuss options with your lender. Keep them informed of your financial position today and where your business is headed. 
-
Brooke Grant
- Senior Credit Officer
- Compeer Financial
- Email Brooke Grant
