It’s easy to fall into the trap of assuming higher milk prices are the “new normal.” But how you build resiliency in your operation now will go a long way toward preparing it for the next pothole, mud bog or canyon the industry faces.

For the past several years, I’ve had the pleasure of teaching at the Wisconsin Bankers Association’s Agricultural Lending School with Kevin Bernhardt, Ph.D., of the University of Wisconsin Center for Dairy Profitability. We’ve used the metaphor of a spoked wheel to help our students visualize what resiliency looks like for an operation.

The concept is pretty simple: the wheels that roll the farthest and the fastest while maneuvering over potholes are the largest and roundest. Each spoke of the wheel represents an operation’s area of resources, risk or management. The longer the spokes, the more resilient the operation is in that area. Figuring out what the spokes should be for your operation is critical to prioritizing what to address first. This may be a great way to assess what and where your time and resources should be deployed to further your operation’s overall business strategy.

Extending the short spokes

During the stress of the last several years, the short spoke on most operations has become liquidity or working capital. Losses show up here first in the form of increased open accounts, extended lines of credit and less cash. If the operation were able to refinance and move some of this down the balance sheet, this may have already been addressed to a degree. But to build resiliency, the operation should continue to work on building more.

You could extend this spoke by building cash reserves, reducing open account balances and paying lines of credit down. From my experience, the goal here is to build working capital to a level that would cover three to five months of operating expenses, with two months or more of that in the form of a cash savings account. The cash gives your operation more flexibility to respond to lower margins and take advantage of opportunities to improve efficiencies during stressful times—without having to call your banker.

The next spoke that most operations should examine when coming out of the downturn is risk management. It’s time to review what you could have done better (and what went well) in the previous cycle. Implementing an improved plan going forward will help add resiliency to the operation. Too often, folks abandon their risk management plans when times get better, only to suffer losses later. Remember, what goes up comes down. A well-thought-out, consistent risk management strategy is a spoke that if done properly, can help offset some of the shorter spokes in other areas during a downturn.

It’s also wise to invest in extending the efficiency spoke of the operation. Research and implement technologies that fit your overall business strategy while increasing either “earns or turns.” In other words, the technology needs to provide a tangible return on investment.

Before making any investment, it’s good practice to ask: 1) How will it impact your net worth? 2) How will it impact your break-even cost of production? If neither improves, the investment will likely create a pothole later. With our propensity to spend money when we have money, it’s important to be mindful to not overspend in this area. Also, it pays to be careful to keep your debt payments in line with historical production and revenue streams. Creating a “what-if” budget using various margin scenarios comparable to historic years is another best practice in guiding your investment decisions.

Keep the wheel turning

You want to make real progress? Maintain the cost-control spoke. Keep the same attention on cost cutting during the good times as you did during the downturn. With improved margins, it’s easy to lose focus on cost-control measures. If this happens, you limit the capital available to improve other spokes and invest further in the operation. Fat pigs get butchered, so make sure you don’t get fat. Stay focused!

It’s also a good idea to take time to invest in your own management skill set. This is the grease that keeps the wheel rolling, helping you access new ideas and foster an environment of continual improvement. In the past, the operations that couldn’t survive were the least efficient production managers. In the most recent cycle, it changed to those with weaker financial management skills. It will take continual improvement to remain in this industry for the long term. That includes all areas of management—risk, production and financial.

Finally, put some air in the tire. After this prolonged downturn, take time to address your personal resiliency. The stress load has been high for an extended period, taking air out of the tire. Reinflate it with some much-needed stress relief, and build resiliency for the next cycle. Build a trusted team of advisers around you with positive attitudes, and include mental health support as part of your personal resiliency plan. An investment in this area can help you keep focused in the next cycle so you can continue to be successful in your work life, family life and community life.

While I’ve outlined several key spokes most operations should examine as they return to profitability, these are not the only ones you can include. Depending on your operation, factors such as net worth, production management and asset turnover rate could be the spokes in your wheel. I encourage every producer to review their strategic plans, then build their own resiliency wheel and truly assess what they need to work on. When cash flow is strong, it’s easy to lead yourself to believe it will continue to be strong. But when it comes to being resilient for the next downturn, it pays to be proactive during the good times.  

Brad Guse is BMO Harris Bank Senior Vice President, Agricultural Banking. Note: The opinions, estimates and projections, if any, contained in this article are those of the author. BMO Harris Bank endeavors to ensure that the contents have been compiled or derived from sources that it believes to be reliable and which it believes contain information and opinions which are accurate and complete. However, the author and BMO Harris Bank take no responsibility for any errors or omissions and accepts no liability whatsoever for any loss (whether direct or consequential) arising from any use of or reliance on this article or its contents. This article is for informational purposes only.

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• Brad Guse

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