After the Crash: What to Expect
Apr 14, 2013
Don’t just sprinkle the money around. Here are smart ways to use your improved cash flow as you come out of the pricing crisis.
By Riley Walter, attorney
In prior posts, I have focused on things that I have learned and observed from representing numerous Central California dairymen during the depths of the dairy crisis.
However, now that there may be some light at the end of the tunnel, it might be a good idea to turn attention to what dairymen might do once there is a positive margin between the milk price and the feed price.
Having seen dairies come out of crises in the past, I know that one of the first things dairymen tend to do is spread the "excess" margin over all of their creditors. They apparently believe that sprinkling the money over the entire creditor body is a good way to go. It is not. Not all creditors are equal. You need to use the enhanced cash flow on those you need or those who have priority. Don't just sprinkle the money around. Pay the CPA you are going to need as you move forward. Fix items of deferred maintenance, especially environmental problems. Catch up on insurance and utilities. Work on rebuilding the herd. You need to use the additional cash flow in a rifle-like manner, not a shotgun.
Second, do not be surprised when there is an avalanche of creditor lawsuits seeking to collect on long overdue vendor bills. As soon as there is excess cash flow, you can be sure that the dam will break and a large number of lawsuits will be filed as creditors jockey to get ahead of other creditors.
Third, please get your accounting, bookkeeping and recordkeeping systems up to par. A lot of folks have let this slip during the crisis either because of the stress or because they did not feel they could call upon their accountants when they could not pay them. You really want to get this cleaned up. At some point, we all hope, lenders will be back in the market, and they are only going to lend to those who have superior financial and recordkeeping systems. The old days are over. You are going to have to demonstrate substantial management and financial acumen going into the future. Being "good with cows" is not going to get you a loan.
Fourth, for those of you in California, it is reasonable to expect that the environmental regulatory floodgate is going to open. Recent court rulings make it pretty clear that dairymen face substantial regulatory compliance costs in the near future, and you need to be contemplating this as your finances improve. If you sprinkle the money to overall existing creditors, you may well be unable to maintain environmental compliance.
Last, and this is maybe hard to comprehend, many dairymen have been able to avoid filing Chapter 11 due to extremely hard work and just by hunkering down. However, many of these dairymen are saddled with huge amounts of vendor debt. That debt is not going to go away even though cash flow improves. Some, maybe many, of these dairymen will need to consider filing Chapter 11 to propose plans to shed debt. To do this, they really need to get their financial report systems up to par. If these dairymen are able to demonstrate "feasibility," they will likely be able to shed considerable unsecured debt.
So, here’s hoping that the reports of enhanced cash flow are true.
Riley Walter is an attorney and founder of the Central Valley-based Walter & Wilhelm Law Group, a law firm specializing in agribusiness, reorganization and bankruptcy. Contact him at 559-435-9800 or RileyWalter@W2LG.com.