By Greg Steele, AgStar Financial Services
**Extended comments highlighted in blue.
What a summer! Has a day gone by without a lead story on the national or local news about the drought and how it is impacting production agriculture?
Those of us in the industry certainly don’t need a newspaper, TV or the Internet to help us keep the most severe drought in more than 50 years top of mind.
Managing your balance sheet, preserving liquidity and working capital, and maintaining lending standards or loan compliance is of utmost importance at this time. From a lender’s perspective, there are some areas where you can ease the financial stress that feed price, quality and availability have put on your dairy operation.
1. Financial information. A reliable and accurate accrual accounting system is paramount. This is the foundation of building the financial forecast and marketing plans for your business. These documents allow you to understand cost of production, evaluate cash flow needs and provide the information you need to make the best economic decisions.
2. Working capital. The old adage is that working capital is the "lifeblood of the business." We may not find a year where that may be more evident than 2012. Having access to adequate lines of working capital for feed purchases and marketing is also essential. Talk with your lender early and often. This provides an opportunity for a proactive approach to cash-flow needs, as well as some flexibility.
3. Feed. Measure forage inventories accurately. Knowing what you have in advance makes it easier to readjust rations if you need to extend forage inventories. Consider alternative forage options when feasible, but keep in mind they may need to be shipped from long distances. Cash-flow planning will be critical in some cases to avoid complications with financing these purchases. Another option in some regions is planting late season forage crops, such as sorghum or sudangrass. Remember, when purchasing forages, investigate quality thoroughly to avoid ration challenges caused by drought-stricken crops. Given the feed situation, it is critical to work closely with the herd nutritionist to create and monitor feed rations and maximize income over feed costs.
4. Marketing. Today’s environment is a classic example of why producers need to hedge margin and not just milk. Protecting income over feed cost is a strategy that yields great benefits. Work with your adviser team to develop a plan that fits your situation.
5. Culling. The market has recently provided very good beef prices for cull animals. Evaluate the key criteria carefully. Culling marginally profit-able animals is a good economic decision. Timing is important for maximizing cull cow revenue.
6. Replacements. Understand your cost of growing heifers and evaluate opportunities to be more selective when deciding which heifers will be raised for internal needs. If your situation requires it, selling off animals can provide immediate impact on cost reduction and create revenue. However, it’s also important to have the cash flow to replace these animals when needed.
7. Capital expenditures. Carefully evaluate capital expenditures. Given the uncertain environment, it is generally in the best interest of the business to delay nonessential capital purchases until more stability returns to the marketplace.
8. Networking. Spread the word that you are looking for feed and are open to considering alternative sources and byproducts. Key advisers, neighbors and friends will be eager to assist you and put you in touch with contacts they may have.
The drought is here, and you can’t do a thing to change it. But if you take a rational, clearheaded look at your operation, there are steps you can take to mitigate risk and put yourself in a position to succeed. In summary:
• Readjust rations as your particular situation demands;
• Revise the budget forecast based on change in cash-flow needs of the business;
• Preserve working capital;
• Procure high-quality feed, contracting feed and milk simultaneously;
• Be aggressive in making good economic culling decisions;
• Be selective with which replacement you raise;
• Network with your team of advisers;
• Limit capital expenditures to immediate needs of the business.
- September 2012