Sep 18, 2014
Home| Tools| Events| Blogs| Discussions Sign UpLogin

Fiscal Fitness

RSS By: Dairy Today: Fiscal Fitness, Dairy Today

Financial management experts, lenders and accountants share ways for dairy producers to improve money and credit management. Look for help on budgets, taxes, loans, financial performance and even bankruptcy.

Is the Margin Protection Plan a Good Fit for Your Dairy?

Aug 14, 2014

Comparing your cost of production and margin basis to the new MPP can be a very powerful tool for your operation.

Teigen Lori   Copy   biggerBy Lori Teigen, AgStar Financial Services

It is hard to believe that August is here already. It seems we were all just dealing with a wet spring and getting crops planted. Now, over the next few weeks, we’ll be making chopping decisions and planning for the second half of the year.

So far 2014 has provided great opportunities for producers through profit margins and IOFC (income over feed costs). The average Class III milk price for 2014 is $21.71/cwt with average 2015 prices just around $18.00/cwt. Protein prices droppedoff the past few months, but strong components on your dairy are adding $2.50-$3.50/cwt basis. Producers are taking advantage of the market opportunities and realizing profits ranging from $3.00-$4.50/cwt. Producers’ cost of production are expected to drop slightly with lower feed costs in the second half of the year with 2014 crop being fed.

Is the Margin Protection Plan right for your operation?

A hot topic right now is the opportunities provided by the Margin Protection Plan (MPP) in the Farm Bill. Granted, there are several questions left unanswered but thebasic premise is it is a voluntary margin protection plan is being offered for producers. If you participate in MPP, you are not eligible to also participate in LGM. The exact implementation date is not yet known but understanding your cost of production and margin basis compared to what the MPP would provide, is going to be a very powerful tool for your operation.

The basis of MPP program is all about protecting and managing margins. Margin management is necessary to the long term success of your operation. While simply cutting costs today to reduce expenses can be a short term fix, it may not be the long term solution you need. Remember that margin management requires discipline and consistency as markets are constantly changing. Keys for margin management are knowing both your cost of production and cash flow requirements, but also understanding the markets to be able to take advantage of margins at the right times.

In the Midwest, because of our feed costs, we have an advantage of margins compared to other regions. I would encourage you to look at the NASS prices for milk and feed and do a comparative analysis of what prices your farm actually received during the time frame you’re analyzing. Use this information, along with your cost of production, to determine what level of protection may be best for your farm in order to protect the margins needed to ensure long term profits.

Other financial considerations:

It can be very easy to get caught up in day to day activities to stop and see how your farm is performing.. How is your dairy performing not only year to date but compared to budget? Things to consider when evaluating financial performance include:

  • IOFC (Income Over Feed Costs) and evaluating feed efficiency. This also includes evaluating and realizing your feed shrink on your farm, but also bunker/feed storage management.
  • Managing net herd replacement cost. Net herd replacement cost/cwt. isthe difference between the cost of a replacement heifer and the value of the replaced cull cow. We are seeing record high cull prices. Manage your herd and animal health program to ensure you are receiving top prices for cull cows particularly with strong heifer replacements.
  • How strong is your working capital position? Working capital is king. It gives you the flexibility to manage your cash flow and be proactive rather than reactive when faced with potential adversity. When will milk prices correct and is your dairy ready for what that happens? Continue to get revolving lines of credits, vendors and accounts payable paid down to keep working capital strong.
  • Evaluate capital expenditures. With the end of the year quickly approaching, evaluate if the capital expenditure is a need vs. a want and make sure it is a realistic capital expenditure you can handle for the next 12-18 months. We are already seeing producers with strong profits in 2014 and sometimes we use capital purchases to avoid taxes. Rememberthis one time purchase will have a long term impact on your cash flow.

The markets are offering great opportunities for your farm. I encourage you to take the time to learn about the MPP program to see if it is a good fit for your dairy and continue your best management practices to ensure your long term success! Best wishes for a safe and bountiful harvest coming up.

Lori Teigen is a Dairy Industry Specialist at AgStar Financial Services. More content from Lori and AgStar’s other industry experts can be found at

Wage and Hour Lawsuits: Is Your Dairy Next?

Aug 07, 2014

Increasing employment-related litigation threatens dairies.

p7 Fiscally Fit Riley Walter

By Riley Walter, attorney

Now that the dairy crisis may be abating, it is time to turn attention to sound business practices, including HR practices.

As an insolvency lawyer, I often perceive patterns of things that are disruptive to businesses. Of late I have realized that, for the past 18 to 24 months, many of my new matters have involved employment lawsuits that threaten the very existence and survival of businesses, including dairy operations.

These lawsuits come in many different forms. There are wage and hour actions, complaints that compensation was not given for rest breaks, failure to compensate for changing clothes, inaccurate payroll records, nonpayment of overtime, and more. In every one of these instances, these suits bring significant exposure to the business enterprise, especially due to the huge fee requests made by attorneys for the plaintiffs. Some of these suits morph into class actions so they involve dozens of present and past employees. The claimed damages can reach astronomical heights

According to a recent study, the average American business has a 12% chance of having an employment law claim filed against it. However, the study reveals that employers in California have the most frequent incidence of employment law claims. California employers who employ at least 10 employees have a 42% higher chance of being sued by an employee over the national average. This should cause red lights to go on in the mind of every dairy operator.

What has surprised me is that in discussing this with dairy operators they generally do not express a high concern and they usually tell me it is because of the nature of the labor force. They believe that the corporation of their labor force means they have less fear of these suits then other types of businesses.

In my mind, this needs to be reconsidered. Just because you operate a dairy, it does not mean that you are not exposed. You are certainly not exempt from these proliferating lawsuits. You may very well want to reconsider your HR practices and come into conformity with the rest of California businesses. You need an Employment Manual. You need to post the warnings. You may want to get some training on HR matters, including payroll and wage and hour matters. You may want to use a payroll service.

Businesses outside of agriculture have wizened up a lot in recent years, and many of them have taken out employment practices liability insurance. However, I believe that very few dairy operators have done so. You may want to reconsider this.

You can be wiped out in just defending one of these lawsuits given the high legal costs, let alone the actual potential damage claim.

Dairy operators are not exempt, and I predict there will be an increase in the number of suits against dairymen.

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

Loan Covenant Clarity Is Key for Dairies

Jul 07, 2014

Questions you should ask about this increasingly important element in your annual line of credit.

Bob Matlick (resized) Blue

By Bob Matlick, partner, Frazer LLP

Most short-term (operating line) lenders now include financial loan covenants in the renewal documents of the annual lines of credit. If the covenant is broken, there is usually a period of time in which the customer can cure the default. If the default is not cured within the given period, the whole loan relationship can be terminated based on the default.

I find many of my clients do not understand the loan covenants nor do they understand the manner in which the particular bank wants them calculated. I must admit at times I am unsure of the calculation the lender is attempting to perform.

In general, prior to 2009, the only firm loan covenant monitored by the bank was the advance rate (or loan-to-value) on the collateral base (cows, feed, etc.). Since banks saw these loan-to-value ratios fail to monitor the overall financial health of a volatile industry, we are now seeing more specific covenants being included to assist in monitoring liquidity, overall equity and the ability of the operation to make the scheduled ongoing debt payments.

The first issue with loan covenants is to find them in the loan agreement. Ask your loan officer to point them out to you and explain them to you. Ask for an example of how the calculation is going to be made and what data is going to be utilized to make the measurement. The most important questions to ask are, "What is the purpose of the covenant?" and "What is the lender is attempting to measure?" Also, make certain you understand the consequences of defaulting on the specific covenant and the ‘cure’ period timeframe. The cure period is the window of time you have to bring the covenant into compliance.

While there continue to be the standard loan-to-value ratios in most dairy operation lending agreements, other common covenants are minimum liquidity requirements, debt coverage ratios, and minimum equity covenants. Make sure you understand how the loan-to-value percentage is calculated and what is considered eligible collateral (cows, feed and milk check receivable) and the corresponding offset (short-term debt, payables, etc.).

A liquidity ratio measures an operation’s ability to raise cash in a very short timeframe to cover monthly cash shortfalls. In the instance of dairies, the most liquid assets are cash and receivables. Remaining potential liquid assets are livestock and feed, which take time to sell, and may include steep discounts in a sale completed over a short timeframe. Sale of these types of assets will usually impact the ongoing operation in a negative manner. Most lenders are attempting to measure the dairy’s ability to withstand a period of negative margins (without utilizing trade vendors or borrowing) when this covenant is utilized.

A debt coverage ratio measures an operations ability to meet all debt payments over a given period of time. The lender wants to make certain that adequate cash flow is being generated from the operation to service all debt. This covenant needs to be fully understood by both the lender and the borrower as to how it is calculated as I have seen many different variations utilized within the dairy industry (cash vs. accrual, how is cattle depreciation utilized, etc.). Bottom line: Discuss and understand the calculation with your specific lender.

A minimum equity ratio is really a measurement of an entities net worth. Again, understand the calculation your lender is making. Is it on a Fair Market Value basis or cost less depreciation? If the calculation is based on cost, are certain assets revalued to fair market value (livestock)? Are deferred income and losses considered? Are taxable gains considered if liquidation were to take place?

In closing, most lenders are requiring an operation meet certain financial covenants. Make sure you understand what the purpose of the covenant is for your lender, if it is applicable to your operation, and how it is calculated.

Bob Matlick is a partner with the accounting firm of Frazer LLP. He has more than three decades of experience in the agriculture industry. Matlick is a management advisory specialist and provides business consulting services to the agriculture industry with an emphasis in the Western U.S. dairy industry. He has extensive experience in credit acquisition, buy/sell transactions, including tax-deferred exchanges, debt and management restructures of distressed agriculture financial situations, preparation of feasibility studies and facility relocation services. You can reach him at

Where Can You Get the Biggest Bang for Your Dairy Bucks?

May 12, 2014

Sound advice from a dairy lender on the best ways to use this year’s extra cash.

Teigen Lori   Copy   bigger

By Lori Teigen, AgStar Financial Services

The first quarter of 2014 is in the books, and it was quite a dynamic quarter for the dairy industry. As of the May 1, 2014 close of the markets, the average Class III milk price for 2014 was $21.25 per cwt. Due to continued emphasis on improving components and lowering SCC to drive their basis, gross milk checks for some producers have been over $25.00/cwt. These are some of the highest milk checks on record.

Higher milk prices have allowed producers to catch up on accounts payable from the previous year, improve their working capital position and reduce debt, particularly their operating-type credit. These are all important factors in securing your dairy’s long-term viability. There is a tendency, however, when times are good, to let some other management factors slide.

Best use of extra cash Producers have been in contact with their lenders the past few months with the question of "where do I put my extra money?" With the higher milk checks, they are wondering where they can get the biggest bang for their buck per se.

  1. Make sure vendors (veterinarians, feed bills, etc.) are paid in full.
  2. Apply extra payments to your operating note. This will allow you to build your working capital and be prepared for the event of a downturn in price. Paying down the operating note also gives you the flexibility of ability to borrow money back if you need it later. Producers have a tendency to pay off term/machinery debt to reduce that monthly payment; however, once that payment has been made, you cannot get that money back without taking out another loan, if you need it for operating. Always have your operating and revolving type credits paid in full prior to paying off term or real estate loans.

Don’t forget the details

A potentially bigger issue during profitable times can be neglecting to pay attention to the details. When margins are tight, producers spend a lot of time paying attention to the minor nuances in their operation. They know exactly where their cost of production is, and they can list off the price of any feed commodity in the ration. They are diligent about ensuring every capital outlay is a sound business decision.

When margins are where they have been during the first quarter, some managers tend to lose the focus they once had on the details. Losing that focus can result in longer loss of profitability and efficiencies. There are some feed costs that have risen lately; do you know which ones they are and how that impacts your operation’s Income Over Feed Costs (IOFC)? What about expenses? Continue to monitor your expenses to ensure your operation is still performing. It can be easy to spend money a little more freely when cash flow is not so tight. Continue watching your bottom line, comparing actuals to budget and, more importantly, maintain the discipline you have always had with your financial performance and measures.

Higher milk prices and margins bring a lot of opportunity for producers. Make sure you continue with a disciplined approach to every aspect of your business to really make your cash and capital work for operation. Stay current on accounts payable, keep your revolving/operating lines of credit paid down, and stay focused on the details.

The markets will continue to show some volatility, and managing all of these items will ensure you are secure as the market fluctuates. Additionally, keep a close eye on our export market and global demand, as they are both leading indicators of U.S. milk prices. Best wishes for a safe planting season and continued success in 2014.

Lori Teigen is a Dairy Industry Specialist at AgStar Financial Services. More content from Lori and AgStar’s other industry experts can be found at

Get an exclusive look at weekly dairy market components and fundamentals from Stewart-Peterson's Bob Devenport.

The Sober Reality Behind Dairies’ Return to Profitability

Apr 10, 2014

As dairies emerge from a painful recession, a veteran attorney urges attention to the critical fiscal steps still needed to move forward.

By Riley Walter, attorney

Riley Walter bio photoSince last writing for Dairy Today, milk prices are up and I am hearing sighs of relief across the dairy industry.

While I don’t want to deprive anyone of a feeling of relief, this does cause me to make two comments.

First, I am hearing the sighs of relief, but I am not hearing how many dairymen are going to address the huge mound of built-up unsecured debt they owe. While the milk price is up, and while dairymen are beginning to sprinkle money around to their creditors, that mound of debt is huge in many instances and is going to have to be addressed in one form or another. I note that some of the creditors who are not being "sprinkled" are beginning to initiate the long-anticipated collection suits, now that they can see that there could be some money at the end of the rainbow.

The second point relates to refinancing. We are all aware that some of the main-line commercial banks would just as soon not have dairies in their lending portfolio. Some even take more aggressive action to force them out of the bank before maturity. Others appear to be biding their time so that when loan renewal comes up, they may or may not be willing to lend.

This leads me to suggest that dairymen need to be looking ahead now to see how and when, if at all, they will be able to refinance.

In connection with this, here are some thoughts:

  • Dairymen will want to pay attention to which banks are, and are not, making dairy loans. Some long-experienced dairy bankers have been moving around to other banks, and this leads me to believe that there may be banks in the mood to make dairy loans before very long.
  • Dairymen need to consider rebuilding relationships. Many dairymen have had long relationships with experienced dairy lender personnel, and now would be a good time to just check in to find out what the attitudes of the banks are and what banks are looking for in new dairy loans.
  • It goes without saying that dairymen need to monitor values. If you are going to refinance, you may want to do so when values are up and trending up, rather than the other way around.
  • Dairymen will want to educate themselves as to the rules that apply to lenders. This is not 2007, where someone with a ball cap could get a loan. Regulations are much more stringent now. You need to know about those rules as you start the process of looking for a new lender. A simple example is the rules about lending to a dairy that may be within a floodplain and whether this would require extensive engineering work before a loan would even be considered.
  • Last, and certainly not least, dairymen need to get their houses in order. They need to make sure that all of their entity documents are current and up to date. They need to be sure that they have documented all easements. They need to be sure they know exactly what collateral they have to pledge. Now is the time to get the books and records in tip-top shape. Pull together copies of all of the documents that you will need to support your loan request.

There is life after the crash, but lessons have been learned – painfully.

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

Log In or Sign Up to comment


The Home Page of Agriculture
© 2014 Farm Journal, Inc. All Rights Reserved|Web site design and development by|Site Map|Privacy Policy|Terms & Conditions