Dairy Today: Fiscal Fitness
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8 Ways to Survive the Drought
Aug 06, 2012
A lender explains how to position your dairy to ease the financial stress.
By Greg Steele, AgStar Financial Services
What a summer! Has a day gone by where a lead story on the national or local news has been something other than 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 over 50 years top of mind. Managing your balance sheet, preserving liquidity and working capital, and maintaining lending standards or loan compliance are of utmost importance at this time. Despite all the bad news, from a lender’s perspective there are some things you can do to ease the financial stress that feed price, quality and availability have put on your dairy operation.
1. Financial Information. Paramount to everything is a reliable and accurate accrual accounting system. 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 for your operation.
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 will be essential. With this in mind, it’s always best to 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. Accurately measuring forage inventories is vital. Knowing what you have in advance makes it easier to readjust rations if you find yourself in need of extending 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 Sudan grass. 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 key strategy that yields great benefits. Work with your advisor team to develop the plan that best fits your specific situation.
5. Culling. The industry has recently been providing very good beef prices for cull animals. Evaluate the key decision criteria carefully. Cull marginally profitable animals as it is a good economic decision to do so. Timing matters and is important to maximize 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 understand the consequences of having 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 non-essential capital purchases until more stability returns to the market place.
8. Network. Spread the word that you are looking for feed and are open to considering alternative sources and by-products. Key advisors, 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, clear-headed 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 particularly 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 advisors;
• Limit capital expenders to immediate needs of the business.
Mother Nature has her own agenda, but taking control of the things in your power can a mean the difference between surviving and thriving.
Greg Steele is Vice President, Dairy Industry, for AgStar Financial Services. He can be reached at Greg.Steele@AgStar.com. For more dairy industry news and information, check out AgStar.com/Dairy.