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December 2012 Archive for 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.

Do You Really Want to Milk Cows?

Dec 28, 2012

To thrive in this new, evolving dairy industry, multiple skills must be mastered. Sometimes skills must be hired to successfully manage the overall business.

p7 Fiscally Fit Bob MatlickBy Bob Matlick, Frazer LLP

There are certain moments in one’s life that will never be forgotten. For me, one such moment  occurred during a client meeting some years ago that was attended by a father and son as partners in a dairy. During the meeting, which centered on the financial struggles of the dairy, I asked the adult son if he really wanted to be in the dairy business.

Tears began to stream from his face and he looked at his father and uttered those dreaded words: "I don’t want to do this anymore." At first, his father was taken aback (the dairy tradition had been in the family for several generations). Then he answered, "Well, then we need to sell this thing." A sale was completed to a neighbor during the next several months and the son entered a new career, while the father enjoyed retirement.

As the dairy industry continues to become more volatile and risky, many find the stress and uncertainty not to their liking. Terms like ‘put’, ‘risk reversal’, ‘EBITA’, and ‘feed-efficiency’ were not part of the dairy vocabulary 10 to 15 years ago. Couple all of this with Mother Nature and it can be a wild ride.

To thrive in this new, evolving dairy industry, a multiple of skills must be mastered. Sometimes the skills must be hired in an effort to successfully manage the overall business. So is it really defeat when a younger generation steps up and says they want to deploy their assets and skills in a different, more stable manner? 

Some would argue yes; others would argue the opposite. I don’t know if there is a right or wrong answer. But I would argue that the question needs to be asked and given heavy consideration. By asking the question early enough, one can evaluate and plan for tax issues, estate planning, and alternative asset structures. For a father to assume that he will pass the dairy operation onto the next generation is perhaps an over-reaching expectation in this new/evolving industry. Perhaps a son has a strong interest in being a farmer of permanent plantings, a calf raiser, or a fire fighter.

Over my 30-plus years of being involved in the dairy industry, I have had dairy clients that had sons/daughters go into fields that included farming, politics, law and assorted others. Bottom line, I would encourage the conversation to be had at all dairies where multiple generations exist. Some people love cows; some people do not. It is not defeat in my opinion – it is opportunity being evaluated.

Robert A. Matlick is a partner in the accounting firm of Frazer LLP. Based in Visalia, Calif., 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. Contact him at or 559-732-4135 Ext. 107.

Financial Goal: Plan for Disaster

Dec 14, 2012

If you have planned for the worst and don’t panic, you can manage your way – and your dairy’s -- through adversity.

By David M. Sousa, CPA

Click here for David Sousa's presentation from the 2012 Elite Producer Business Conference.

This morning I discovered that I had a virus on my computer. I immediately went into disaster recovery mode. I first tried to deal with it myself by running an antivirus program to try to defeat the virus. That was unsuccessful, so I went to plan B: Call my professional. I trust that my professional can eventually deal with the virus and computer issue, but I cannot afford to be without my computer while the computer technician works on it.

In my business, being without my computer is like a dairy farmer without a loader. The dairy can run for a little bit without the loader, but without a back-up or back-up plan, he will get into trouble real fast.

Lucky for me, I have planned for the unfortunate circumstance of having a computer breakdown. I simply went back to my backup computer and lost very little time. In the event that the virus had deleted my important files, I have both internal and external backup sources. I was prepared for this disaster. Most disasters are unexpected and cannot be fully planned for. There are ways, however, to begin the disaster planning process to help you to survive through a disaster.

I remember the day I learned that dairy consultant Mike Cherniske was trapped in Hurricane Katrina. He had taken his daughter for the weekend to New Orleans to attend Tulane University. It just happened to be when the full force of Hurricane Katrina hit. He was trapped in his hotel room without food or running water for several days. His resourcefulness and disaster planning helped him to survive through this ordeal.

Financial disasters are not dissimilar to natural disasters. If you have planned for the worst and don’t panic, you can manage your way through the process. Assume that you get a call from your lender today who tells you that your bank accounts are now frozen and your lines of credit have been shut down. She also tells you that the bank is keeping your milk check deposited today too. The bank tells you that, unless you agree to a complete liquidation, they will not even advance enough money to feed your cows. You are already on c.o.d. with the grain company and you only have three days of any feed in inventory left on the dairy. Can this happen to you? Why not? It has happened to other dairy farmers this fast.

If you have not already planned for this situation, most likely you will make an appointment with bankruptcy counsel. You make the appointment with the attorney, and he tells you that, in order for him to begin working on your behalf, he needs a $125,000 retainer. You meet with a second attorney, and he agrees to begin with a smaller retainer of $50,000. You then remember this article and my suggestion “Bury a coffee can with $50,000 inside in your backyard.”

After the Great Depression in the 1920s, many people did just that. They remembered being caught without any resources and hid money in coffee cans, under their mattress, etc. You don’t need to go so far as to actually bury a real coffee can with $100 bills in it, but have something set aside somewhere in another institution that is readily accessible in the event of a financial disaster. It might be your only source of funds until you are able to get back on your feet and work through your long-term plan.

Those who fail to plan are really planning to fail.

David Sousa, a CPA, is the owner of Sousa and Company, an accounting firm based in Visalia, Calif. His firm works with more than 80 dairies in multiple states, preparing financial statements and income tax returns. Sousa also consults with dairies on cash-flow forecasting, financing, estate planning and bankruptcy. Contact him at or (559) 733-0544, est. 108.

What You Should Know about Buying Farmland

Dec 10, 2012

A lender answers four frequently asked questions about farmland values, real estate bubbles and borrowing determinations.

Steele Greg (2)By Greg Steele, AgStar Financial Services, Dairy Lending Specialist

Q. Given the rapid increase over the past few years in land value and cash rental rates, how is the limit for lending on farmland determined?

A. AgStar has developed a lending approach which looks at the whole operation. Our approach considers the production of the land being financed as well as the producer’s yield history. Other standards that measure equity, working capital, repayment capacity and the loan amount as a percent of the collateral offered are also taken into consideration. While not a dramatic change to our underwriting philosophy, this is evolution in our process to align loan standards to be relevant with current market conditions.

Q. Given the increased market price of land today, is there a dollar limit per acre that AgStar is able to lend?

A. AgStar looks at each opportunity to lend as a unique situation. When it comes to what a financial institution may lend per acre, there are a lot of factors that come into consideration, such as productivity of the land — which can vary by location — and the financial strength of the borrower. At AgStar, we’ve developed an approach to land values based on a formula which uses an analysis of historical data from several sources in order to project a value we believe can be sustained throughout agricultural cycles.
• Our baseline value was calculated on the following long term assumptions: $10.50 beans, $4.50 corn. Land value should equal approximately 25 times the rental value.
• Additionally, the long term assumption is that rental rates should be about 34% of gross revenues.
• Due to the variability in land quality and make-up (tillable/irrigation etc.), a set dollar per acre is not an appropriate, long-term approach to real estate lending.
• Based on this approach, if a parcel of land generates $1,000 of revenue/acre, you could expect the rental rate to be at approximately $340/acre. If you run the land value calculation on this same land at 25 times the rental rate, the land value could be expected to be $8,500 acre.

Q. Does AgStar think there is a farmland real estate bubble?

A. That is a fair question and one that deserves some thoughtful response. AgStar doesn’t believe we are on the verge of a real estate bubble. There will likely be a correction at some point, but we don’t know when or how much. We consistently monitor certain metrics to signal if a bubble is on the horizon, which could increase the chance of correction. Some of these metrics include:
• Farm debt to asset ratio
• Availability of export markets
• The existence of a farm safety net (e.g. government payments and crop insurance)
• Increasing interest rate environment
• Land not being rented and cash rents not being paid

AgStar is committed to real estate lending. We are dedicated, and we will be there long-term riding out challenges and volatility to help clients succeed.

Q. How can a producer be prepared for a possible correction in land values?

A. Sound risk management plans and maintaining a solid level of equity capital remain critical to withstand a correction in real estate values. Risk management has proven itself as a key tool to determine how to build profit margins for long term financial success.

In summary, AgStar believes:
• Real estate lending and purchases should be based on long-term, sustainable land values and evaluated as part of a producer’s entire operation, including production expenses.
• The sustainable value is tied to the production of the land being financed as well as the producer’s proven yield history.
• A sound margin management approach will provide stability in the event of a land price correction
• The benefit to the producer is about buying the right land to maximize production.

Greg Steele is vice president of agribusiness capital with AgStar Financial Services, ACA. His focus is working with commercial dairy operations that have grown and expanded their business. He provides expertise in the area of finance, business planning, and accounting. Contact Steele at (612) 963-7941 or For more insights on markets, risk management and other topics that impact your operation, visit

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