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August 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.

How to Project Your Dairy’s Working Capital Needs

Aug 31, 2012

Forecasting your cash-flow requirements and ensuring you have access to adequate cash are essential because volatility is here to stay.

Bob Matlick (resized)By Robert Matlick, Frazer LLP

Working capital. This two-word metric is rarely found in financial conversations regarding production dairy and dairy farmers. By its simplest definition, working capital is Current Assets less Current Liabilities.

Bottom line: Working capital is the amount of readily available cash a business has available to meet its operating needs and any unexpected volatility related to its own business cycle. In the past, a dairy producer has relied on bank lines of credit for his or her working capital needs.

With increasing volatility in the milk output and feed input side of the dairy business, a dairy owner should be keenly aware of his own personal working capital position. One of the most effective ways to accomplish this is to forecast business operations.

I have often written about the need for every dairy to have a working 12-month cash-flow projection that is measured to actual performance on a monthly basis. Each month, when the cash flow is updated with actual numbers, another month should be added to the end after reviewing the actual performance.

Robert Matlick will speak at Dairy Today’s 2012 Elite Producer Business Conference Nov. 6 in Las Vegas. Click here to learn more.

The cash flow should then be tested as to sensitivity. This may sound difficult, but it simply entails working through several “what ifs.” For example, what if the milk price drops $4.00 per cwt.? What if the feed cost increases by $2.00 per head per day? What if production falls by 8 lb. per cow per day? Bottom line: Stress-test the main drivers of the cash flow. If the cash flow is set up in an Excel format, the what-ifs can be changed easily and the effect identified quickly.

After the sensitivity is accomplished (you will be amazed at the various scenarios you will become interested in), evaluate and identify negative cash flow positions and their timing that will occur within the 12-month time frame. The question then becomes: Does the operation have enough working capital to survive the negative projections?

Many producers have always relied on the bank to fund the losses should they occur. Others have depended on trade vendors. However, as volatility has increased and margins have decreased, many times these fallback positions are not reliable sources of working capital. The dairy business person needs to identify and monitor his cash needs going into the future and plan for deficit cash flow while making certain there is adequate cash (working capital) to meet those needs.

The sale of operating assets cannot be considered readily available working capital nor can the extending of trade credit. I have been part of many discussions in the past 12 months that will argue the use of operating bank debt may also not be considered available working capital, and only cash reserves or assets not associated with the day-to-day operation of the dairy that can be converted to cash in a very short time frame can be considered working capital.

In my mind, bank lines of credit could certainly be considered available working capital if openly discussed with the lender at the annual renewal and the assurance of the lender that valuation of the underlying collateral supporting the line will not change dramatically. If a producer is going to depend on the bank for working capital, there should open and honest communication when the loans are established and renewed. Otherwise, make sure the cash is around because volatility is here to stay.

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.


Common Threads in the Dairy Crisis

Aug 17, 2012

An attorney offers 6 tips to help you avoid the pain of liquidating or reorganizing your dairy.

Riley Walter bio photoBy Riley Walter, attorney

I have had the great privilege of representing and advising a large number of dairy operators during the course of my 32-year career as a restructuring lawyer. In the last two years, I have had the privilege of working with many Central California dairymen as they worked their way through the current, and seemingly never-ending, dairy crisis. I say it has been a privilege because I have never met a group of harder-working people. They toil from sun-up to sun-down in the hope of maintaining their dream and longed for way of life.

I have represented many companies and individuals in distressed financial conditions over the years, but I have never represented so many people having such highly concentrated risks to manage. Dairymen must manage or deal with such things as price risk, feed costs, labor issues, living breathing biological beings, disease, crop failure and drought. So many of these are outside the control of the dairymen that it makes the dairy business a very risky business, as readers well know.

Over the past two years, I have tracked my general perceptions of the distressed dairy cases that have come to me. There are some common threads. These threads did not appear in every single case but there was enough of a pattern that it warrants pointing out six key, common threads that I have observed in my cases. The items described below are generally for dairies that had 2,000 or fewer milking cows. Larger dairies have other common patterns that will be addressed in a subsequent issue.

The six items described below are not presented in order of priority or frequency.

1. As a group, there is a relatively low level of financial understanding. There is a high concentration of poor accounting and recordkeeping. The inability to budget occurred in virtually every case. In many instances, the operator is not even sure how much or who is owed money.

2. There is very often a total lack of understanding of the lien structure being faced by the dairymen. They do not understand what a security agreement or a UCC lien is. They may, or may not, understand a livestock service lien. This is a very typical thread.

3. So many of the dairies lack financial controls. They may or may not have the same person handling the money coming in as going out, which gives rise to a huge potential for embezzlement. They do not have controls on ordering such things as feed, medicine and fuel. They often lack inventory controls on medicines. Feed receipt controls are virtually non-existent on many dairies. Who knows how many dairymen are being charged for feed never delivered to the dairy?

4. Part and parcel of all of the above is the tendency to skimp on financial help. At the time when the need for financial help is most acute, it is when dairymen seem to lose controllers, bookkeepers and financial advisers. Running a dairy is not just about production, but there does seem to be far more emphasis on production than financial management.

5. Without really understanding the grave risks inherent, dairymen will often borrow from the federal and state government by not paying payroll taxes. While this may be appealing in the short run, in the long run it is deadly because of the non-dischargeability of such tax obligations in the event of a bankruptcy.

6. Dairymen, at least smaller dairymen, very often do not understand that, in an insolvency case, their greatest risk is potentially non-dischargeable income taxes. Many of these dairymen simply did not know that there is a deadly tax consequence to a liquidation unless it is properly structured and handled.

While it has been my privilege to represent approximately 50-55 dairy families of the type described above over the last two years, I can see that it takes huge emotional toll on them as they go through the excruciating process of liquidating or reorganizing. So much of their pain could have been avoided through better financial management and understanding. I hope that other dairymen can learn from this and avoid the pain and agony.

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

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

Steele Greg (2)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 For more dairy industry news and information, check out


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