Sound advice from a dairy lender on the best ways to use this year’s extra cash.
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.
- Make sure vendors (veterinarians, feed bills, etc.) are paid in full.
- 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 AgStarEdge.com.
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