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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.
By 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 RileyWalter@W2LG.com.