Take the steps that will enable your dairy operation to strengthen and evolve into a stronger financial position.

By Mark A. Brady, CPA, CVA, Partner
Cooper Norman Certified Public Accountants

The past few years have dramatically changed how numerous industries operate, especially the dairy industry. In the dairy industry, we have seen many articles and posts about the need to be "Fiscally Fit" in various publications and media settings. Much of the discussion was in regard to the need to change with the changing times. For most dairy operations, it became a necessity for survival.

We are now beginning to see numerous posts and articles that discuss items of generally more positive tones. We need to remember that no one can see the future. As our dairy operations and the economy change, we will need to look for and take steps that enable our business operations to strengthen and evolve into stronger financial positions. That will allow them to withstand future downturns that we know are inevitable and extremely unpredictable.

If we were able to put together the management team spoken about in the previous posts and have survived to now, there is a good chance we are headed in the right management direction. We must keep in mind that whether the economy has begun to change for the positive or not, the things discussed earlier while in the down market are still extremely vital. The continuation of those management-type decisions while in upward swinging markets can allow a business to get out in front of the curve and move to the forefront of the industry.

Remember, the real key is to have a management team that has the future success and continuity of the business at heart. They should be looking ahead to identify ways to accomplish things like:

1. Which creditors should be caught up first?
2. How can we improve our lending relationship?
3. How we can rebuild the equity lost by the current owners?
4. How can we put funds away for older, less active owners?
5. Is it time to begin ownership transition to the next generation since values are depressed from the down economy?

Every business operation must review his or her current position (financial and market) and begin asking, answering and preparing to implement plans to successfully complete the items needed to improve, propel and enable their success into the future. The business might even need to reshape the structure of the company, its management and/or its employee workforce.

The list above is in no way all-inclusive and is not what every business needs to accomplish. As indicated, the responsibility of the management team is to identify the needs of your business operations and put into motion the plans to accomplish the desired results.

As accountants, we cannot agree more with some of the most recent posts discussing the importance of having up-to-date bookkeeping and record-keeping systems and a set of personal benchmarking criteria. It is basically impossible for a management team to implement management strategies, let alone set goals, when it cannot identify the position the operations are currently in. Appropriate accounting records, ratios, budgets and projections all assist management in making timely, realistic, achievable plans.

Since, the last few years have been so tight dairy operations have generally operating on an extremely tight, crisis mode. It becomes vital to each operation and owner to be sure that they are planning for the future of longer than just one day. The last few years have been extremely brutal on the dairy industry and not many members of other industries would be able to survive the way many of you in the dairy industry have been able too. If the current economy is truly improved for the dairy industry at all, and we have positioned our operations appropriately, the potential successes are sure to come.

Based in Idaho, Mark A. Brady is a partner with the firm of Cooper Norman Certified Public Accountants. Brady is a Certified Public Accountant (CPA) and a Certified Valuation Analyst (CVA). He grew up on a Montana dairy. Contact him at 208-733-6581 or mbrady@coopernorman.com.

While it’s never too late to start planning, the key is to start in your early years.

By Gary Sipiorski, Vita Plus Corporation

You will not find a group of people more dedicated to their careers than dairy producers. Dairy producers surround themselves with people, living creatures and crops that must be attended to 365¼ days a year. They often get so wound up in what they do that they forget time passes by and one day they will not be able to do the physical and mental work required to run the business.

So, are you preparing for that time down the road? I do not have a Series 7 (stockbroker’s) license, so I cannot give specifics of what to invest in, but I can suggest choices of directions you have. The key is your dairy will have to be passed on to someone. That may be a family member(s) or the next buyer.

Many dairy producers say, "My dairy is my investment choice and my retirement. So I plow everything I have back into my farm!" Others say, "I am never going to leave, they will have to bury me here!" One way or another, you are going to have to build up enough equity to give you choices when that day comes to turn you over or the farm over to someone else. You cannot have two bankers on the farm. You can be the banker or a lender will be borrowing money to the next owner. So, back to our question at hand, where does that leave you for your retirement?

1. If you have dairy that supports a single family, you will need to have most of the debt satisfied when you decide to retire. Most of these types of farms have stuck every dollar right back into the farm for machinery, cattle, land, buildings or other things the farm needs. Many times there is a spouse that works off of the farm. That income will be used for family living or buying farm items that are needed. A lot of times the off-farm income will have some type of a retirement plan tied to it, like a teacher’s retirement or other investment opportunities. That can be used in a retirement plan as well. I have also known dairy producers who do manage to squirrel money away in investments off of the dairy so they actually do have a nest egg put away.

The key to any off farm investment is to start early. Find a trusted investment person who can help you set up a retirement savings and earnings account with monthly deposits for the future. Now, when time comes to pass on the farm, the relative or new buyer can borrow money from a bank to pay off the retiring couple. The retiring couple may be in a position to offer a land contact and get paid back over a period of time, basically turning the farm asset into an annuity that pays back monthly. Here again, the farm has to be mostly debt-free so the first couple is not also having to make bank payments. The cash flow of the farm is a key factor here as well. So make sure you have a productive herd of cows that can generate enough income to support the next generation’s payments.

2. If you have a larger multi-family dairy, you may have some additional options. With an adequate cash flow, invest money can be set aside off of the dairy for a future retirement. Here again, it is important to start early. Therefore, when retirement comes, there are off-the-farm investments to fund a new lifestyle. This farm as well needs to be in a strong financial equity position. There is nothing wrong with these farms carrying debt. It just has to be able to manage the payments. Borrowed money must be able to generate at least twice the return that it is borrowed at.

Many times the owner(s) of a larger dairy are managing people and making management decisions. They are doing a lot of mental work. They can continue this style for many years. The key is to train the next generation to make decisions so they can slowly phase themselves out as retirement nears. Stock or ownership transfers can occur with the next generation, assuming the business debt and responsibilities. The first generation can be paid out over time with a monthly income or all at once if lender borrowing can be arranged. Tax planning is critical and any time a farm transfer is being considered on any size farm.

It is never too late to start planning for retirement. It really should start in the early years, because some day you will not be able to do what you are doing today.

Gary Sipiorski has a long career in the banking industry, doing business primarily with dairy producers. He has been associated with the Citizens State Bank of Loyal, the Graduate School of Banking in Austin, Texas, the Independent Community Bankers of America, the Governor’s Task Force on Growing Agriculture in Wisconsin, and the Advisory Council on Agriculture, Industry and Labor for the Federal Reserve Bank of Chicago. In 2008, he joined the Wisconsin-based nutrition firm, Vita Plus Corporation, where he is dairy development manager. Contact him at 608-250-4267 or GSipiorski@vitaplus.com. 

Don’t just sprinkle the money around. Here are smart ways to use your improved cash flow as you come out of the pricing crisis.

By Riley Walter, attorney

In prior posts, I have focused on things that I have learned and observed from representing numerous Central California dairymen during the depths of the dairy crisis.

However, now that there may be some light at the end of the tunnel, it might be a good idea to turn attention to what dairymen might do once there is a positive margin between the milk price and the feed price.

Having seen dairies come out of crises in the past, I know that one of the first things dairymen tend to do is spread the "excess" margin over all of their creditors. They apparently believe that sprinkling the money over the entire creditor body is a good way to go. It is not. Not all creditors are equal. You need to use the enhanced cash flow on those you need or those who have priority. Don't just sprinkle the money around. Pay the CPA you are going to need as you move forward. Fix items of deferred maintenance, especially environmental problems. Catch up on insurance and utilities. Work on rebuilding the herd. You need to use the additional cash flow in a rifle-like manner, not a shotgun.

Second, do not be surprised when there is an avalanche of creditor lawsuits seeking to collect on long overdue vendor bills. As soon as there is excess cash flow, you can be sure that the dam will break and a large number of lawsuits will be filed as creditors jockey to get ahead of other creditors.

Third, please get your accounting, bookkeeping and recordkeeping systems up to par. A lot of folks have let this slip during the crisis either because of the stress or because they did not feel they could call upon their accountants when they could not pay them. You really want to get this cleaned up. At some point, we all hope, lenders will be back in the market, and they are only going to lend to those who have superior financial and recordkeeping systems. The old days are over. You are going to have to demonstrate substantial management and financial acumen going into the future. Being "good with cows" is not going to get you a loan.

Fourth, for those of you in California, it is reasonable to expect that the environmental regulatory floodgate is going to open. Recent court rulings make it pretty clear that dairymen face substantial regulatory compliance costs in the near future, and you need to be contemplating this as your finances improve. If you sprinkle the money to overall existing creditors, you may well be unable to maintain environmental compliance.

Last, and this is maybe hard to comprehend, many dairymen have been able to avoid filing Chapter 11 due to extremely hard work and just by hunkering down. However, many of these dairymen are saddled with huge amounts of vendor debt. That debt is not going to go away even though cash flow improves. Some, maybe many, of these dairymen will need to consider filing Chapter 11 to propose plans to shed debt. To do this, they really need to get their financial report systems up to par. If these dairymen are able to demonstrate "feasibility," they will likely be able to shed considerable unsecured debt.

So, here’s hoping that the reports of enhanced cash flow are true.

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.

Several factors can bridge the gap in value between owning your replacements and purchasing them from the open market.

By Tim Swenson, AgStar Financial Services, ACA

As producers continue to improve calf facilities and calf-raising protocols, calf survival rates (including DOAs) of 90%+ are being achieved. Producers are now faced with answering the question, "Does every heifer born on my operation get raised and freshened into the milking herd?"

Many operations, if they freshen every heifer they currently are growing, are looking at replacement rates (cows culled + death loss) in the upper 40%, some over 50%.

In the past, producers could raise their heifers, and then sell the excess as springers. This age-old strategy does not appear economically feasible in today’s marketplace. Analysis of our latest benchmark data shows that the cost of raising replacement heifers across Minnesota and Wisconsin dairies falls between $1,400 and $1,700. Adding $300 for the value of the calf pushes total replacement values upwards of $1,700 per head. With springing heifers averaging $1,250-$1,300 throughout Minnesota and Wisconsin, should producers be raising their own replacements?

There are a number of factors that can bridge the gap in value between owning your replacements and purchasing replacements from the open market. Knowledge can be an offsetting factor in evaluating the additional costs of raising the replacements versus purchasing them from the marketplace.

By owning your replacements, you have first-hand knowledge of:

• The genetic base of your heifers;
• The nutrition program the animals have been on throughout their growing phase;
• The service date;
• The service sire (calving ease sire or not);
• Whether or not vaccination and parasite control protocols have been followed.

On the other hand, many producers choosing to raise their own replacements are raising more than they need. Instead of targeting a healthy turnover rate and growing the number of replacements necessary, producers are choosing to grow every heifer and let the number of replacements calving drive their dairies’ turnover rate. Based on the economics listed above, waiting until heifers are ready to calve to decide whether to keep her or not, unnecessarily wastes the operation’s resources (feed, labor, facilities, and CASH!).

In order to make these decisions sooner rather than later, there are numerous decision criteria a producer can employ to manage the number of heifers in his or her inventory. A few tactics to consider are:

• Tracking heifer growth rates (both height and weight) and culling animals that are falling behind herdmates;
• Evaluating the genetic base of the milking herd, and breeding the bottom tier of cows to beef sires. The resulting crossbred calves are sold to market, with no temptation to keep a heifer calf;
• Evaluating the genetic potential of the heifer inventory (based on pedigree or preferably genomic testing), and culling the bottom tier of growing heifers;
• Removing heifers that don’t conceive by the third service;
• In all cases, this identifies the heifers used for replacements earlier in the growing phase. The producer can then reallocate the resources associated with growing those unneeded animals to other enterprises of his or her operation.

There are numerous factors that must be considered when weighing the decision to grow your own heifers, either at your current operation or a custom grower. The best choice may be a different answer for each operation, but with objective reasoning, the right decision can be determined. After deciding to grow or purchase replacements, the hardest choice may require a philosophical change. Are you going to grow every heifer born at your operation, or are you going to grow only what are needed for your dairy herd’s replacement needs?

Swenson is Senior Business Consultant with AgStar Financial Services, ACA, which he joined in 2006. He consults with family dairy businesses and large producer operations across the upper Midwest. Contact him at: Office: 715-688-6362; Cell: 715-491-8161 or tim.swenson@agstar.com.

In benchmarking, evaluate and challenge each category – reproduction, nutrition, finance, feed shrink – and seek the unvarnished truth.

By Robert Matlick, partner, Frazer, LLP

Being a partner in a dairy niche accounting firm, I am often asked, "What makes one dairy more profitable than another?"

Many dairy operators want to look at benchmarking or peer-group statistics to indentify weak spots in their own operations. Ten years ago, I was a huge proponent of benchmarking and embarked on the gathering and standardizing of financial and production information from clients. Then reality set in. After scouring through stacks of data, I realized benchmarking is great in stimulating discussion within peer groups, but chasing the ideal income and cost structure through benchmarking will most likely end in failure.

One may ask, "Why does benchmarking leave so much to be desired?" The answers are numerous. To begin with, no two facilities are identical. There are nuances with every facility (for example, cow flow, acres farmed, cow comfort, the age of the facility, various depreciation calculations, etc.).

Secondly, no two herds are exactly the same because of variables such as the herd’s age, genetic make-up, milking frequency, nutrition philosophy, milk components, and so forth. A third major issue is debt structure: Is it long term or short term? What are the interest rates on the various pieces of debt?

While these issues may just be the tip of the iceberg, it quickly becomes apparent that it is impossible to standardize all the raw data enough to provide statistically sound information on which to make management decisions.

So does this mean a dairy operator should not benchmark? My answer is no. A dairy owner/operator should diligently benchmark against his/her own operation monthly, annually, and further into the future. In other words, understand your individual operation as it currently stands and then attempt to make improvements in efficiencies, cost structure, and overall profitability on a monthly basis. Develop a monthly budget/cash flow for your operation and then track the actual performance.

There will be variances. Take the time to identify what those variances are. For example, is milk income less than projected because of number of cows milking, production per cow, milk price (basis)? Is feed expense higher than projected? Research the root cause (e.g., building up of inventory, shrink, change in dry matter intake, etc.). Evaluate and challenge each category with the appropriate personnel or professionals.

One of the greatest assets to a dairy’s operations is a team of experienced, knowledgeable and involved consultants. Dairy consulting professionals should be asked to be blatantly candid in their assessment of the individual operation. If there is a reproductive issue in the herd, the owner needs to be counseled in the matter, and a discussion should be had to determine the cause and the cost to remediate the issue. The same would hold true in regard to nutrition and finance.

Often, while working through a cash-flow projection with a client, I find there are problem areas on the dairy that were not addressed or even communicated to the operator. Consultants, nutritionists, veterinarians and the like should feel comfortable bringing up the issues they see. By bringing the issue to light, the matter can be addressed and remedied, and the herd (and production) will benefit.

Pay careful attention to the income-over-feed cost projections. In preparing cash flow projections for clients, I find dry matter intakes and shrink can wreak havoc on monthly cash flow. On a 5,000-cow dairy, a 2% point fluctuation in shrink can affect the monthly cash flow by as much as $300,000 per year.

Close attention should be given to components and how they affect your overall pay price. Just as you understand every other aspect of your operations, you should understand what drives your milk price. If you are farming a large portion of roughages, understand the monthly outflows and how it will affect the monthly cash flows of the dairy (for example, large harvesting bills incurred at harvest time). I encourage clients to sell the harvested crops to the dairy at fair market value in order to evaluate the overall farming operation.

With tight margins and large operations, all income and expense items need to be continually scrutinized. I know from experience that each month presents a different cash-flow challenge to an individual operation, so it is imperative to understand and plan for those variances. Gone are the days of preparing an annual cash flow in order to renew the bank loan.

As mentioned above, benchmarking can provide for stimulating conversation within peer groups, but a dairy manager must benchmark against his/her operation to make continual improvements.

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 bmatlick@frazerllp.com or 559-732-4135 Ext. 107.