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January 2013 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.

Re-think Your Dairy’s Interest-Rate Fix

Jan 31, 2013

Historically low interest rates could be poised to climb. Should you consider a lower variable rate that can change monthly or a longer-term fixed rate?

Gary Sipiorski VPBy Gary Sipiorski, Vita Plus Corporation

Unbelievable, historically low interest rates have now been with us for four years. Many dairy producers have continued to ride the variable rate because those rates are rock-bottom low. Variable rates generally change monthly, but no one has noticed because, in the last four years, rates have gone no place.

Variable interest rates are mostly based on the Prime Rate, which, by definition, is supposed to be the best rate to the best customers. To a large degree, that definition has been lost. Prime is the Over Night Fed Funds rate that banks charge one another to borrow money back and forth overnight, which today is 0.25% plus 3.00%, giving us a Prime Rate of 3.25%.

The second rate used for variable rates is called LIBOR (London Interbank Offered Rate), which is a composite of bank rates across the globe. That rate is running around 3.60% at the writing of this article.

Sometimes lenders will have an inter-bank rate of their own based on their cost of funds and internal factors.

Regardless of how the variable rate is derived, it will be a lower interest rate than a fixed or locked-in interest rate. The real question is what is right for your dairy? A lower variable rate that can change monthly or a longer-term fixed rate?

A lender will normally offer you borrowed rates that are tied to their cost of funds or deposit or bonds that fund those loans. Remember, all a lender does is take money with one hand, pay the depositors an interest rate for the use of the money and loan that money back out at a higher rate, then use the difference to pay staff and show a return. The lender will match the deposited money to the borrowed money for a specific amount of time. So, when the depositor’s certificate of deposit or bonds matures, the loan comes due for a renewal.

So we do not forget, the overall U.S. interest rates are watched and moved by the Federal Reserve, which is totally separated from the government. They have a two-part mandate from Congress to keep people employed and keep inflation under control. The Fed, as it is commonly known, controls the money supply, which, in turn, moves interest rates up or down. It is the overnight Fed Fund rate that people focus on, which will move the U.S. bond market all the way to the 30-year U.S. Treasury Bond. All other borrowing rates in the U.S. are based on the U.S. bond market, considered to be the safest place to invest money.

Over last four years, since the "Great Recession," the Fed has been trying to stimulate the U.S. economy with low interest rates. This is in hopes of getting businesses to employ more people and get the general public spending more money. The U.S. economy, or GDP (Gross Domestic Product) of all goods and services, is driven 70% by consumer spending. The Fed has even been buying U.S. Treasury debt or bonds to keep interest rates low. So far, economic recovery has been slow. The Fed has gone so far as to say it plans to keep interest rates low until the end of 2014. Recently, some of the Fed Governors who vote every six weeks on interest rates are thinking the Fed has done enough and rates should start moving up.

So what does all of this mean for your dairy? There are a lot of moving parts to the Fed’s decisions. Interest rates cannot stay low forever. Once interest rates start to move, "all" longer-term fixed rates will begin to move up. It is possible they could move fast. Those producers who lived through the 1980s remember all too well 16% and even 18% interest rates. Today’s general economy could not stand for anything near those rates. A movement of a few percentages would get the public’s attention.

To take out whatever risk you can in this high expense rate environment of operating a dairy would be responsible. Talk to your lender about a longer-term interest-rate fix. You still have to make the final decision. It certainly is time to give it some serious consideration.

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.

'If I Had More Cows': Hard Truths about the Dairy Crisis

Jan 04, 2013

After meetings with more than 60 dairy producers, this insolvency attorney offers a few sobering insights on common problems.

p7 Fiscally Fit Riley WalterBy Riley Walter, attorney

Happy New Year. I certainly hope that this year is better for my dairy clients than the last three have been. We can all hope for sunshine, rain and sensible political and regulatory policies. Hope springs eternal.

In my last several columns, I have made comments about my observations of things learned as an insolvency lawyer representing dairymen during the California dairy crisis. I have now seen approximately 61 different dairymen from eight contiguous California counties, plus a few from Texas, Idaho and Arizona.

Here are some further observations.

First, dairies are not alike. Those of you in the dairy business know this. Those of us who are not in the business lump things together and say that if you milk cows, you are the same as the person next door. Nothing could be further from the truth. The kind of barn, the kind of management, the kind of herd management, etc., make each and every dairy pretty much unique. While there are many similarities, they are far from identical. However, bank lawyers and judges have a tendency to think they are identical to one another. Not so.

Second, dairymen seem often to think that if they would just work harder it will be okay. There is a limit to how much you can work, and working smarter is almost always better than working harder. I sense that "working harder" means to flee the harder task of making changes in the way you work.

Third, if I have heard it once I have heard it 61 times. If I had more cows, it would solve the problem. So far, almost none have commented on focusing on how to get more milk per cow. Maybe it was different years ago, but today the objective has to be to wring as much milk per cow, taking the costs into consideration. More cows are not necessarily the answer.

When stressed and under great pressure, many dairymen will flee the office to "work with the cows." We all have a flight instinct, and this is how many people seem to avoid making hard financial decisions. I bet I have seen this 20 times. The dairyman has to make a very difficult decision but refuses to do so by "having to go sort cows." The problem was still there when the sorting was finished.

The lawyers and accountants who come into the picture late in the game get put into the stack of already owed bills. Dairymen, as a group, do not recognize that the people who are trying to help get them out of the mess sometimes have to be paid ahead of those who are already owed. This may be self-serving, but my accountant friends tell me it is okay to say this. The days of "you get paid when I get paid" are over. Professional practices do not work this way anymore.

In far too many cases, I have learned that sons and daughters of dairymen have been dissuaded from higher education "because they’re needed on the dairy." I have heard it said that it does not require an education to be a dairyman. This is really short-sighted. If anything, dairies are among the most complicated agricultural enterprises that exist. More education, rather than less, would probably be good for the industry. There would also be benefits to sending the sons and daughters off the dairy for a few years to get new and different ideas and then, perhaps, bring them back to the dairy. The dairy business is more wrapped up in cultures and traditions than most any I have encountered.

Another recurring observation is that very few of the dairymen with whom I have met know their own financial situation. The usual response to the financial question is, "I will have to ask my accountant." And, of course, this means the information is usually not current and is often a quarter or more behind, if not more. And, if the dairyman has not been paying the accountant, it may be much further behind and therefore useless.

The last observation is that I have been told repeatedly that "cows are more important than management." Many seem to believe that herd maintenance, which is incredibly important, is more important than the day-to-day management. It is my prediction that when this crisis subsides, dairymen seeking loans are going to find that those dairymen with absolutely up to date, reliable financial records will stand a chance of getting the loan. The "shoebox, hand-ledgered guy" will not.

In my next column, I will address additional observations in the hope folks will see that some major changes in style, approach and ability are coming to the dairy industry, and those who will make it think and act differently from those who will not.

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.

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