Aug 1, 2014
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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.

Loan Covenant Clarity Is Key for Dairies

Jul 07, 2014

Questions you should ask about this increasingly important element in your annual line of credit.

Bob Matlick (resized) Blue

By Bob Matlick, partner, Frazer LLP

Most short-term (operating line) lenders now include financial loan covenants in the renewal documents of the annual lines of credit. If the covenant is broken, there is usually a period of time in which the customer can cure the default. If the default is not cured within the given period, the whole loan relationship can be terminated based on the default.

I find many of my clients do not understand the loan covenants nor do they understand the manner in which the particular bank wants them calculated. I must admit at times I am unsure of the calculation the lender is attempting to perform.

In general, prior to 2009, the only firm loan covenant monitored by the bank was the advance rate (or loan-to-value) on the collateral base (cows, feed, etc.). Since banks saw these loan-to-value ratios fail to monitor the overall financial health of a volatile industry, we are now seeing more specific covenants being included to assist in monitoring liquidity, overall equity and the ability of the operation to make the scheduled ongoing debt payments.

The first issue with loan covenants is to find them in the loan agreement. Ask your loan officer to point them out to you and explain them to you. Ask for an example of how the calculation is going to be made and what data is going to be utilized to make the measurement. The most important questions to ask are, "What is the purpose of the covenant?" and "What is the lender is attempting to measure?" Also, make certain you understand the consequences of defaulting on the specific covenant and the ‘cure’ period timeframe. The cure period is the window of time you have to bring the covenant into compliance.

While there continue to be the standard loan-to-value ratios in most dairy operation lending agreements, other common covenants are minimum liquidity requirements, debt coverage ratios, and minimum equity covenants. Make sure you understand how the loan-to-value percentage is calculated and what is considered eligible collateral (cows, feed and milk check receivable) and the corresponding offset (short-term debt, payables, etc.).

A liquidity ratio measures an operation’s ability to raise cash in a very short timeframe to cover monthly cash shortfalls. In the instance of dairies, the most liquid assets are cash and receivables. Remaining potential liquid assets are livestock and feed, which take time to sell, and may include steep discounts in a sale completed over a short timeframe. Sale of these types of assets will usually impact the ongoing operation in a negative manner. Most lenders are attempting to measure the dairy’s ability to withstand a period of negative margins (without utilizing trade vendors or borrowing) when this covenant is utilized.

A debt coverage ratio measures an operations ability to meet all debt payments over a given period of time. The lender wants to make certain that adequate cash flow is being generated from the operation to service all debt. This covenant needs to be fully understood by both the lender and the borrower as to how it is calculated as I have seen many different variations utilized within the dairy industry (cash vs. accrual, how is cattle depreciation utilized, etc.). Bottom line: Discuss and understand the calculation with your specific lender.

A minimum equity ratio is really a measurement of an entities net worth. Again, understand the calculation your lender is making. Is it on a Fair Market Value basis or cost less depreciation? If the calculation is based on cost, are certain assets revalued to fair market value (livestock)? Are deferred income and losses considered? Are taxable gains considered if liquidation were to take place?

In closing, most lenders are requiring an operation meet certain financial covenants. Make sure you understand what the purpose of the covenant is for your lender, if it is applicable to your operation, and how it is calculated.

Bob Matlick is a partner with the accounting firm of Frazer LLP. He has more than three decades of experience in the agriculture industry. 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. He has extensive experience in credit acquisition, buy/sell transactions, including tax-deferred exchanges, debt and management restructures of distressed agriculture financial situations, preparation of feasibility studies and facility relocation services. You can reach him at

Where Can You Get the Biggest Bang for Your Dairy Bucks?

May 12, 2014

Sound advice from a dairy lender on the best ways to use this year’s extra cash.

Teigen Lori   Copy   bigger

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.

  1. Make sure vendors (veterinarians, feed bills, etc.) are paid in full.
  2. 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

Get an exclusive look at weekly dairy market components and fundamentals from Stewart-Peterson's Bob Devenport.

The Sober Reality Behind Dairies’ Return to Profitability

Apr 10, 2014

As dairies emerge from a painful recession, a veteran attorney urges attention to the critical fiscal steps still needed to move forward.

By Riley Walter, attorney

Riley Walter bio photoSince last writing for Dairy Today, milk prices are up and I am hearing sighs of relief across the dairy industry.

While I don’t want to deprive anyone of a feeling of relief, this does cause me to make two comments.

First, I am hearing the sighs of relief, but I am not hearing how many dairymen are going to address the huge mound of built-up unsecured debt they owe. While the milk price is up, and while dairymen are beginning to sprinkle money around to their creditors, that mound of debt is huge in many instances and is going to have to be addressed in one form or another. I note that some of the creditors who are not being "sprinkled" are beginning to initiate the long-anticipated collection suits, now that they can see that there could be some money at the end of the rainbow.

The second point relates to refinancing. We are all aware that some of the main-line commercial banks would just as soon not have dairies in their lending portfolio. Some even take more aggressive action to force them out of the bank before maturity. Others appear to be biding their time so that when loan renewal comes up, they may or may not be willing to lend.

This leads me to suggest that dairymen need to be looking ahead now to see how and when, if at all, they will be able to refinance.

In connection with this, here are some thoughts:

  • Dairymen will want to pay attention to which banks are, and are not, making dairy loans. Some long-experienced dairy bankers have been moving around to other banks, and this leads me to believe that there may be banks in the mood to make dairy loans before very long.
  • Dairymen need to consider rebuilding relationships. Many dairymen have had long relationships with experienced dairy lender personnel, and now would be a good time to just check in to find out what the attitudes of the banks are and what banks are looking for in new dairy loans.
  • It goes without saying that dairymen need to monitor values. If you are going to refinance, you may want to do so when values are up and trending up, rather than the other way around.
  • Dairymen will want to educate themselves as to the rules that apply to lenders. This is not 2007, where someone with a ball cap could get a loan. Regulations are much more stringent now. You need to know about those rules as you start the process of looking for a new lender. A simple example is the rules about lending to a dairy that may be within a floodplain and whether this would require extensive engineering work before a loan would even be considered.
  • Last, and certainly not least, dairymen need to get their houses in order. They need to make sure that all of their entity documents are current and up to date. They need to be sure that they have documented all easements. They need to be sure they know exactly what collateral they have to pledge. Now is the time to get the books and records in tip-top shape. Pull together copies of all of the documents that you will need to support your loan request.

There is life after the crash, but lessons have been learned – painfully.

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

Time to Rebuild Your Working Capital

Mar 27, 2014

With today’s margins, what should a dairy focus on to build the liquidity and working capital it needs?

Bodart, Steve 3 12By Steve Bodart, AgStar Financial Services 

With the recent improvement in a typical dairy’s margin over feed cost, most dairies are starting to see some improvement in their cash flow. This improvement allows dairy producers to catch up on any bills that may not have been current, start doing some deferred maintenance and — possibly — look at making some capital purchases. The strong current margins are causing some producers to think about what is next for their operation. While it is important for a successful business to look at all these factors, it is also important for a dairy to focus on rebuilding working capital during these times.

Working capital is one of the best measures of an operation’s ability to weather a storm. Working capital is an operation’s first line of defense and a shock absorber against a price or yield decline. The stronger the working capital of an operation, the longer it can withstand poor or negative margins without being forced to change its cost structure. Working capital is defined as current assets (cash or items that are normally converted to cash during the course of a business year) minus current liabilities (financial obligations that are due and payable within the next year). In other words, it’s the owner equity in the current portion of your financial statement.

It is critical for dairy operations to understand how their working capital stacks up with other dairy operations within the industry. As a general rule, I like to see the operations that I work with have working capital that is equal to their cost of production for two months. So if their operation has milk sales of 25,000 pounds/cow annually and their cost of production is $17.50/cwt, a target for their working capital would be $730/cow.

Building and retaining adequate working capital sometimes creates a conflict for producers, however. Producers often feel that investing the cash into assets of the business will improve their profitability. While this is generally true, a lack of working capital can have a tremendous negative effect on the business during the volatile times of low or negative margins. A lack of working capital can result in peaked-out operating lines, past due open accounts and no ability to take advantage of opportunities as they come along. Without adequate working capital, an operation has limited liquidity and the situation puts a great deal of stress on the people managing the finances for the dairy.

With today’s margins, what should a dairy be focusing on in order to build the liquidity and working capital it needs? I would suggest they focus in on making sure all of their vendors are paid current first. In doing this, it is also important to make sure that your hedge line with your lender is reconciled and kept in line with the current outstanding positions that you have.

The second place that extra cash should be used is to take care of your revolving operating line and ensure that this loan has been paid down so that you have availability of credit in times when margins do become tighter again. The third area to make additional payment on would be on revolving capital lines and revolving cattle lines. This payment will not directly improve your working capital position but does provide you the ability to access credit for the purchase of capital items or replacement cattle.

Remember the milk market is a very volatile commodity and working capital is necessary to weather those turbulent times. As the old saying goes, "the cure to high milk prices is high milk prices." Make sure your dairy is positioned to handle the difficult times and take advantage when opportunity arises.

Steve Bodart is a Principal Business Consultant for the Dairy Industry at AgStar Financial Services.
For more insights and regular dairy industry blog posts, check out

How to Take Advantage of Dairy’s Solid Margins

Feb 12, 2014

A lender offers advice on what to monitor -- both on your dairy and beyond -- as 2014 yields dairy profitability.

Teigen Lori   Copy   biggerBy Lori Teigen, AgStar Financial Services

2014 has definitely started out with a bang for dairy producers. Between the challenges brought on by colder temperatures and a current average Class III milk price exceeding $19.30/cwt. for 2014, producers are left wondering what to expect next.

We’ve been hearing many questions from our clients, ranging from what to do for contracting milk and feed prices, to handling high costs of land rents with current commodity price levels, to wondering if they will have enough inventory on hand until next harvest.

Risk management: a critical conversation

Risk management, particularly margin management, continues to be a critical conversation every dairy producer needs to be having on your operation. Significantly higher milk prices over the past few months are offering opportunities for producers to lock in good margins throughout 2014. It is critical to remember, however, that margin management is not just looking at the price of milk and the price of feed. It’s vital to look at the correlation between those prices. Margin management will be imperative to the long-term success of your operation. Simply cutting costs today to reduce expenses can be a short-term fix, but it’s usually not the best solution for the long haul.

Remember, margin management requires discipline and consistency as markets can be volatile. In addition to knowing both your cost of production and cash flow requirements, understanding the markets is also important. This is key for being able to take advantage of margins at the right times. Utilize your team of advisors to help with marketing decisions and making sure you truly understand each of these factors.

Evaluate your feed inventories

With winter kill and prevent plant last year, many producers were able to get a good handle on their 2012 feed inventories as inventories were lower than they have been in quite a while. The effects of last year are still leaving some uncertainty among producers this year on how alfalfa fields will be affected by this winter. Unfortunately with weather conditions during our growing season, many producers are having feed-quality issues in forages, which are affecting production. The main thing to keep a close eye on is ensuring you have enough feed to get through until the 2014 harvest. Haylage inventories may need to get stretched this year, which will impact affecting rations.

Feed quality issues in the U.S. have played a role in the Class III prices due to the affects on production and, therefore, supply and demand. Furthermore, in the past, dairies raising all of their forages had the advantage over producers buying their feed. Will this shift going forward give producers buying feed the advantage?

Global economics impact milk prices

Lastly, continue to stay in tune with global dairy economics and how it affects our milk prices. U.S. dairy exports continue to remain strong and are currently over 15% of U.S. milk production, a gain of 2% since 2012. The U.S. export market is a big driver in the milk prices, making it critical to understand the impact of global markets. Cheese stocks have been declining and are 20% lower than they were recently, when cheddar cheese prices were at record levels. Many commodities are reaching low inventories. That, combined with unseasonably high prices, creates considerable volatility in the markets. Throughout 2013, U.S. prices were very attractive in the global markets; however, those competitive margins have started tightening.

Current markets are providing great opportunities for producers to take advantage of solid margins going forward into 2014. Continue to keep an eye on the margins available while keeping your own operation’s cost of production in mind. Continue monitoring feed inventories and pay attention to what global dairy trade is doing, as it will affect your farm’s profitability. Best wishes for a successful and profitable 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

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