By Riley Walter
Riley Walter is an attorney and founder of Walter & Wilhelm Law Group, a law firm specializing in agribusiness, reorganization and bankruptcy. Contact him at (559) 435-9800 or RileyWalter@W2LG.com.
Now that there may be some light at the end of the tunnel, it might be a good idea to turn attention to what dairy farmers 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 dairy farmers 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.
First, 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, don’t 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, get record-keeping 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.
At some point, lenders will be back in the market, and they are only going to lend to those who have superior financial and record-keeping systems. You will have to demonstrate substantial management and financial acumen going into the future. Being "good with the cows" is not going to guarantee that you get a loan.
Fourth, it is reasonable to expect that the environmental regulatory floodgate is going to open. Recent court rulings make it pretty clear that dairy farmers face substantial regulatory compliance costs in the near future. 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.
Fifth, many dairy farmers have been able to avoid filing Chapter 11 due to extremely hard work and just by hunkering down. However, many of these dairy farmers 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 dairy farmers 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 dairy farmers are able to demonstrate "feasibility," they will likely be able to shed considerable unsecured debt.
- May 2013