Apr 23, 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.

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 RileyWalter@W2LG.com.

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 AgStaredge.com.

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 AgStarEdge.com.

Through the Candid Lens of a Dairy-Friendly Banker

Dec 20, 2013

In frank but admiring observations, a lender reflects on the strengths and weaknesses of the dairy business.

Steele Greg (2)By Greg Steele, AgStar Financial Services


As we close the books on another year in the dairy industry and look back at 2013, I offer my thoughts on 11 key points about this essential and complicated agricultural sector:

• Dairy is by far the most complicated production model in agriculture. To be able to coordinate all the housing, environmental, nutrition, feeding, and labor systems in a fashion that leads to the production of what has been is said is "nature’s most perfect food" is an amazing accomplishment.

• The fragmentation within the dairy industry has led to a lack of unity with consumers, regulators, politicians and even those of us within the industry. Individual beliefs, policy, and geographic location are just a few of the reasons behind these inconsistent philosophies. Our inability to present a unified front puts the industry at risk and makes us is vulnerable to threats by those who continue to seek to divide the industry.

• A modern dairy operation is a capital-intensive investment, requiring careful management to allow the business to achieve solid financial returns.

• Having a reliable, well-trained labor force is vital to our industry, as it is with all of agriculture. However, lack of immigration reform and the challenge of attracting and fairly compensating a reliable labor force continue to be a concern for dairy producers.

• Specialized dairy farms that purchased their feed have suffered in recent years while those who controlled their feed source did better. Which structure will work in the future? The prospect of $4 corn will likely change the economics of dairy once again.

• Risk management still has limited adoption by the industry as a whole. Given the tremendous influence the global markets have on U.S. milk prices, this fact has made the industry extremely vulnerable to volatility. Risk management is essential component to long-term success.

• Accrual accounting is a must to understand cost of production. Accounting systems are inadequate in relation to the risk present in many operations. Enterprising dairy, feed and replacement is also critical to give producers the ability to make the best management decisions using the most reliable information. Scales and feed inventory software are essential for generating reliable accounting records.

• Benchmarking is a very popular exercise by many. It can be a very slippery slope, however, because the way in which data is collected, valued and analyzed can skew the results. Consultants worth their salt will always recommend comparing actual results to budget. This provides the insight needed to improve performance. Comparing individual business results to peers is also very helpful and can identify any consistencies n accounting systems.

• Credit is a tool that enhances profitability when deployed correctly. However; we know that the proper levels of equity and working capital play a critical role. Every operation needs a backstop for unforeseen financial adversity.

• There are three undeniable characteristics that are evident in successful dairy operations:

  1. They produce high quality forages, knowing it is the single best way to influence profitability.
  2. They continually work on ways to maximize income over feed costs because they understand this leads to the best possible economics for their business.
  3. Their herd’s reproductive performance is world-class. They realize that pregnant cows and heifers are the leading indicator for future profitability.

Dairy owners, operators, vendors, suppliers and consultants are some of the most passionate folks in agriculture. Maybe it’s the work ethic it takes to dairy, or the deep understanding of how to treat the animals providing our living with great care and respect.. These qualities, along with unparalleled dedication, commitment to family values and adoption of technology and new ideas, are what make the people of the dairy industry so special. 

Greg Steele is vice president, dairy industry, for AgStar Financial Services. He can be reached

Where to Use That 'Extra Money'

Nov 22, 2013

Prudent dairy operators should heed the fact that creditors aren't going to walk away.

Riley Walter bio photoBy Riley Walter, attorney

Thankfully, at long last, California dairymen appear to be getting a bit of a break. It seems that there finally may be a little extra money left over out of milk checks.

This raises the question of how this "extra money" should be used. Should you use it to attend to deferred maintenance? Should you use it to upgrade the herd? Should you use it to pay creditors who have been mounding up over time due to the dairy crisis?

Whatever you do with the extra money needs to be based on strategic considerations that put you in a better position. Don’t just sprinkle it around. Be thoughtful.

In recent weeks, we have had several meetings with dairy operators. They are coming in to talk about the fact that they have barely survived the crisis, and now that things are looking better, they want to know what they can expect. Many of them have a significant amount of accrued unpaid payroll taxes. Almost all of them have a very large mound of unsecured creditors in the form of feed suppliers, veterinarians, vet suppliers, fuel distributors, etc.

In these meetings, we often explain that there are debts that do not get wiped out by bankruptcy and there are debts that do get wiped out by bankruptcy. Generally speaking, tax obligations are a kind of debt that does not get wiped out by bankruptcy, so if the dairyman has a choice between paying on a non-dischargeable tax or a payment on a dischargeable vendor bill, the answer should be pretty easy.

However, this still leaves hanging the looming question about what to do about the piles of trade debt.

As you might guess, most of these clients ask if we think the creditors are going to "walk away" and leave the dairymen alone and not seek any recovery. We explain that the trade creditor community is already starting to gear up and file numerous collection lawsuits. As creditors perceive that there might be some "extra money," they are filing lawsuits trying to get ahead of the other people in the pile.

At some near point, these lawsuits are going to reach the point where there are judgments, and creditors will begin to attach milk checks or pursue recoveries on judgments by levies or other means.

We also explain that while many of the trade creditors will be, and have been, patient and willing to "take payments," others will not simply because they want to get ahead of the rest of the herd to be first in line. This makes us anticipate that there will be numerous operators who will have to reconsider using Chapter 11 or Chapter 12 as a mechanism for reorganizing their finances. For a host of reasons, this probably will have to be done through official court action so that these operators can shed unsecured debt and fix their balance sheets.

The point of all of this is that just because it now appears that there might be a little "extra money," prudent operators should not let their guard down. They need to be facing the fact that they have balance sheets that are way out of whack and they are going to have to get them in order so that they can go forward and live decent lives without looking over their shoulders.

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 orRileyWalter@W2LG.com.

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