Six Ways to Safeguard Your Dairy’s Profits
Aug 19, 2013
With a profitable year emerging for many dairies, make sure your financial barnyard is in order.
By Gary Sipiorski, Vita Plus Corporation
It is an understatement to say that dairy producers endured a lot in 2012. It did not matter what part of the country you milked cows in, feed ingredients of all kinds were affected by the drought.
Western dairies and other dairies -- no matter where they were located -- that historically bought all of their feed felt the sting the most. Some were still paying back loans from 2009 and now they were into their lender’s office again asking for operating money. Even Midwest dairy producers that have a land base suffered forage storages or at least high protein prices.
2012 is still going to haunt many farms until the fall of this year. Seeing new forage growing helps to calm the nerves. There is reason for continued optimism for those who milk cows. If you have not noticed, the business of exporting dairy product is still running at an annual rate of 13.5% of U.S. production. We have a little more cheese in storage, but pizza still ranks high as a consumer preference. And has anyone been watching the yogurt consumption skyrocketing? It may not be all Greek-style yogurts, but that has been the best advertisement in years for the dairy industry. The best part about it is that yogurt ranks right up there as a "healthy food."
As good as this all is, no one is going to hand over cash on a silver platter to your dairy. Others around the world will compete for a piece of the world dairy pie. So now is a time to get and keep your financial barnyard in order. Margins will stay tight on the income and expense sides of the cash flows. The future milk usage and price have all of the markings of a positive swing, so here are some things to think about.
1. When you start harvesting this year’s crop, make sure it is packed, inoculated and covered to achieve the least amount of shrink. These feeds are now far too valuable to waste. You need to have a pre-planting, or at least a pre-harvest, meeting with your crop specialist, harvest people and nutritionist to make sure the most nutrients are being captured and make it to the mangers.
2. Always keep your most current balance sheet on the front page of your mind. Know where you are and the impact each decision will have. Regardless of the small or large choices at the time, think about whether the results will add to your net worth.
3. Your cash flow is and will always be king. You must know your cost of production. If you decide to look at fixing a margin between expenses and future milk prices, your major costs must be addressed.
4. Keep talking with your lender, who is your biggest supplier of capital. The general economy is starting to show some signs of recovery. The Federal Reserve cannot keep interest rates where they are forever. There appear to be more and more discussions between the Fed Governors that the low interest rates may be coming to an end. Once interest rates start to move, today’s attractive fixed rates will be gone. The economy is still fragile, so they will probably move but move slowly.
5. Buying land is still on the minds of many. Lower grain prices may cool some of the prices. If considerations of a land purchases are on plate, make sure you stress-test your cash flow with a 15% swing in income and expenses to make sure you are not betting the farm.
6. With the opportunities in exports and domestic milk usage, it is important that your milk flow keeps moving higher. That may be a 1,400-pound creature you deal with, but she is very sensitive. Cow comfort and health are keys.
This year has all of the makings of a profitable year for many. The business of milking cows is a business you are either in or out of. There is no in-between. You will have to make sure you are thinking and planning ahead to take advantage of the investment you have.
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.