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Credit crisis changes DFA’s cash flow management

00:00AM Oct 14, 2008
             Dairy Farmers of America (DFA) has had to change the way it borrows short-term money to keep cash flowing as a result of the credit crisis. Ironically, the new method is actually saving DFA money.
            Normally, DFA must borrow anywhere from $75 million to $175 each day to meet cash flow requirements. The mega-coop has traditionally issued commercial paper, which has always been readily purchased. The interest has been in the range of 15 to 25 basis points (0.15% to 0.25%) above the LIBOR rate, which had normally been running about 3%.
            In recent weeks, however, LIBOR rates have shot up to 7%. And for the past few weeks, DFA as well as others have been unable to sell all of its commercial paper offerings even at the higher rate. "Then, a week ago, things shut down totally,” Rick Smith said in a teleconference this morning. Smith is DFA president and CEO.
            DFA has a back-up plan, using a credit facility of 15 to 20 banks with a $500 million line of credit. But it had not had to use the facility because the commercial paper route had worked well in the past.
            "In the last two weeks, we had to tap the facility,” says Smith. But ironically, the banks' interest rates are tied to the Federal Reserve's prime rate, with interest costs at about 4.5%. "So in the last two weeks, we saved money.”
            Smith says the coop has also been watching its accounts receivables very closely. To date, it has not experienced problems in getting paid. "We're pretty steady, averaging 19 days on net receivables,” he says.