Dairy Money Matters: Survival Guide for Farm Finance - Sample

DAIRY MONEY MATTERS Sur vival guide for farm finance

© 2018 Copyright by W.D. Hoard & Sons Company All rights reserved.

No part of this book may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying, recording or by an information or storage retrieval system, without permission in writing from the publisher.

Address inquiries to: W.D. Hoard & Sons Company Book Department P.O. Box 801 Fort Atkinson, WI 53538-0801 USA www.hoards.com Tel: 920-563-5551 Printed in the United States of America ISBN 978-0-932147-62-2 Library of Congress Control Number: 2018954917 Book design by: Aisha Liebenow Special Publications Manager Hoard’s Dairyman Book editing and proofing by: Kelly Wood Editorial Assistant Hoard’s Dairyman Special thanks to the following individuals and farms pictured throughout the book: (cover) Horning Farms | Manchester, MI Art Woodward | Rio, WI Langer Dairy Farms | DeForest, WI United Dreams Dairy | North Freedom, WI Kellercrest Farms | Mt. Horeb, WI 3D Dairy |Malone, WI Knigge Farms | Omro, WI

DAIRY MONEY MATTERS Sur vival guide for farm finance

By Gary Sipiorski

ABOUT THE AUTHOR Raised in the Green Bay-Denmark area in Wisconsin, Gary Sipiorski was a local and state FFA officer. In 1973, he graduated from the University of Wisconsin-River Falls with a degree in animal science. From there, Gary went on to work for Ralston Purina (Purina Mills). For 18 years he worked with feed dealers and consultants, making over 1,000 calls to dairy farms each year. He also completed the program at the Graduate School of Banking in Austin, Texas.

Gary spent 17 years with the Citizens State Bank of Loyal working his way up from an agricultural loan officer to president and CEO, to where he now serves on the board of directors.

Actively involved in the state of Wisconsin, he has served in numerous roles including: the board of directors of the Wisconsin Rural Leadership Program, state and national director of the Independent Community Bankers of America, and chair on the national agricultural committee. He also chaired the Governor’s Task Force on Growing Agriculture in Wisconsin.

Gary gives many presentations each year in Wisconsin, across the United States, and internationally, and continues to search for opportunities to share the importance of smart money management. Facilitating his drive for education, Gary chaired the advisory board of the University of Wisconsin-River Falls and is an emeritus member of the Board of Visitors advisory board for the College of Agriculture and Life Science at the University of Wisconsin-Madison. He has also taught the financial portion of a 234 course at University of Wisconsin-Madison.

In January 2007, Gary was asked to be on the Advisory Council on Agriculture, Industry and Labor for the Federal Reserve Bank of Chicago. And then on October 1, 2008, he joined the Vita Plus Corporation — a plus 400 employee-owned nutrition firm based in Madison, Wisconsin. He is currently helping to develop financial training tools for the Professional Dairy Producers of Wisconsin and authors the Money Matters column for Hoard’s Dairyman magazine.

Gary has been married to his wife, Linda, for 45 years. They have three adult children and four grandchildren.

CONTENTS Section 1: Introduction

Chapter 1: Appreciation 2 Chapter 2: Change 4

Section 2: Business side

Chapter 3: Business planning 12 Chapter 4: Balance sheet 21 Chapter 5: Measuring dairy by the numbers 26 Chapter 6: Land values and leasing 36 Chapter 7: Banking, lending, and accounting 45

Section 3: Management

Chapter 8: Taking care of what’s in your barnyard 60 Chapter 9: Low milk price times 70 Chapter 10: Higher milk price times 82 Chapter 11: Future dairy investment decisions 88 Chapter 12: Avoid and do 92

Section 4: Marketing

Chapter 13: Corn or dairy and forages Chapter 14: Milk marketing, the owners decision

Section 5: Future

98 103

Chapter 15: Training the next generation early 110 Chapter 16: Farm transition 115 Chapter 17: The future 123

DEDICATION I owe a great deal of appreciation and thanks to the editors of Hoard’s Dairyman.

In particular, to Aisha Liebenow, Corey Geiger, and the entire staff who helped bring this book to life; Marjorie Stieve, marketing director of Vita Plus, who gave me the idea for this book. I am also grateful and honored by the three financial professionals who reviewed the script: Dr. David Kohl, emeritus professor from Virginia Tech and national and international speaker; John (Jack) Olsen, board of directors and former president/ CEO of the Denmark State Bank, Denmark, Wisconsin; Gary Weirauch, board of directors and former president/CEO of the Citizens State Bank of Loyal, Loyal, Wisconsin.

How can I even come close to thanking all of the dairy agri-business people I have known and in some way are a part of this book? First of all, to my high school agriculture teacher, Ken Seering, for seeing the possibilities in me. To those from Ralston Purina where I spent my first 18 years after graduating from the University of Wisconsin-River Falls, 25 years with the Citizens State Bank of Loyal where I served as loan officer, president/CEO, and director (some years overlapped with other career roles), then 10 years as dairy development manager for Vita Plus, Corporation.

I want to especially thank the many dairy farm family members that have touched my career and life. They forced me to better understand business so I could assist in some small way in helping them to make better decisions on their own for their future.

And, finally, I want to thank my wife, Linda, who lost her dedicated dairy farm father in a car accident when she was only 11 years old. Linda is my best friend and encouraged me to keep reaching and getting better. I want to thank our adult children, Chris, Kate, and Emily, for putting up with their intense father who got up early and stayed up late just to spend some time with them when they were home. Now, I have the privilege of enjoying the grandchildren as well.

FOREWORD Dairy Money Matters contains nearly a half-century of institutional knowledge by a professional who has worn many hats while growing up on a dairy farm, and becoming an agribusiness banker, an advisor of the Federal Reserve, and a consultant. This book is full of business, financial and management nuggets that can be customized to your situation or profession. It includes a combination of concepts and principles interwoven with interesting personal stories and anecdotes. This book would make an excellent primer for any business course in dairy management.

It’s been a pleasure to work side-by-side with Gary through many economic cycles and changes in the dairy industry. As a loyal reader of Hoard’s Dairyman since I was six years old, it is an honor to provide this review.

Dr. David M. Kohl Professor Emeritus College of Agriculture and Life Sciences Hall of Fame Virginia Tech Blacksburg, Virginia

In this publication, Gary Sipiorski provides a meaningful, honest evaluation of what characteristics and financials are needed to compete in the dairy industry. The current dairy economy has a substantial number of units looking for direction and a means of evaluating their long term viability. This book can provide the reference guide for building their realistic plans and goals.

As technology and economies of scale continue to change the dairy industry, future readers of this book will find his advice beneficial. Given the size and complexity of dairy operations credit needs, banks have continued to push for the financial record sophistication that is outlined in this book.

Given the aging population of dairy farm owners, the section of this book relating to farm transfers will provide solid direction for those readers as well.

John P. Olsen Past President and CEO Denmark State Bank/Denmark Bancshares Denmark, Wisconsin

Dairy Money Matters is a primer that all aspiring dairymen and dairywomen, both present and future, need to read and comprehend. Throughout, the book is replete with management tips and key financial ratios that are required knowledge tantamount to successful dairy farm management.

Gary’s book also leads the dairy farmer into the appropriate discussion as to management and ownership succession, a topic which provides more puzzlement among farmers than any other issue.

He also stresses a work - life balance under his “intangibles for a good life” important to the whole family.

In the current dairy economic downturn, many farmers withdraw from discussion and research. Lessons from this book should lead them to conclude that openness and frankness can point them to improved economic solutions. This book should be included in all dairy farm libraries.

Gary R Weirauch Past President and Chairman Citizens State Bank of Loyal Loyal, Wisconsin

PREFACE In past generations, dairy cattle owners were successful by caring for their livestock along with growing or buying quality feed. As time has progressed in this supply and demand-based business, doing the physical work is no longer enough to maintain a seat at the farm business table. Massive strides in education, animal science, and technology have culminated in growing milk production levels. This in turn has created a globally competitive climate. In addition to being experts on animals and crops, dairy farmers now have to develop the skills of chief financial officer (CFO).

This book has been developed as a financial learning tool for the many hard working men and women who care for these wonderful “Foster Mothers of the Human Race.”

It is written for the young people who grow up participating in youth actives that teach them to pursue the legacy of those highly productive farmers. There are many, too, who serve through education, genetics, nutrition, building services, herd health, and lending the capital needed to maintain and grow the farms. These support specialists will find this book a valuable resource in understanding dairy farmers’ needs.

This book has grown from “conception” to “prized dairy cow” since I began writing for Hoard’s Dairyman in 1994. The articles that are the basis for these pages were penned at times of comfortable profit to periods of milk price distress. As a result, this book is filled with timeless, foundational lessons that teach not only the key issues that dairy farmers have faced in the past, but in today’s present and tomorrow’s future.

I’ve included discussions on farm management, investments, decision-making in good times and bad, and how to approach farm transition and training the next generation.

Through these lessons, you will become confident in your understanding of a farm’s financial toolkit — balance sheet, income statement, business plan — and the crucial ratios that define a financially successful farmer.

Enjoy this book bit by bit and a piece at a time. Let each concept sink in. Take the information and apply it to real-life numbers that one deals with on a daily, monthly, and annual basis. Only then, will the words and numbers truly come to life. I hope that within the bindings of this book, you find encouragement to stimulate your mind in the thought process of better financial decision-making.

Disclaimer

The ideas and strategies within this publication should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. All information is provided as is, with no warranties to the individual success of those that apply the knowledge within this text.

SECTION 1: INTRODUCTION

“

There is no vocation on God’s green earth that calls for higher elements of character, for deeper research, for grander nobility of nature than that of the farmer.

-W.D. Hoard

”

Chapter 1

Appreciation 1.1 You’re part of a fantastic food machine

When we have something that is plentiful, we generally do not think about what life would be like without it. In fact, we do not even give it a second thought. There is a “fantastic food machine” operating in the United States that simply goes unnoticed, probably because it works so well. It is like a reliable engine. It just keeps running and does not have any attention drawn to it.

The best way to appreciate what we spend on the food items today is to make a comparison of farm markets over the last 90 years. There have been a lot of ups and downs in that period of time.

There also have been a lot of changes in the business of processing food items to make them more attractive from the farm to the plate. Let us go right to the farm and make a fair market basket comparison.

To put this into perspective, we need to compare an agricultural product to another industry. The son of a dairy producer who milked cows in 1929 said, “The price of milk in many central Wisconsin areas did not quite get to $2.” A central Wisconsin Chevy dealer, who sold cars in 1929, told me that a new car could be bought for $600.

It is always interesting to play with numbers and percentages from the past. Remember that I am extrapolating, so take these numbers with a grain of salt; but this makes an interesting observation.

Agriculture has been challenged to become more efficient over the last 90 years.

Let’s see how the dairy industry stacks up to the automobile industry.

The latest figures show that there are roughly 40,000 licensed dairy operations in the U.S. and three domestic car manufacturers. If milk was $2 per hundred in 1929 and Chevys were selling for $600, that makes a 1:300 ratio.

Let’s make a comparison using a $16 milk price compared to a $40,000 Chevy.

That changes our ratio to 1:2,500. Another way to look at this is that, if the auto industry could have been as efficient as the dairy industry, new cars would be selling for $4,800 ($16 times 300).

Nice job, dairy producers! In fact, if you use the same formula on other agricultural market prices, the automobile industry would have to produce cars for between $930 and $4,875 in order to compete with American agriculture.

The American farmer has given the U.S. food of the quantity and quality that many others around the globe can only dream of enjoying.

To some degree or another, any time any product is produced, there is some effect on the environment. With eating being essential, the better question is: “How can the production process have the least amount of impact?” Given the productivity of modern agriculture, the best way to maintain the beauty of the world’s forest, wetland, and grassland is to encourage continued efficient production of the present farmland.

Many more acres would have to be cultivated if not for the advances in modern agricultural technology.

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1.2 A thank you from the grateful

had time to come up with the idea for Microsoft if he was spending his day digging in the woods surrounding Seattle for something to eat. The success of a country’s agriculture in a big way allows it as a society to make great accomplishments.

Not only does our agriculture supply us with the least expensive food but the healthiest and safest.

There have been incidences where food items have not been handled properly and health issues have occurred. Many times, the problems we face are not about having enough food, but but too many choices.

Even in a country of plenty, there are people with incomes who know the pains of hunger — $130 billion of the USDA’s $155 billion 2017 budget is directed at mandatory programs providing services and nutritional programs. In all, 30 million children are served in school lunch programs, 42.4 million people receive support through the SNAP (Supplemental Nutrition Assistance) Program, and 7.3 million are in the WIC (Women, Infants and Children) program. Our farms allow many to be fed.

A big thank you, American farmers, ranchers, and dairy producers, for what you do . . . from the grateful.

In times like these when dairy producers and agriculture in general struggle to make ends meet, it is important to reflect on the huge benefits agriculture has given the citizens of the United States and to much of the world.

The best way to measure and appreciate these benefits is in dollars and cents. That is, the dollars and cents that people do not spend on food. As a result, people in the U.S. have more money to spend on other nonfood items that make life easier.

The average family in the U.S. spends 10 percent of its disposable income on food. This figure represents food eaten in restaurants, as well as food that is brought home in the shopping bag. Compare that number to Europe where they will spend 25 percent of their income for the food they eat. Those living in the nation of India will spend 50 percent of their take-home money to sustain themselves. I have a friend who spent a number of years in the former Soviet Union. He said, “I do not know how they did it at times. They would spend 90 percent of what they made in a day for food and still go to bed hungry at night!”

The small amount of money that we as Americans spend on food allows us to have “ Less than 2 percent of Americans money left over for home mortgages and produce the food that has given the rest automobiles. We are able to educate our children and even enjoy recreational times of the citizenry other lifestyles.” and toys.

Not only does U.S. farm production provide for this nation but many other nations as well in the form of exports. Our extra production fed much of the world during World War II. We came to the rescue of Russia in the early 1970s when they had a grain disaster. How many times has U.S. food supplies headed off starvation in many countries?

I am not trying to boast of what we have compared to others, but I want to draw attention to this forgotten gift. Less than 2 percent of Americans produce the food that has given the rest of the citizenry other lifestyles. The social benefit to society is that 98 percent of the people can go on to pursue nonfarming careers without worrying about how to feed their families. I doubt if Bill Gates would have

CHAPTER 1: APPRECIATION

3

Chapter 2

Change

2.1 Understanding change is half the battle We hear the quotes about change all of the time.

“The only thing that we can count on is change.”

“If you do not like the way things are, just stick around awhile and things will change.”

“Give me the good old days; today things change too fast.”

The business of milking cows has one of the same ingredients in it as any other business. That is the aspect of change. The past may have seemed safer, more stable, and more pleasant because we all can look back in our Monday morning quarterbacking chairs. We can see clearly now what the weather was going to be like, where the price of milk was going to move, and what would have been a better decision.

There appears to be a mental process that people go through when dealing with change.

There are a series of steps that move from one emotional mindset to the next.

If we understand the journey that must take place along the way, it will be easier to deal with the entire process. This process can be equated to climbing a Advancements in technology show no signs of slowing anytime soon. mountain. There may be We can only pause to recognize the progress that got us here today difficult elevations along and revel in its beauty.

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SECTION 1: INTRODUCTION

the way. Knowing that there is a way is better than ignoring the path or, worse yet, trying to make the climb in the dark and alone. The next time you have a difficult decision to make that deals with change, think about my analogy of “climbing the mountain of change” in Figure 2.1.

Denial

Our first human reaction to a situation that involves change is to deny that it is even happening.

Change comes with different degrees of emotion.

Probably the most stressful is the loss of a loved one.

The first reaction generally is “I cannot believe it.” A major change in the world of dairying might be met with the phase, “I cannot believe that ____________ is happening.” Each person deals with each phase in his or her own time frame. The healthy approach is to recognize the phase, talk it out with family members, trusted friends, or professionals. Deal with it, and then move on.

Anger

Once we have understood that a change is taking place and the change is not to our liking, anger will result. Every person handles each emotion in different degrees. The extremes range from verbal and violent outbursts to keeping it all in and letting it eat you up on the inside.

This phase can last Figure different amounts of time in different people. Some get over it and move on. Others have difficulty changing.

Rather than to make progress by climbing the mountain of change, they keep going around and around.

We all know people who have never gotten over the anger of a situation, and they have worn paths by circling the mountain for years.

This one is real important to talk out with people. This phase can be equated to being stuck in quicksand.

For many, the only way to get out is to reach out for a helping hand.

industry will move on, with or without them. Now is the time to go to the drawing boards. Discussions need to be held, all options across the board considered, and a plan drawn up.

It is very difficult for many dairy producers who are used to dealing in a physical world with cattle, equipment, and land. These items one can put their hands on. Now one must think in the abstract world of ideas.

The bottom line here is sitting down to think, talk, discuss, and getting it all written down. The tough point here is that it all takes time. This is not a 10-minute discussion. Many dairy producers grew up with a family attitude, “If you were not out physically working, you were wasting time.” This can be a tough mindset to overcome; today’s business world demands planning.

Depression

Even though we are now moving down the mountain of change, it does not make the next step any easier for some. We may not like the idea of what we will have to do to stay in the dairy industry as a result of our plans. As with anger, some will beat a path around the mountain of change and have a hard time moving on.

2.1 The mountain of change

Realization

After cooler heads prevail, a person realizes that, no matter what they do, the

CHAPTER 2: CHANGE

5

Again, many of us know people who remain in a depressed state of mind for years. It is the same muddy hole that requires a helping hand to be freed. If you have a friend in this stage, think about this analogy and give them help or find them help. A long-term depressed state can lead to a disastrous situation.

A good, positive peer group with the future in mind will make a great rope of hope. These peers do not have to be neighbors either. Sometimes it is better to have some distance between six dairy producers so more open discussions can be shared in sensitive areas such as money matters.

Acceptance

As we come to the level of acceptance, a breath of fresh air will enter us. By this time, your mind should be at ease to start thinking clearer. You still may not like what you have to do, but at least you have accepted that change is for the best. If your new plan has been given the proper amount of time and discussion, you should feel more comfortable to move on.

Growth

Now an interesting phenomenon occurs. Real personal and business growth happens. Not that everything will always go 100 percent of the way that you planned it to go. In general, you will move into the arena of growth.

Then a funny thing happens. Another situation comes up, and we have to go through the whole mountain experience all over again. It may not be as big as a major strategy change in the business of your dairy. It may be a personal decision. It could be dealing with employees or one of the many other decisions a dairy producer needs to make in a day, month, or year.

If we recognize the process, change will be easier to handle. Interestingly enough, many people see this experience of change as a real mountain to be climbed each time. Others see the task of change as a speed bump. They go through the emotional roller-coaster ride, but it is a fast trip.

Change can be as complicated as deciding to overhaul cattle housing to as simple as changing a milking procedure. It is important to recognize that change must and will occur in any business that is worth being an owner or employee. This great business of dairying is that kind of a business. Enjoy the climbs.

2.2 Dairying’s financial rules are changing

In the past, taking care of cows and crops meant success. And, if you worked hard, you made a profit.

Old methods may not cut it anymore. You may need to

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rethink your milk marketing and financial strategies.

Many of these ingredients still are needed, but we are in uncharted waters.

Apparently, policies are not soon going to change back. There will always be price volatility. Weather and feed supplies affect milk production. Economic and climatic forces will give us price peaks and valleys.

The quicker we let go of the past and accept the new changes, the sooner our minds can start to think through what we will need to do.

All one has to do is look around to see in most dairy areas the number of farms is shrinking. It has been a slow reduction. Year after year there are fewer in number for a variety of reasons depending on the region of the country. From my perspective, it is sad to see even one dairy farm milk its last cow.

Among the many reasons farm numbers decline is farm managers failing to grasp how each decision affects the river of money that flows in and out. Believe it or not, in the 1970s and 1980s, the U.S. milk support prices offered an average $13.50 mailbox price in a world of a $6 cost of production. Some countries around the globe still maintain margin certainty. Other countries have tried or abandoned quotas and have allowed the free market to move the price. Agriculture in general is the last true supply and demand market.

From year to year, wrestling with milk cycles has taken a toll on farm numbers. Advances in cow comfort, genetics, organic production, and technology of all kinds have changed the dairy landscape. Critical investment decisions, whether to move forward or not, rely on financial choices of understanding and potentially realizing a return on the investment.

There is a learning curve

At the center of the dairy business, not unlike other businesses, stands the pillar of financial understanding. Dairy producers of all ages need three to five years of study to get their arms around a thorough knowledge of their financial documents based on the current pace of this changing market. Operating conditions will probably not be getting easier. More farms will close the barn doors without improving their financial knowledge.

This is an area where it is never too late to learn more regardless of the current level of know-how.

Accurate balance sheet preparation, accrual-based income statements, cash flow projections done in advance of the beginning of a new year, and knowing what ratios to monitor are a must for future success.

A person does not have to go back to a formal school to start building a higher knowledge base. • Financial consultants can be a good source of education. Having a consultant explain quar-

terly what is driving the cash flow and balance sheet is a source of education. The producer needs to be prepared with written questions and open discussions during the team meeting.

• Extension agents from universities and county staffs who are experienced in farm financial areas and are educating producers.

• Dairy organizations, lenders, and accountants are all equally prepared to further farmer education with programs or face-to-face meetings.

This also should be a wake-up call to students entering technical colleges or universities to make sure a thorough business and financial curriculum is taken along with the dairy science courses.

There are plenty of group producer meetings conducted during the year. Organizers should make sure some financial training sessions are inserted into the programs. For a producer to come away with even one new skill topic furthers the overall financial understanding.

So you see, the financial understanding clock is ticking. It always has been, but these days it is running a little faster. Your dairy future, now more than ever, depends on your financial understanding.

2.3 Get out and learn something new

The quotes from W. D. Hoard may be over 130 years old, but many are as true today as the day he penned his words. One that particularly struck me says:

“The average farmer . . . does not read, and he does not travel — but stays on the farm and measures himself by himself.

Now, the result of that is he gets misled.”

— W. D. Hoard If everyone is honest, there are some improvements every dairy can make. A dairy cow requires care every day of the year. There are a lot of moving parts on a dairy. Moving parts wear out and need to be replaced.

The business of dairying is not unlike any other modern-day business. It is being driven by technology.

New discoveries in crops, equipment, and management are showing up every day and surface at events regularly. One cannot change everything when something new is introduced. As changes are needed and new discoveries are introduced, finding better ways to find cows that are in heat, making cows more

comfortable, improving milk components, and making the day-to-day dairy operation more people friendly will make your dairy a better place to profit by. You must have the “desire” at least to think about what else you can do.

Reading is a good start to enhancing your knowledge base. Another quote from a well-known author also comes to mind. Mark Twain once said, “The person who does not read is no better off than the person who cannot read.” Obviously, if you are reading this book, you are taking advantage of helpful information to run your business. This is information that has been thought out, planned with a great deal of effort in each piece by the editors. Each chapter is going to be helpful to someone to grow his or her knowledge.

Each generation makes life better for the next by passing on the information they learned through failure and success. Books enrich your thought process. Isn’t that what you tell your children or grandchildren?

There are large dairy meetings around the nation, state, and local areas. The number attending can be impressive. A lot of people make these functions a regular event. Farm equipment shows are fun to go to and smell like new paint.

Yet, what surprises me at times is many meeting opportunities go unused. There are a lot more people who should make a point to get out to a group meeting, at least twice a year. Co-ops and other dairy-related businesses put agendas together with current topics.

Sure, some events will have products that they want to highlight. However, each time you will pick up something that is helpful.

Now, do not forget about the biggest benefit of going to a meeting. That is brushing shoulders with other good dairy producers. Make sure you do not just spend time with the neighbor you brought along to the meeting.

Odds will be that you are going to be sitting next to someone you do not know. Introduce yourself. Find out something about your new acquaintance and what they are doing.

Most meetings will have a sit-down meal or social time. That is a great opportunity to mingle. You will find that others are just as interested in talking to someone they have not met before. Remember, half of the information that you will pick up will come from someone else whom you end up talking to who is not on the agenda.

Think about opening up your pores, reading about new ideas, going to see some new inventions, listening, and asking questions at a meeting. Do not miss the chance to meet someone new to share your ideas and find out their ways. The bottom line is getting out to learn something new.

CHAPTER 2: CHANGE

7

2.4 Everyone is saying, “Talk to me”

Industry leaders talk about and show graphs on milk price cycles all of the time. Farmers feel euphoric when a 2014 rolls around and not so good in time periods such as 2009 or the light milk checks of 2016.

It is easier said that the industry has been here before in a low milk price period, but it’s certainly harder to live through it.

The majority of businesses in a free enterprise, economic system go through cycles. When demand is higher than supply, suppliers find a way to produce more to meet the need. When demand drops for a variety of reasons, prices fall until consumers use more or new consumers are found. Until that occurs, prices level off and drop to a point many times below the cost of producing that product.

So here the dairy industry finds itself in one of those low price milk cycles. Farmers are asking, “What do we do now? Because here we are again!” Turn the question around and find out who is saying, “Talk to me!” Most people may not come right out and verbalize that three-word statement. However, inside they may be screaming it!

Four “Talk to me” moments:

1. It is generally impos-

sible to hide the fact that an owner or top decision maker is not looking or feeling good about the current milk price. The family and employees will see it and certainly feel the discomfort.

Recognize their hidden question: “Talk to me!”

Openly share the discomfort. Everyone will feel a little better with concerns out in the open. Family members and employees may even have some thoughtful ideas for decreasing some costs and bumping income.

2. Lenders at times may not look or sound like they want to talk about a negative milk price. However, they would prefer a frank, down-to-earth discussion and really are saying: “Talk to me!”

Now is the time for that

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“early in the cycle” business meeting. Demonstrate your knowledge and interest in the farm’s balance sheet. A look at the status of the equity position will start the lender to think through what could be done.

Now is the time to pull out last year’s cash flow to review what the bottom line looked like. Review the projections that were made for the current year along with the assumptions that were made to build it. There could very well be a need to readjust some of the major projections to better stress test what this year-end could look like. The cost of production (COP) can be revisited to see where a shortfall is occurring. Marketing positions that are in place will have an impact on the cash flow. In low futures markets, new positions may not make any sense. It still is a good discussion to have.

Now you and the lender may be able to come up with some type of a plan to work through an undetermined period. Additional lines of credit may be in order. Extending loan terms may be part of a solution. Some producers bristle at the thought.

Alleviating month-end cash flow stress with less money paid on principal may help. Interest-only could be a short-term solution. This recurring tool may have been used too often. This is a lender and

regulator discussion to have. Guarantees through the Farm Service Agency may also be part of a choice. After the talking is over, some type of a plan could be helpful. Once again, the sooner the better.

3. Those businesses that provide products and

services to the farm also are thinking: “Talk to me!”

Remember the health of their businesses rely on the pulse of the dairy producers as well. Honest discussions of what is really happening will allow them to serve you better. There has to be a control of accounts receivable. They want to at least know you are thinking this through.

4. With milk supplies testing the operating capacity of milk processing plants, an occasional conversation with the owner or field staff personnel may satisfy the “Talk to me!” discussion both ways.

2.5 You can’t get in and out of cows

The last few years of high grain prices have been confusing for a lot of dairy producers who have a substantial land base. Watching the grain farmer neighbors working and planting their land a month in the spring and then harvesting a month in the fall looks quite inviting. It may be difficult to watch when you, as a dairy producer, are making your way to the barn and parlor 365 days a year.

Now before you call the cattle truck, give some serious thought to your unique business. Milking cows requires a lot of specialized buildings and equipment.

Furthermore, to sell your herd of cows this year and think you will buy equal or better cows back next year to start in again is pretty impractical. Animal quality will not be the same and buildings will deteriorate. You cannot just get in and out of the business of milking cows.

Exceptions might be someone planning a registered cattle sale and keeping some cows and all of the heifers back to start milking again. In other cases, there may not be a next generation and it is time to exit the business.

Good or bad, the number of milking herds in the U.S. is consolidating. For those that remain, opportunity awaits. Domestic fluid consumption may have dropped in the last 30 years but cheese consumption has more than doubled to over 33 pounds per person, and yogurt consumption has gone from 2 pounds to 22 pounds and continues to grow. Let’s not forget about exports hitting 13.5 percent of milk production with worldwide demand on the upswing. I’m saying all that profit will not be handed to anyone on a silver platter.

Everyone will have to compete globally for their piece of the cheesecake.

Based on 2012 grain and milk prices, the average net income from an acre of corn was $350 and $347 an acre from milk. This is based on $6.50 corn and $20 mailbox milk prices. Yes, I know all prices can fluctuate. With 97 million acres of corn planted, will the corn price hold? And be careful here. Just because we had $7 corn in the past does not mean that is a “new era” in corn price. Does anyone think corn could ever be $4 or $3 again?

The skill level of milking cows is higher than ever today; if cows leave, that skill will be lost. There certainly is a lot of specific equipment used on a dairy.

It is not uncommon today to see $10,000 invested per cow in assets to milk cows in the West. An investment per cow in the Midwest or East can reach as much as

$20,000 with a conservative value of land being applied to the balance sheet. If cows are no longer milked on a dairy farm, a loss of asset value will occur with buildings no longer in use.

What drives you?

The big question is, what do you really like doing?

How about the next generation on your farm? What do they like and want to do? I am talking about your legacy here. Before you make a fast decision regarding your dairy’s future, give it a lot of thought. You will miss the paychecks twice a month.

The future is never certain in any industry; however, the dairy industry is a good choice. It is a good choice to stay because you cannot get in and out.

Big picture

In 2008, the general U.S. and world economies were struggling without many positive signs of a recovery. The reason this fact needs to be on your radar screen is these are your customers. When they start to do better, they will again start buying more of the high-quality products you produce.

Make sure you face the facts that volatility and uncertainty may not be totally erased from the business of milking cows. Time will tell if any of the milk stabilization plans that are proposed by the dairy industry and the government will get legs under them.

Make sure you take time to think through your decisions and realize the emotional decision should not be your first choice. Keep talking with others you can trust. Keep talking to people who have the proper attitude to get through this time of living with a tight margin.

CHAPTER 2: CHANGE

9

2.6 Veteran producers share budget-crunching insight

Judging from the lack of movement in the milk future pits, it appears margins will remain tight into the foreseeable months if, and that’s a big “IF,” the current conditions hold. As we have learned from the past, some market movement can change direction fast with the flash of a news report.

In the meantime, you have to keep milking cows.

You not only have to keep milking them, but you have

to make sure you are doing as many things right as you can. You have to do this even under the economic restrain of mounting expenses with a breakeven or less-than-breakeven revenue stream.

Some of the best financial advice comes from dairy producers who are in the heat of the financial battle and may have scars from past skirmishes. One can only make the milk check stretch so far. The higher cull cow prices help, but 85 percent of the income on a dairy still comes from milk.

Ten points to consider Here are some comments that have stuck with me from veteran dairy producers who remain optimistic yet realistic about what they need to do to contain the present financial bear.

1.

“Do not do anything that causes my cows to lose milk production!” This may be an odd statement in light of the growing milk supply. Regardless of what is happening nationally, it drills down to, “What’s in your checkbook?”

2.

“I need to make sure I know my cost of production!” You have to grab the steering wheel on this one and keep your eyes open. No longer can you make the statement, “Why figure it; I cannot do anything about it.” You need to know this number and think through it.

3.

“I evaluate all expenses monthly, keeping track of my out-of-pocket cash flow!” We are talking about “real cash” that is needed every month. For the time being, you will need to put depreciation cost or non-out-of-pocket cost to the side “for now.”

4.

“We are not buying any equipment now!” Key pieces may have to be bought but “preventive repair” is the name of the game to avoid breakdowns.

5.

“I am taking a hard look at current cull cow prices versus what springing heifers are selling for!” For a few hundred dollars, younger productive animals can be brought in at a minimum difference. At times, keeping olders, mature cows and only raising the heifers that are needed may be the better option.

10

SECTION 1: INTRODUCTION

6.

“I’m doing some hard thinking, number crunching, and making a plan to market my milk!”

Dairy producers are considering and taking a margin when they can between the cost of production and an arranged future milk price on a percent of their milk. They are focusing on a margin rather than trying to beat the market.

7.

“I have to keep talking to my family and partners!” Talk regardless if the discussion could be about more pleasant things.

8.

“I make myself talk to and I send my suppliers money, whatever money I can!”

These people are financing a lot of dairies without any collateral positions.

9.

“Tough as it may be, I keep talking to my lender. I do not want to surprise them!”

10. “I am talking with dairy producers I trust and who I believe are in this business for the long run. I am doing more “What ifs” with my trusted advisers and consultants, as well!”