Dairy Outlook: Stay Proactive During Low Cycles

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Work closely with lenders to help manage financial decision-making.

08.09.18    |    Planning
With every commodity market cycle, there are peaks and troughs. Dairy farmers are in the midst of a sustained trough, mainly due to an oversupply of milk. The oversupply comes largely as a result of a greater number of higher-producing cows globally without sufficient demand or processing capacity. Although there have been several consecutive years of generally lower prices, it’s important to stay positive and proactive so your business can capitalize on opportunities when the market rebounds. Here are five actions to take to sustain your business during a downturn.

1. Make tough decisions
With milk prices below the cost of production for many producers, cash flow can be a real challenge. Bridging that gap may mean that you have to delay capital purchases, cut operating expenses, draw down on cash reserves or take advances on additional lines of credit. While none of these options are ideal, they are the first place many producers look when trying to balance cash flow. Taking a hard look at operating expenses today and making adjustments where necessary might save you from making even tougher financial decisions down the road.

“Making adjustments now might save you from making even tougher financial decisions down the road.”


2. Understand your burn rate
In addition to making changes to your expenses, it’s also a good idea to pencil out your burn rate. That means calculating how many months or years you’re able to supplement your cash flow with on-hand cash or available credit lines at the current market price. With this information you can begin to look longer term and see past what is happening today. If you have to make additional changes that may involve tougher decisions, you’ll at least know what your timeline is. Often, this exercise can provide reassurance and a positive look at the future.


3. Establish timelines for action
Once you’ve established burn rates and know how long you’re able to supplement your cash flow, you have a timeline in place and can prepare in the event you’ll need to make additional financial decisions. For example, you may need to think about selling fixed assets, applying for additional credit or changing your business model to sustain the downturn. Knowing your burn rate can help you plan for changes ahead of time instead of making emotional, rash decisions in the heat of the moment.

4. Communicate with your lender
Open, honest communication with your financial advisors can help guide you through tough markets. Candid conversations can lead to actionable results. Farm Credit can help you determine what options are available to help supplement cash flow and develop strategies to help ride out the markets until they rebound or until your operational changes result in positive cash flows. Your lender can also help you pencil out your cost of production to benchmark your operation against others in the industry. If you’re able to pinpoint areas where your costs are much higher than the benchmark, you can focus on increasing efficiencies in those areas of your business.

“Our goal is to help you position yourself to handle financial adversity.”

Farm Credit is chartered to serve agriculture, so we understand that the dairy industry is cyclical. As a member-owned cooperative, we have the unique advantage of returning dividends to our members. In 2018 we gave back more than $87 million to our producers during this challenged ag economy.

We want to be a consistent and reliable source of credit for our producers, and our goal is to help you position yourself to handle financial adversity. For instance, we offer credit packages that can help supplement negative cash flows with available lines of credit. In addition, we use multi-year commitments and appropriate financing levels to give you peace of mind through the ups and downs of the market.

5. Set yourself up for success
Even with the tough dairy economy, the very best producers are still finding ways to improve and make money. It is possible, but you have to understand your financial position and your competitive advantages, and you have to benchmark regularly. Look at your financials quarterly and compare them with peer data. Find ways to increase production and lower expenses, and don’t stop looking for ways to increase efficiencies.

At Farm Credit, we’re invested in your success. We can help you plan for future expansion and growth so that you’re prepared and ready for action when the time is right. Sometimes those opportunities come at a low point in the cycle, and we want to help you navigate what that means for your financial position today and in the long-term. Don’t miss an opportunity to build your business because of current market conditions. Your Farm Credit team can offer options that work for your current situation and long-term goals.

Matt Davis

Matt Davis is Vice President – Agribusiness for Farm Credit Mid-America.

More from this author: Financially Speaking: The 3 Traits of Success (Episode 15), 3 Traits of a Successful Operation

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