Written by Joanna Lidback
The first defense in making it through low milk prices is knowing your net cost of production and/or your break-even milk price. When you have a solid grasp of where you stand financially, you will know more precisely how much cash will be needed to keep afloat.
The net cost of production is the amount needed to cover expenses (including depreciation and family needs) less any non-milk income, expressed as dollars per cwt. Break-even milk price hones in even further on cash, including cash operating expenses, principal payments and family needs, less non-milk income.
According to Gary Sipiorksi, 60¢ per cwt. makes a huge difference in cash flow. Further, top farms in a benchmark of Midwestern dairy herds still showed profit of 94¢ per cwt. for the second quarter of 2018. “The difference,” says Sipiorski, “was a nickel here, a dime there, in expense category costs. But it all added up…” Read more here.
If you find you need to generate cash, consider these strategies:
When it comes to cutting expenses, everything needs to be on the chopping block. There are generally two ways to cut expenses: cut back on current levels and defer certain expenses. Start with your biggest expenses. Review your feed ration with the nutritionist. Evaluate labor efficiency – cut hours if necessary. For deferment, prioritize capital repairs and put off non-essential fixes. Look at freight and shipping charges. Review insurance policies. Seek out alternative suppliers. Determine how many heifers you should raise—this is a topic unto itself.
Not everyone has to go get a part-time job, but there may be other sources of income that could be tapped. Is there a market for local beef or other farm-derived products? Do you have timber? What does your forest management plan allow? Is there room for extra cutting? Do you have any extra crops to sell? Is there any custom work available? Do you have any outstanding receivables on which you could pursue payment?
Request deferral or debt restructuring.
Take a look at your debt structure. What is your blended capital debt term? Is there room to consider restructuring your loans? A deferral of principal payments might be considered if conditions warrant, however this method should be used sparingly. Be realistic with your debt goals. Just staying even with debt levels this year is an accomplishment. A conversation with your loan officer may go a long way.
Sell unproductive assets.
Is there any machinery and/or equipment sitting out in the yard that’s not getting you the return you expected? Do you have any unproductive land that could be sold? Unproductive assets often carry unnecessarily overhead costs; this money could be used elsewhere.
Milk market uncertainty is nothing new in the dairy business. While this may feel like unchartered territory between trade disputes, oversupply concerns, and market closures, financial success for dairy managers can often be traced to how well one uses the profits from a good milk price year to help them in a year with low milk prices.
Contact: Joanna Lidback jlidback@YankeeFarmCredit.com