Economists are indicating that recovery from low milk prices this year will be slow in coming and indeed may get worse before getting better. The first defense in making it through a down cycle is knowing your net cost of production and/or your breakeven milk price. When you have a solid grasp of where you stand financially, you’ll know more precisely how much cash will be needed to keep up.
The net cost of production is the amount you need to cover expenses, (including depreciation and family needs) less any non-milk income, expressed as dollars per cwt. Breakeven milk price hones in even further on cash, including cash operating expenses, debt payments and family needs, less non-milk income.
If you find you need to generate cash, consider these strategies:
1. Cut expenses
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. Further, 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.
2. Accelerate/supplement income
Not everyone has to go get a part-time job, but there may be other sources of income that could be tapped. Beef prices remain elevated slightly. Can you continue a higher-than-normal cull rate? Do you have timber? What does your forest management plan allow? Was it a good crop year? Any extra crops? Any custom work available? Do you have any outstanding receivables that you could pursue payment on?
Milk price volatility is nothing new in the dairy business. While it has increased dramatically over the past ten years, so has the potential for profits with record high milk prices. Recall from the last newsletter, “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.” While we are in the down cycle now, keep this in mind for when the roller coaster goes up.
This article was originally published in the Fall 2015 Association Insider of Yankee Farm Credit, ACA.
3. Finance previous capital purchases made out of cash flow
Last year was a great year. Many farms were able to replace or add new machinery, equipment or vehicles right out of the checkbook. Consider reimbursing those funds from an existing line of credit if one is in place or perhaps you can work with your loan officer to write a new loan. Another option is a “lease buy-back,” where again you reimburse funds spent in the current or previous year and finance via a lease.
4. Request deferral or debt restructuring
4. 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 a consideration, however this method should be used sparingly. A conversation with your loan officer may go a long way.
5. Sell unproductive assets
5. Sell unproductive assets
What’s sitting out in the yard that isn’t getting you the return you need or expect for investment? Especially if it’s just sitting there, it’s not only costing you overhead, but potentially the opportunity cost of those funds being tied up in the equipment that may be more useful somewhere else.
Milk price volatility is nothing new in the dairy business. While it has increased dramatically over the past ten years, so has the potential for profits with record high milk prices. Recall from the last newsletter, “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.” While we are in the down cycle now, keep this in mind for when the roller coaster goes up.
This article was originally published in the Fall 2015 Association Insider of Yankee Farm Credit, ACA.
