There is no question the dairy industry is in the midst of an extended period of stress and economic misfortune. It will take time, but some producers will eventually return to the financial position they were in prior to the downturn. Others will or have made significant adjustments, and their operations may look much different than they did before. Either way, resilience is one of the admirable traits that runs deep in the soul of many farmers and it will carry them through a down cycle.
Over the past 25 years, dairy producers have grown accustomed to big swings in milk prices. Typical responses to periods of low prices have been to shave operating expenses or postpone equipment purchases. Producers might do some custom work or even seek off-farm employment. They may sell extra feed, breeding stock or machinery to generate cash flow. And perhaps some will choose to exit dairy production altogether.
The current downturn feels different; it’s lasted longer than other down cycles. The potential for producers to be left without any market for their milk if their current buyer drops them has added an extra layer of stress. A higher percentage of producers have chosen to exit in the current environment than in past down markets. So what can a producer do to persevere while waiting for better days to return?
First and foremost, it’s essential to keep your financial scorecard, your balance sheet, up-to-date. In particular, monitor the farm’s working capital (current assets - current liabilities = working capital) on a monthly basis. If working capital drops to a negative number, act quickly to bring it back into the positive. You may want to consider temporarily rolling operating loan balances or credit card debt over to longer-term debt. If you choose to go with that strategy, plan to pay off that portion of longer-term debt as soon as cash flow allows.
Second, it’s important to project the farm’s cash flow on a month-by-month basis for at least the next year. Along with that, track actual cash flow as the year goes along. By projecting a year in advance, you can anticipate when cash flow is going to be tight and devise a plan to carry the farm through those months.
Third, closely examine the farm’s largest monthly expenses, such as feed and labor. Can these be shaved a bit without impacting milk production? Small percentage changes in the biggest expense categories will send more cash to the bottom line than big cuts in relatively minor expense items.
Creative ways to generate income
Finally, are there creative ways of generating additional income without taking on extra expenses or debt? Below are a few ideas to help you start thinking about possibilities you may be able to take advantage of in your own operation.
- Make sure all tax parcels are being assessed correctly. If a parcel that’s being pastured is taxed as productive cropland, you could be paying triple the amount of real estate tax you should be paying.
- Consider leasing out hunting rights. There is tremendous demand for decent hunting land. You could add several thousand dollars of income with little effort.
- Consider renting out a second farmhouse on AirBnB or a similar service, if this is allowed in your area. You might be surprised at how much urban dwellers are willing to pay to get out of the city for a week.
- Think about ways to generate additional revenue from your woods by harvesting and selling firewood, maple syrup or other forest products.
- Do you enjoy working in the woods but can’t justify spending your time out there? In some states, including Wisconsin, there are grants available that will pay you for time spent cutting brush or otherwise improving the quality of your timber stands.
- Is there pasture that isn’t being used because the fences are shot? There are financial incentives available to build fences for managed grazing systems. You could get your fencing done at little or no cost, put your heifers on grass and cut the cost of raising them by half during the grazing season.
- Speaking of grazing heifers: Have you thought about grazing your heifers? The cost of raising heifers on managed pasture is less than half of the cost of raising them conventionally.
- Do you raise your bull calves? Perhaps you could sell a few finished steers directly to consumers in halves, quarters or cuts. The price of beef sold directly to consumers is relatively high and doesn’t fluctuate as much as the conventional market.
- Are there opportunities to raise and sell additional ag products to consumers in your area such as sweet corn, straw, cornstalks or other items people living in town can’t easily get?
- Do you have older hay in storage you’ll never feed to your dairy animals? With current high prices for feed, now is a great time to take inventory and sell what you don’t need.
- Do you have older, unused machinery sitting in the shed? While machinery values have generally been soft, the market for smaller equipment has been fairly strong. Get it off your balance sheet, generate cash, clear space to use for something else and stop paying insurance on it.
There is no arguing these are tough times in the dairy industry. Some operations will look much different when better times return. By thinking creatively and tapping your resiliency, you will get through this part of the cycle and be positioned for greater success in the future.
- Senior Lending Officer
- Compeer Financial