The author is the dairy development manager for Vita Plus of Madison, Wis. He is a member of the board of directors with Citizens State Bank of Loyal, Wis.
In this volatile commodity business of milking cows, it is a relief to have a period of time when the income is higher than the expenses. Understandably, there are some producers getting by, and others are in weather-stricken regions where it is more than money that ranks among the top concerns.
Overall, many dairy producers are enjoying a comfortable checking account. Worldwide demand for dairy products is outstripping what the cows can produce at this time. With the improvement in profitability, the incentive to add cows is unavoidable. Milk cow numbers are growing across the globe. In the same breath, the appetite for dairy products continues to expand.
To make sure everyone has their feet on the ground, the consequences of geopolitical changes and overproduction should always be part of a contingency plan. In the meantime, enjoy the profitability.
Before too much money is spent on the items from the "want" list, now is the time to give some forward thought to money needs that are not parked in the shed.
On the heels of profitability come income taxes. Most farmers too often automatically disregard that thought with the statement, "That's what I have an accountant for!" This year, compared to other years, may be a bit more challenging for the pencil pushers and a surprise to producers.
Bonus and other types of aggressive depreciation will not be as easy to come by. With the economy showing signs of life and the government need for revenue, checks will have to be written. Early tax planning will be a must.
Let's make sure everyone agrees here that making money and showing a profit are not bad statements. Most of agriculture still has the ability to manage taxes by prepaying some expenses for the incoming year. There are limits. That means advice from tax preparers is valuable. Next year's feed needs and cropping expenses are good places to start.
Items to be cautious about are prepaying term loans on cattle, equipment or real estate. Paying down additional principal ahead of the required time may feel good; however, all paid principal comes from profit and is not an expense in IRS terms. Some producers with healthy cash flows will use some leases for tax planning purposes in which all of the payment is an expense.
Aggressive payments of any type could be a problem in tight cash flow periods. Paying down lines of credit can be the exception as long as the lines can be drawn on in the future; again, this is principal reduction and not an operation expense. Thinking ahead here will save headaches in the future.
Pay down accounts
During an extended period of profitability, paying off the payable accounts is always good money management. Most suppliers generally charge 18 percent annual interest on outstanding accounts. Once those accounts are paid in full and the immediate equipment replacement needs have been satisfied, building some cash reserves should be in order. Even though having money sitting in a checking or money market account may seem like a waste, it comes in handy when the economics turnaround. A half a month's milk check is a good place to start.
Finally, talk with your accountant and lender about the importance of building liquidity on your balance sheet in the "good times." The definition here is the ratio of current assets, cash, feed and other assets that will be turned into cash in the next 12 months compared to current liabilities such as bills over 30 days or principal due in the next 12 months. Ideally there should be $2 of current assets to $1 of current liabilities. The message here for you and your lender is you should have the ability to pay your bills in the next 12 months.
The dairy industry needs good times to catch up and get ahead of capital needs. In this extended high milk price period, plan for some year-end obligation needs that generally have not occurred in other years. Enjoy the higher milk prices, and take time to think and stay ahead in preparation for when the winds change.
This article appears on page 600 of the September 25, 2014 issue of Hoard's Dairyman.
In this volatile commodity business of milking cows, it is a relief to have a period of time when the income is higher than the expenses. Understandably, there are some producers getting by, and others are in weather-stricken regions where it is more than money that ranks among the top concerns.
Overall, many dairy producers are enjoying a comfortable checking account. Worldwide demand for dairy products is outstripping what the cows can produce at this time. With the improvement in profitability, the incentive to add cows is unavoidable. Milk cow numbers are growing across the globe. In the same breath, the appetite for dairy products continues to expand.
To make sure everyone has their feet on the ground, the consequences of geopolitical changes and overproduction should always be part of a contingency plan. In the meantime, enjoy the profitability.
Before too much money is spent on the items from the "want" list, now is the time to give some forward thought to money needs that are not parked in the shed.
On the heels of profitability come income taxes. Most farmers too often automatically disregard that thought with the statement, "That's what I have an accountant for!" This year, compared to other years, may be a bit more challenging for the pencil pushers and a surprise to producers.
Bonus and other types of aggressive depreciation will not be as easy to come by. With the economy showing signs of life and the government need for revenue, checks will have to be written. Early tax planning will be a must.
Let's make sure everyone agrees here that making money and showing a profit are not bad statements. Most of agriculture still has the ability to manage taxes by prepaying some expenses for the incoming year. There are limits. That means advice from tax preparers is valuable. Next year's feed needs and cropping expenses are good places to start.
Items to be cautious about are prepaying term loans on cattle, equipment or real estate. Paying down additional principal ahead of the required time may feel good; however, all paid principal comes from profit and is not an expense in IRS terms. Some producers with healthy cash flows will use some leases for tax planning purposes in which all of the payment is an expense.
Aggressive payments of any type could be a problem in tight cash flow periods. Paying down lines of credit can be the exception as long as the lines can be drawn on in the future; again, this is principal reduction and not an operation expense. Thinking ahead here will save headaches in the future.
Pay down accounts
During an extended period of profitability, paying off the payable accounts is always good money management. Most suppliers generally charge 18 percent annual interest on outstanding accounts. Once those accounts are paid in full and the immediate equipment replacement needs have been satisfied, building some cash reserves should be in order. Even though having money sitting in a checking or money market account may seem like a waste, it comes in handy when the economics turnaround. A half a month's milk check is a good place to start.
Finally, talk with your accountant and lender about the importance of building liquidity on your balance sheet in the "good times." The definition here is the ratio of current assets, cash, feed and other assets that will be turned into cash in the next 12 months compared to current liabilities such as bills over 30 days or principal due in the next 12 months. Ideally there should be $2 of current assets to $1 of current liabilities. The message here for you and your lender is you should have the ability to pay your bills in the next 12 months.
The dairy industry needs good times to catch up and get ahead of capital needs. In this extended high milk price period, plan for some year-end obligation needs that generally have not occurred in other years. Enjoy the higher milk prices, and take time to think and stay ahead in preparation for when the winds change.
