As cash flow becomes tight, dairy producers look for other ways to keep the payable boat afloat. The regular standby answers are always out there.
“Now is the time to use the equity on the balance sheet that has been built up in better years.”
“Talk to the lender about getting a line of credit or increasing the line.”
“How about paying interest only for a while?”
“This time around there may be assets that could be parted with.”
Here are some other ideas. How about some larger pieces of machinery that could be sold and a custom operator can do some of the planting, harvesting, or manure work? Yes, admittedly it is a buyers’ market, but this topic still must be discussed by farm teams.
Maybe there is some rough land a sportsman would like to buy? Are there parcels that can be turned into development for business or residential? Assets of any type are difficult to part with but may be necessary if all of the above asset disbursement ideas have been used in the past.
Improving the milk production generally enters discussions on topics like this as well. And some will say “oh yes, we already have too much milk.” However, it is the future of your farm that is at stake.
Making sure the somatic cell count is low and keeping the components up adds to the bimonthly pay price. Some of this can be encouraged from cows through cow comfort or breeding, which is a long-term proposition although some of the solids can come sooner from nutrition changes.
Look at loans
There is another answer that gets used reluctantly by farmers and lenders. It is stretching out the amortization on the loans that already exist. Here is the rub . . . if a farmer is 50 and a real estate loan has five years left before it is paid off, many hate to see the payoff years extended. If there is a red cash flow flood, the objective needs to be to stop the bleeding. Here is an example of what to consider:
Let’s say 15 years ago:
- You borrowed $200,000 at 6 percent interest
- Monthly payments of $1,433
- Today, with 180 payments made or 15 years later, there is a remaining principal balance of $75,172
- Now you borrow an additional $50,000 for outstanding payables (add the current balance of $75,172 + $50,000 new money) for a new loan total of $125,172 at 6 percent interest
- The payments of a new principal balance of $125,172 on a new 20-year loan is $897
There are a few things to consider. First of all, in this example there will be $50,000 available to pay off bills and the required monthly payment now loosens up $536 of additional dollars for other needs.
Yes, if nothing changes, it will take 20 years to pay off this loan. However, if there is no prepayment penalty in a better year, additional payments can be made to shorten the years to the payoff. Also remember a lender may do this once. There may be other loans as well that a lender may do this to. There are limits, however. One cannot come back next year and do it again.
It’s a tough decision
The comment always comes up, and should come up, “Do you know how old I will be in 20 years before this new loan will be paid off? And here I thought I was going to have this loan all paid off by the time I was 55!”
The dairy producer has to want to do this and the lender has to agree to do this. With many lenders, the original recorded mortgage at the county court house of $200,000 can still be used without additional fees as the new loan amount of $125,172 will be less than the original $200,000. This, of course, will be a lender decision.
This is just an example. It can be a lifeline to help out in times of a tight cash flow. Use your situation to see if it makes sense to stretch out the amortization.