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.
As each month ticks by with Class III milk prices in the mid-teens, equity slips away from the balance sheets a little at a time. The other classes of milk closely parallel the Class III cheese benchmark regardless of where the milk ultimately ends up in the dairy processing pipeline. That means similar economics exist elsewhere.Unfortunately, all dairy farmers are feeling the pinch now. The efficiencies that come with larger herd numbers help to spread facility and operating costs. Midsize herds may put off replacing capital with higher maintenance expenses and family labor taking the place of some hired staff. Farms with fewer numbers of milk cows are just working harder. Those farms may have some off-farm income.
It costs so much per hundredweight of milk to properly care for cows. Low milk prices have slashed the income over operating costs with losses of $1 to $4 per hundredweight. Those fortunate to ship milk to a plant that pays a basis or premiums with a variety of incentives are weathering the lingering storm a bit better. Forward marketing also may have helped garner some extra margin . . . however, future prices may not be satisfactory to do so at this moment in time.
What can be done?
So where does a dairy farmer go from here? What are the choices?
1. The first thing to do is to take a hard look at the year-end balance sheet. Make sure all the assets have been correctly inventoried and priced to the current market values.
Value feed inventory at the going market price or at least at a consistent price compared to last year. Livestock values have dropped in most markets. Machinery, land, and buildings are still bringing a fair price at this time. Make sure all current liabilities such as payables over 30 days are accurately accounted for, along with other loan balances.
Now, what does the ownership equity position look like compared to the last two years?
2. Next, compare the income statement from the last three years. What has the net income or losses done to the balance sheet?
Generally, losses show up in higher payables or higher loan balances to soak up the fact the dairy was short on operating money. This probably ends up showing a lower net worth from last year. Positive incomes should result in improvements in ownership equity.
3. Now it is time to sit down and do a business plan for next year. What is going to be done differently to improve next year? The business of milking cows has now entered a new and strange business environment for reasons out of one’s control.
4. Now come the choices:
Begin by seeking advice, asking questions, and finding a trusted counselor to discuss your situation.
Next, have a heart-to-heart discussion with family members and key employees to make sure they understand the gravity of what is happening with the present cash flow. Extend these important discussions. Ask, “What can be done with expenses and other sources of income?”
If equity is shrinking with no next generation on the leadership horizon, and managing the current situation is not working, think about conserving the equity you have by selling off some or all the farm assets. Always talk with your accountant and lender before making this type of a major decision.
If you decide to forge ahead, enhance your knowledge base. Develop a better understanding of balance sheets and income statements. Seek advice from a lender, accountant, or consultant to benchmark your farm with others to find areas needing improvement.
Finally, educate yourself on government programs that are available. Look at the options milk marketing brokers offer. Remember, you are the only one who can make the final marketing decision.
No clear forecast
At this point in time, no one can tell when the milk price will change to produce a positive cash flow. Nationally, milk cow numbers are holding, domestic dairy consumption is already at a high level, and future growth in the U.S. marketplace depends on new product development. Exports are at the mercy of the U.S. dollar’s strength and also are impacted by each country’s ability to afford buying dairy. Plus, there’s worldwide competition from fellow dairy exporters.
Evaluate your situation, study the matter, seek advice, and determine the best pathway for your business. All decisions are tough decisions right now.