If it’s been on your mind to consider farm expansion during this tough financial time, there is one question dairy lenders say is essential to answer.
Do you have someone to buy your milk?
During the May 27, 2020, DairyLivestream entitled “The dairy farm finance pivot,” BMO Harris Bank’s Sam Miller had this warning. “If you’re going to try to grow your way out of some challenges, you better make sure you have a market for that milk,” the managing director of agricultural banking said.
“A few years ago, we were asking — Where do you ship your milk? — and that was really the end of the conversation,” Miller elaborated. “If somebody wants to expand right now, we’re having conversations about, can you actually sell that milk? Do you have a supply agreement? Those are critical conversations.”
Farm Credit East’s Roger Murray echoed those comments saying, “Any expansions we’ve seen, we have also required a letter from their market saying they are in favor of the expansion and would continue buying milk from the increased facility.”
Even before the onset of COVID-19, the dairy industry was well on its way to this paradigm shift. It’s one caused by changes in processing capacity and the variability of markets. It’s no longer enough to have the permitting and financials to expand; securing a market for the additional milk is paramount to any expansion decision.
As Cornell University’s Chris Wolf detailed while discussing the fluctuations of the cheese markets, “When we’re talking about milk supply and demand, we’re talking about really inelastic supply and demand. Small changes in quantity can lead to large changes in milk prices,” he said.
That’s not to say now is a bad time to invest. If a farm has the desire and capabilities to invest in the operation at this time, Murray encouraged putting that money toward key asset advancement.
“A lot of folks are investing in training for key employees,” the executive vice president explained. “You don’t always think about your employees being part of your assets, but they are some of your key ones. Then obviously, invest in things to help reduce costs per hundredweight or positioning for new markets.”
Miller also elaborated on non-expansion investment opportunities that he had recommended and discussed with clients. “Investments in efficiency have been ongoing whether it’s capturing parlor efficiencies, genomics and breeding, or in regard to cropping equipment. A lot of efficiencies have been employed in those places,” he said. “As labor has been tighter in the last few years, we’ve had people looking at automating and moving to robotics as an alternative. I think those plans have continued.”
The Wednesday, May 20 episode of DairyLivestream also featured Wolf discussing the impacts of the newly released Coronavirus Food Assistance Program. The whole program was sponsored by Diamond V and can be found here.
An ongoing series of events
The May 27 DairyLivestream will feature “Candid comments from the nation’s capital” with special guests Michael Dykes, CEO of the International Dairy Foods Association, and Jim Mulhern, CEO of the National Milk Producers Federation. This episode is sponsored by Boehringer Ingelheim.
As always, the panel of experts will discuss over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future broadcasts.