Decades of financial advice will offer the same conclusion to the question, “How much cash does a dairy need to have on hand?” Traditionally, the answer is around three months of working capital to serve as an emergency fund.
Dairyman and veterinarian Bill Wavrin of Sunny Dene Ranch offered a bit of a different perspective during the Wednesday, November 4 Hoard’s Dairyman DairyLivestream.
“How much cash should I hold in reserve depends on how much uncertainty there is in the future,” he shared. “One of the most compelling reasons to manage that risk in the future is to hold less cash and keep that cash working.”
That’s the perspective the experienced Mabton, Wash., dairyman has utilized as he has engaged in risk management programs for 20 years.
“If I have taken all of the uncertainty out of the next 12 months and there’s margin being created in those next 12 months, why would I need to hold any cash?” he said.
On the other hand, dairies that aren’t participating in risk management or forward contracting of any kind likely need to have more cash on hand. Wavrin advised that the traditional number is about right. That being said, three months of cash on hand can’t always buoy unforeseen downturns like those experienced this spring.
Keeping it working
Wavrin’s participation in risk management and forward contracting allows him to do more than just sleep securely at night knowing he will make a profit.
“While we’re on the subject of cash, another reason to manage risk forward is that many of us access debt to grow our business,” he said. “Managing risk in the future gives you a better answer to the banker, has given us good access to capital, and good cost of capital.
“If you have repeatable earnings and a projection that can be trusted, I think the bank’s going to be on your side,” Wavrin advised. “If your history is being all over the board, then they have to withhold some cash in their system to protect variability of a producer to repay them.”
An ongoing series of events
DairyLivestream will air twice each month for the remainder of this year. The next broadcast “Can we sell all this milk?” will be on Wednesday, November 18. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.