February 7, 2019

Northwest FCS News

The dairy industry is in the fourth year of margin and equity compression. This reduction in income, combined with structural changes occurring in the food industry, has accelerated the consolidation and loss of U.S. dairy farms. At a recent agriculture lenders conference, I was asked a difficult question: “Do you have any advice for an excellent producer who has a moderate business management IQ and operates a 550-cow dairy with $5,000 of debt per cow?”

In this producer’s case, one tool to monitor the business is the monthly cash flow projections compared to actual results. Keeping a close eye on the cash flow statement is essential for businesses of all sizes, but is particularly important for larger businesses with more zeros and commas on the financial statements. Losses can mount quickly in large companies if management is not responsive.

Second, I recommend forming an advisory team to serve as another set of eyes to monitor the operation. This advisory team could consist of a crop or livestock consultant, lender and/or nutritionist. The key is to meet quarterly and identify strengths and areas for improvement. Remember, in today's economic environment “base hits” or incremental improvements compared to “home runs” will be more sustainable moving forward.

The use of marketing plans for revenues and expenses will be imperative. The changes in the Farm Bill directed toward the dairy industry may provide some incremental boost to the bottom line. The key to the marketing plan is to plan, strategize and execute. You also must know your cost of production and monitor the results with your advisory team.

Examine your loans and existing debt structure to determine when loans will be paid off or reach maturity. Are there opportunities to restructure loans to reduce debt service requirements? Can you reduce your interest-rate risk by fixing interest rates?

Are there any ways to cut family living costs? Some spouses have found off-farm employment for health insurance and other fringe benefits.

Identify areas where the business management IQ is strong and areas that need improvement. Generally, keep your focus on two to three areas of the business. Focusing on more than three areas for improvement is often overwhelming.

Finally, set aside some time to do good, old-fashioned goal setting. Organize your goals by one- and five-year timeframes. Examine your business, family and personal goals during the goal-setting process. Having clear goals will help to guide the business through this difficult economic environment.