Take a quick glance at year-over-year financials and it's easy to notice the shift of the tides. A different story is unfolding in 2023 with a decline in milk prices, while expenses continue to remain elevated. As lenders review balance sheets, independent dairy financial consultant Gary Sipiorski recommends the following advice to best help position yourself for a good start for the first half of the year.
Working capital. What the balance sheets are showing thus far is aggressive prepaid expenses in feed purchases and cropping expenses. Feed and grain inventories are up as well. Profitability in 2022 was anywhere from $3 per cwt. to $6 per cwt. More information in this area will be forthcoming as accrual-adjusted cash income statements are finished. This year’s profitability helped in paying down loans and building working capital. Working capital is and will be very important as we currently anticipate a declining milk price curve.
Conservative land values. One thing to be aware of with land value having a strong upward movement is to still keep the land value at a conservative value. Simply bumping the land value because farms in the county have sold at a high price is simply land ‘appreciation’. This does not reflect true profitability, which, if done, ends up on the balance sheet looking like an increase in net worth.
Cash flow projection. With the current future milk markets, it is very important that every dairy producer complete a cash flow projection. This is addressing cash coming into the checkbook and “only cash” expenses leaving the checkbook. This also includes interest, principal, and general operating expenses. Any capital additions should also be noted in the month they will occur. Any anticipated family living withdraws should be added. It does not include depreciation. Even though milk income arrives twice a month, a monthly cash flow should be done to reflect months when expenses exceed income.
Lender meeting. A lender meeting should be set early in the year, sharing yearend balance sheets for 2021 and 2022, accrual adjusted cash income statements, monthly projected cash flows and a business plan. A line of credit or possibly an increase in the line of credit may be in order to cover the coming months of anemic milk income.
Where do you see yourself going this year?
Starting the year off with strong farm financials, dairies are planning what’s next for their operation and looking at what their future landscape includes. After coming off record all-milk prices this year could be relatively challenging for producers, many dairies are also asking how they can keep their dairy in a good financial position.
Curtis Gerrits, a senior dairy lending specialist with Compeer Financial, underscores the importance of understanding financial numbers in terms of production costs and spending, but says it is critical to diving deeper to get a more accurate financial analysis.
“With the volatility of the dairy industry always on the forefront of the minds of our dairy producers, having a thorough understanding of your dairy business in relationship to industry best practices and profitability metrics remains ever so important,” he says.
Gerrits notes that not only does the commodity arena in the dairy industry fluctuate on an ongoing basis, but the production thresholds and business regimens of dairy businesses are regularly enhanced.
“For dairy business owners having a thoughtful awareness on dairy industry trends, production benchmarks, and business ratios remain ever so vital,” he says.
7 Key Points
According to Gerrits, seven key points that illustrate the importance of the utilization of benchmarking and industry ratios to best position dairy operations for future success are:
Comparing your dairy’s production (milk and crops) to industry benchmarks allows for ongoing comparisons of per-unit efficiencies (per cow and/or per acre).
Understand the makeup of the benchmark you are reviewing to assure the metrics being evaluated are the same or similar to those of your dairy business.
Benchmarking your dairy against dairies similar in size, location, and business practices can allow for insight on areas of opportunity and improved profitability for your operation.
Regularly evaluating industry ratios compared to your dairy may provide key indications on the success and sustainability of your operation. You may ask yourself “Where is my dairy operation headed compared to my peers?”
Being aware of industry benchmarks and ratios can provide targets and goals for your operation when preparing business plans surrounding profitability.
Routinely evaluate dairy industry benchmarks and ratios to your operation for an ongoing understanding of where your operation compares in the dairy arena.
Work with your professional team for a well-rounded understanding of data sets and calculations when comparing your dairy’s information to that of your industry peers.
With thin margins in today’s dairy economy, there is little room for error. And, with skyrocketing costs from labor to feed, knowing your numbers is a key factor in planning for the future.
March 15, 2023
dairyherd.com
