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How Do You Stress Test Cash Flow?

The rollercoaster of milk prices is something we have seen before. The up-and-down cycle isn’t new. Although according to Dr. Kevin Bernhardt, a professor of agribusiness at UW-Platteville and UW-Extension Farm Management Specialist, producers tend to fool themselves after coming off a profitable year, that they have finally figured it all out.

“2022 was probably a peak year for the dairy industry,” Bernhardt, who spoke on a PDPW Dairy Signal webinar about 2022 expenses vs. 2023 projection, says. “We’re probably going to be coming off that starting here in 2023 and that cycle for dairy is variable.”

The forecast is lower milk prices over the next 18-24 months before it circles upward again. However, Bernhardt says that good management not only helps producers survive the dark moments, but if positioned well, producers can take advantage of opportunities that are on the horizon, too.

In order for producers to take advantage of opportunities, they must:

  • Have a good handle of their finances, including managing how they utilize their debt load.

  • Can squeeze a profitable margin.

“Where can we squeeze a cost without having an impact on productivity,” Bernhardt asks. “Where can we gain those extra revenues?”

The rollercoaster for the dairy industry peaked in 2014, then fell during 2015 to 2018 before a peak was seen again. Bernhardt says it vital to understand what followed each peak.

“It doesn't take very long to see that there was a pretty severe dive that followed each one of these peaks, sometimes more than others, but a fairly severe dive,” he says.

Risk Management

Determining a profit is essential, but Bernhardt shares that every producer is in a different situation depending on their debt load and what their cost of production is. He says producers must know what margin is needed to cover all those costs.

“I think that [risk management] marketing this next year is going to be much more important because those opportunities come in split seconds,” he says. “One recommendation I would throw out to folks is to be ready to market.”

And before producers can be ready to market their milk, they first must know what their cost of production is and know what their profit goal is.

Sensitivity Analysis

Bernhardt recommends producers do a sensitivity analysis and ask, ‘How quickly can your good fortunate change?’

“Put your projection together now and change the price,” he says. “What if the costs end up going up or down? That sensitivity will help you get a better judgement and can help you with your risk management activities.”

Areas that need to have a sensitivity test performed include:

  • Interest rates

  • Milk Price

  • Feed costs

“Marketing takes time, but the opportunity comes on instantaneously,” Bernhardt says. “Producers must be ready.”

March 10, 2023



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