What are you doing with higher milk prices?
July 8, 2022
Dairy producers are seeing record milk prices due to strong worldwide dairy consumption and milk production not quite able to keep up with that demand. Inflation and many world events are painting an interesting economic landscape. History has shown that prices can change quickly in either direction for a variety of reasons, so enjoy the income while it lasts.
If income exceeds expenses, it is important to stop and think about what you are going to do with the surplus cash. A plan is critical in times of higher incomes. There are more mistakes made when the milk price is high than when it is low.
Get a handle on expenses
With most farm expenses on the rise in this inflationary time, one of the first things to consider is how much higher the farm expenses are compared to last year. An example would be to take the first six months of this year and compare the operating expenses to last year. Remember, operating expenses are all of the farm costs excluding principal payments, interest, lease payments, and depreciation.
Using a 1,000-cow example, imagine you add up the operating expenses for the first six months of last year to total $2,300,000 while this year’s first six months adds up to $2,650,000. The difference of $350,000 divided by last year’s $2,300,000 equals a 15% jump in operating expenses.
One can do the same calculation with any herd size to determine the escalation in expenses. It is important to know this because that change is eating into the income. It is also important to know this as one plans for next year. Generally, during inflationary periods of the past, when most items increase, they do not go down.
The next step is to address any current outstanding bills. Traditionally, in most cases, it is standard business for a supplier to allow a farmer to have some time to pay bills. Now is the time to clean up unpaid bills.
Many suppliers offer cash discounts for automatic clearing house (ACH) payments. This is an arrangement with the supplier for the bill to automatically be drawn from the farm checking account when the service is made or delivered. This is common for feed companies and is being encouraged by other service providers. These discounts add up for the farm as well.
Do not forget the credit cards that farms use, either. If there are balances not paid in full when the statements arrive, these should now get cleaned up.
A look at loans
When there is extra money sitting in checking accounts, farmers have asked if outstanding loans should be paid down. Lines of credit (LOC) would be the first to consider. In some cases, LOC have to be zeroed out by year-end. These are generally lines used for cropping and feed purchases. There are other LOC, which only require a monthly payment and can be ongoing. With extra money, it would be good business to pay down these lines with the understanding from the lender that they can continue to be available.
Give existing loans for cattle and machinery a lot of thought before money is paid on them. There may be locked-in interest rates that will go away when the loans are paid off. This is certainly true for real estate loans, which generally are longer term and have the best interest rates. If the money paid needs to be borrowed back in the future, the loan will have to be rewritten, most likely with a higher interest rate. Before any existing loans are paid off, make an appointment with the lender to discuss other farm plans.
Everyone knows dairy farms require a great deal of capital to keep operating. If the farm is to remain profitable, investments need to be made. When margins are good, parlor and housing improvements can be made. Labor-improving facilities such as robotic additions can be considered. Precision planting and harvesting with newer machinery adds to efficiencies and yields. Of course, land is generally on the radar.
When there is additional money flowing on the dairy, it is important to sit down and have a plan. Talking over ideas with family, key employees, and other trusted advisers can help gel together a plan that makes sense.
Have discussions with marketing advisers to capture milk prices through the many risk management programs that are available. Consider input costs for the coming months and year to try to keep margins positive. Remember, the owner must ask enough questions to understand the possible outcomes. It is always the owner’s responsibility to make the final decisions.