By Greg Steele, vice president - AgStar Dairy Team
Lenders are well aware the past year has been a struggle for many dairy farmers with those lofty prices of 2014 having faded to nothing more than a memory. A large share of dairy farms lost money in 2016 largely due to the low prices early in the year, despite good crop production and reasonable feed prices.
The last thing Midwest dairy farms needed was a notice from their processor informing them to find a new buyer for their milk. Unfortunately, the unthinkable happened.
Wisconsin processors are making the very difficult decision to reduce milk intake from farmers. This is changing the environment for both farmers and their lenders. It is unprecedented in the Midwest for a processor to reduce its milk supply from producers without an alternative milk buyer willing to take that milk.
This is a powerful reminder that the market for your milk, in many cases, is not guaranteed. During the past several years there has been a trend toward end-user agreements or contracts that can cover your milk. Although not available to all farmers, the ability to have a mutli-year agreement that contains product specifications protects farmers from volatility and uncertainty. This risk management tool becomes even more important when planning an expansion.
The days of expecting that you will always have a buyer for your milk are likely over. Many lenders will likely require farmers to have a secure market for their additional milk.
Although losing your processor is serious and may be uncomfortable, it’s important to notify your lender as soon as possible. Lenders have a network of resources to tap into that could be useful when evaluating your options.
Another thing to keep in mind: Do you have milk marketed through your processor or on the CME? If so, you will want to contact your marketing adviser and attorney to see what alternatives are available.
The best defense is a good offense. In business, there will always be unexpected circumstances over which you have little to no control. Preparing for any eventualities now will help you should something come up in the future.
Prepare a budget annually that provides a cash flow, profit and loss statement and a balance sheet. These foundational source documents are used for financial analysis and reporting. It is particularly important to include capital purchase or expansion plans in your budget. Additional accuracy and value can be provided if cow flows, feed rations and crop plans are included. These data elements tie production information to financials, allowing a deeper dive into the economics of your business.
Two other big benefits of a robust budget process are periodic monitoring of actual performance to budget and establishing a sound base on which to make marketing decisions. This is a key practice in the area of continuous improvement and being prepared for uncertainty. Information like this is just as important to your lender as it is to you.
Membership in industry trade organizations can and should play an important role to assist in times of uncertainty. The Dairy Business Association, Dairy Business Milk Marketing Cooperative, Professional Dairy Producers of Wisconsin, and Minnesota Milk Producers Association are just a few of the regional associations that can help in times of crisis.
Having a strong policy advocate for your business in times of challenge can also pay big dividends. There will always be unforeseen events that could shock markets and affect the supply and demand of dairy markets. Having the tools, relationships and processes in place to manage unforeseen risk will provide peace of mind that you are prepared for what’s next.
Greg Steele is a Vice President of the AgStar Dairy Team. His focus is working with commercial dairy farms that have grown and expanded their business. His responsibilities include providing expertise in finance, business planning and accounting. AgStar Financial Services is a cooperative, owned by our client-stockholders, that provides a broad range of financial services and business tools for agricultural and rural clients in Minnesota and northwestern Wisconsin.