Positioning your dairy financially for 2012
Posted on October 21, 2011 in Dairy Performance
By Gary Sipiorski The weather’s getting chilly, which means winter and the New Year are coming up fast. It also means it’s time to once again time to take a hard look at your dairy business and position yourself financially for 2012. Here are my top 10 things to look at as you plan: 1. Year-end balance sheet Add up the value of your assets (what you own – cash, feed, cattle, etc., but not household item). Add up the value of your liabilities (bills over 30 days – cattle, machinery, lines of credit, credit cards, real estate loans, etc.). You want to see a 2:1 ratio of your current assets (cash, feed, steers and other assets that will be turned into cash in the next 12 months) and current liabilities (bills over 30 days, interest and principal due in the next 12 months). Know your equity position; 40 percent equity keeps your lender comfortable. You definitely don’t want to drop below 30 percent. 2. Calculate your average income and expenses for the past four years We all know what happened in 2009, so it’s not reasonable to use that as a benchmark as virtually everyone had a bad year. Averaging the last four years will give you a better picture on whether you’ve achieved adequate profitability. Your lender will also feel better if you know that number. 3. Project your 2012 cash flow…with logic Use a reasonable milk price and reasonable expenses to project your 2012 cash flow. Based on the futures, I’d say $16.00 for milk makes sense plus your bases. Know your five biggest expenses. Take some time to really think about why they are what they are and if you can change that at all in the coming year. 4. Maintain a good lender relationship Don’t move to another lender over a 0.25-percent difference in interest rates. A good, long-term relationship with your lender will help when times are tough. It’s about the people, not the pennies. 5. Put your business plan on paper Your business plan should be all-encompassing, including personnel changes, land purchases, cash flow, updates and expansions. Think through the “why’s” and “how’s” of the decisions you’ll make. Good planners spend 20 to 70 hours thinking through the business plan. Guaranteed, the plan will be different at year-end from when you started, but at least you have a good idea of the direction your headed. 6. Take advantage of low interest rates if it makes sense Interest rates will probably stay low for the next two years. It’s the borrower’s advantage. Now is a great time to borrow money if you’re in a place to do it. Just keep in mind, for every $1 you borrow, you should see a $0.75-return every year from here on out. Interest rates also bring up the topic of land purchases. If land close to your dairy becomes available, what will be the savings in bringing forages closer? Not having to transport manure away? Generally, you’re in a good position to borrow if the total interest and principle on all loans does not exceed 15 percent of your gross income. 7. Volatility, uncertainty, opportunity In this time and in these markets, we have all three. On the macro scale, we see struggling economies in Europe and Asia and cheap money in the U.S. We also have an ever-increasing number of mouths to feed, which should allow for continued exports. 8. Be a coach and a good communicator Instill a culture on your dairy that helps employees make good decisions and work together as a team. Give your employees ownership in what they do by teaching the why behind the how. We find stability in long-term employees. 9. It’s not too early to think about transition Everybody has a birthday. By age 55, it’s imperative to start planning for the transition. Think about the money you have in assets. Seek sound advice from a financial consultant, an accountant and an attorney who is well versed in dairy structure and income tax ramifications. 10. Consider milk marketing It’s not about the highs. It’s not about the lows. It’s about the margins. Give some serious thought to how you can protect your margins when you have the opportunity. First, decide what margin you need to feel satisfied. Then think about strategies you can use to lock in milk and significant input prices to protect that margin. About the author: Gary Sipiorski is the Vita Plus dairy development manager. He grew up on his family’s dairy farm in eastern Wisconsin and attended the University of Wisconsin-River Falls. Sipiorski spent 17 years with Citizens State Bank of Loyal and worked his way up to president and CEO. In 2008, he transitioned to his current role at Vita Plus and continues to serve on the CSB board of directors. In addition, he served on the advisory committee on agriculture and industry for the Federal Reserve Bank of Chicago. He is also an advisor for the Professional Dairy Producers of Wisconsin and a regular contributor to Hoard’s Dairyman and other agricultural publications.
Business and economics