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October 8, 2018

60¢/cwt Makes A Big Difference in Cash Flows

 |  By: Jim Dickrell

You wouldn’t think a 60¢/cwt makes much of a difference in cash flow or profitability. After all, 60¢ represents just three or four percent of the milk price for many dairy producers.

 

But it can be a big deal in today’s dairy economic environment, says Gary Sipiorski, a former nutritionist and banker, and now Dairy Development Manager for Vita Plus, Inc.

 

Sipiorski is based in Wisconsin, but works with farmers across the Midwest to analyze cash flows, balance sheets, profitability and long-term farm financial sustainability. When you multiply 60¢/cwt times 24,000 lb of milk per cow, it equates to $144/cow/year difference in net income. Multiple that time 100 cows, and it equates to $14,400 more income. For 1,000 cows, it’s a $144,000 difference.

 

The 60¢/cwt difference comes from herds in Indiana, Michigan and Ohio who have their financial records analyzed by the Nietzke & Faupel, a CPA firm based in Pigeon, Mich.

 

In 2017, the average net return for all Nietzke & Faupel dairy farms averaged $1.18/cwt. There was no difference between herds with less than 1,500 cows or herds with more than 1,500 herds. But when they pulled out the top 1/3 of herds, the best had 60¢/cwt more in net return than the average of all herds (regardless of herd size).

 

“The difference,” says Sipiorski, “was a nickel here, a dime there, in expense category costs. But it all added up to 60¢/cwt more in net return.”

 

This year, the differences are even more striking. In the second quarter of 2018, for example, the average of the Nietzke & Faupel herds was a loss of 70¢/cwt. Herds with less than 1,500 cows lost 98¢/cwt and herds with more than 1,500 cows lost 68¢/cwt. But again, the top one-third of herds still had a profit—of 94¢/cwt.

 

Ninety-four cents per hundredweight is a big deal, but the difference between the top one third of herds and even the average was greater than that because the average herds lost 70¢/cwt, says Sipiorski. “But even if you only take 94¢/cwt of profit, that’s $22,560 in more income for a 100-cow herd, and more than a quarter million dollars for the 1,000-cow herd,” he says.

 

“The question is: Are you doing all those 100 little things right that get you to that level of profitability?” he says. Are you driving pounds of butterfat and protein because that’s what most farms are now paid on? Is your somatic cell count below 100,000 cells/mL? Are you watching your replacement heifer numbers because of the high cost of raising them?

 

Dig Into Your Numbers

 

As harvest and tillage operations wrap up this fall, Sipiorski is urging dairy producers to really dig into their balance sheets to analyze their operations. It might be painful, but it’s better to know what’s going on than being surprised in February or March when you might need operating loans. Here are a few areas to consider:

 

• 2:1 liquidity ratio. Current assets, such as cash and feed should be twice as large as current liabilities, those bills due in the next 12 months. “If the ratio is less than 1:1, you may not have enough to pay bills in the coming months,” Sipiorski says.

 

• No more than 20% of gross income for loan principal repayment, interest and lease payment. If you exceed this percentage, too much of your income is going toward debt payments. Consider re-structuring loans.

 

• Total expense rate should not exceed 85% of gross income. “A lot of farms have a total expense rate at 110%,” he says, which creates huge cash flow problems.

 

• Debt per cow. A comfortable level for most herds is $5,000 per cow, and some farms make it work at $7,000 per cow, Sipiorski says. “$10,000 per cow is really pushing it,” he says.

 

• Ownership equity. A good level of equity to debt is 50%. “Thirty percent is a minimum. If you get below 30%, you might have a tough time when it comes to renewing loans,” Sipiorski says.

 

• Year-end balance sheet. On December 31, update your balance sheet to accurately reflect herd and on-farm feed inventory. Be as accurate as you can be to get a full accounting of your financial position. “Don’t forget credit card debt,” he says.

 

• Pull it all together. Once you’ve updated your balance sheet, do a projected cash flow for next year and then visit with your lender in January. “You need three years of balance sheet history and the cash flow projection for 2019,” he says.

 

Even if the cash flow is negative, you’re more likely to get renewed if you tell your lender what your expected needs are next year. Waiting until February or March and surprising your lender is not a good idea.

 

Finally, Sipiorski also notes it’s likely the Federal Reserve will increase interest rates again in December and maybe twice more in 2019. Some economists on the Federal Reserve Board feel that the Fed rate needs to go to 3% to prevent the U.S. economy from over-heating, he says. “Now is a good time to lock in variable loan rates if you can,” Sipiorski says.

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