Is It Time To Sell Out?
When your banker pulls down your driveway to take the keys to your farm, it’s too late. According to the October Rural Main Street Index from Creighton University, one in 10 bankers expect farm foreclosures to be the biggest challenge facing agriculture in 2018. While there are no definitive steps that automatically result in liquidation, there are three areas to watch that address systemic issues in your business before milking cows is no longer an option.
Cash Flow – Cash is usually where short-term problems are felt the most, says Matt Lange, a dairy consultant with Compeer Financial. “Every month you should know what your checkbook balance is, what you’ve got for availability on your operating loan, what you’ve got for payables, in addition to any big cash expenses in the future,” he says. “Usually a first sign of distress is ‘we don’t have enough cash for this fall.’” According to Bob Milligan, dairy business strategist and former professor at Cornell University, a cash crunch can be simply that, but it can also be a sign of a systemic issue. The latter is what would be cause for concern and would warrant further investigation.
Cost of Production – What is your cost of production? If you’re having a systemic cash flow problem, the first place you should look is cost of production, says Sam Miller, an ag lender with BMO Harris Bank. “If your cost of production is well above your peers’ that’s a sign that something is wrong,” he says. Lange advises producers know their cost of production, which costs can be reduced and which costs are fixed. He tells the story of one dairy he works with who is milking 700 cows. “In the second quarter, they are going to be No. 1 in our benchmark for production,” he explains. “Problem is, they are going to be almost dead last for profitability. We’re looking at a cost of production around $20 per cwt.” If you’re tight on cash and your milk check is healthy, figuring out how to reduce costs can help improve margins.
Depletion of Balance Sheet – Where was your balance sheet a few years ago, where is it today, and what will 2018 look like? Some herds have lost 5-10% equity over the last couple of years, according to Lange. “Maybe you were sitting at 55% owner equity and comfortable with where things were at, but now you could be at 45% and given the futures markets for next year that number could get even worse,” he says. “If we’re not able to even break even, we seriously need to have the discussion of how to begin to evaluate an exit strategy that may require a liquidation process.”
What is next? Following analysis, if some sort of liquidation is the only answer, keep in mind that selling all of your cows isn’t the only option. If milking 800 cows in a rented facility isn’t working maybe there are some things that could work. Maybe you quit milking cows, but become a heifer grower instead. Maybe you focus on cropping? Could you reduce your farmland acreage, and maybe raise heifers? If you own the facility you’re milking in, could you lease it out?
“It really all comes down to scenario planning,” Miller says. “Start with a visit to your tax professional to understand the tax implications of liquidation.”
Good business managers address the issue. Ignoring financial trouble doesn’t make it go away.
“I don’t see getting out of business as failure,” Lange says. “If you recognize that the business model you have today is not working and you’re doing something proactive to change that, that’s not failure, that’s being a good business manager. To me failure is seeing the writing on the wall and not doing anything about it.”