May 10, 2016

Power Through to the Next Dairy Boom

 |  By: Curt Covington

A s 2014 gets smaller and smaller in the rearview mirror, the year of great prosperity in dairy is becoming a distant memory. Dairy producers are now facing more difficult times. The global interconnectivity of agriculture means the dairy business is more volatile, with higher highs and lower lows. Nimble operators will recognize financial management of their business must reflect this new reality. Now that leaner times in the dairy sector are upon us, tougher decisions could be on the horizon. What does this really mean?

Watch how much you borrow. Inter- est rates are still relatively low, but that does not mean money is on sale. Money borrowed during good times is what has to be paid back during lean times. Successful and balanced operators will temper their expansion plans with affordable levels of debt. In the end, highly lever- aged businesses are much more vulnerable during a downturn.

Evaluate every asset you have. The prosperity of 2014 encouraged many dairy operators to use their cash to buy stuff—lots of stuff. A sound producer should ask whether yesterday’s purchases still make sense in his or her operation today. Take a cold, hard look at everything you acquired during the boom and evaluate its importance to the business now. I realize this is easier said than done, but freeing up cash by selling unnecessary assets to create liquidity is the first line of defense against the commodity price volatility we’re seeing now.

Trim lifestyle expenditures. Bankers hate to get involved in a discussion with their customers about how much they are spending for family living; but it is, and always has been, the elephant in the room. During great times, producers want to enjoy the fruits of their labor just like everyone else. This is completely understandable. As long as there is plenty of money, who is to say you should not buy a condo in Vail, invest in collector cars or take a long-postponed trip to some exotic location? But, during lean times, these expenditures don’t make sense and should be reassessed. No one likes to scale back their lifestyle, but prudent operators are already doing so. This is tough, but necessary, to do. And now is the time to start having those difficult conversations with your family.

Volatility in the dairy business is not new. The speed at which it occurs is. Managing your finances to ensure a level of survivability by making tough decisions now is the way you will power through to the next great dairy boom.