DairyBusiness

“No matter how bad things are at times, Americans believe all difficulties can be overcome. As a result, pessimists and predictors of gloom and doom eventually are ridiculed as alarmists, cranks, frauds and fools… Americans love a winner in every area of life, big or small.”

By John Ellsworth

Wow! The world as we know it has certainly changed since the economic meltdown in October 2008! Not only are producers receiving less of the retail milk dollar as a percentage of store sales compared with a year ago, they are now supposed to cash flow when they are getting less than $10/cwt for their milk…

Not long ago

This truly is a different world. It was not that long ago when it was sufficient to remain at Loan-to-Value (LTV) levels of 65% or less on your herd loan, 100% or less on your feed line and no higher than 65-70% on your real estate LTV. Apparently, that has changed, too.

Please allow me to provide you with two examples. A client of mine achieved a net income of more than $400,000 in 2008. Not bad for a year with very high feed prices. We were refinancing their real estate loan. After that, their LTV’s would be 14% on their dairy herd, 80% on their feed, and 70% on their real estate.

Their lender did complete the loan process, but it took five months… The first two months were for the real estate appraisal, which is understandable, but three months to document this deal? As I said earlier, it is clearly a different world, with no clear explanation from the lender for this delay.

Cash flow issues

My second example is from a client who was having some cash flow issues in 2009. Imagine that?

We presented a proposal to their lender that would put them at 65% LTV on their herd loan and 75% LTV on their feed line (48% when their new corn silage is all harvested by October). It would also allow them to cash flow at $12.96 per cwt. With the amount of pool quota that they own, they will be close to that level by Sept. 15.

Is this proposal a solid risk? Yes, I believe it is, but it is still pending approval after seven months. As I stated, this is clearly a different world.

Contrast that with a third client who has been approved for a herd expansion, an increase in his feed line, and a new real estate loan, all in about two months. He, like the other two clients, had a well thought out plan that would guide them to continued positive results. What has changed? Perhaps our expectations, or at least those of the bank? Is it at all reasonable to expect to cash flow when you are getting $9.50/cwt? Probably not. Should they have fixed milk prices? Perhaps, but at the same time, they did not get trapped with any high fixed price feed contracts for 2009.

What is the solution?

Perhaps a slight degree of optimism would help. While things have looked bleak these past nine months, I don’t think consumers will stop buying dairy products. As a producer, I suggest you keep doing those things that still make economic sense. Produce an excellent product for your market, and take advantage of any quality bonuses available to you.

Maintain your financial information for future use, especially keeping your CPA prepared financial statements up to date. These provide you with so many more options for future financing. Is it reasonable to expect to cash flow in 2009? Not yet. However, you should be determining what changes you need to make to cash flow in 2010, whether you receive $12/cwt or $18/cwt. Plan for a more positive future.

My advice for the lenders would include one thought. Many of these producers have been successfully running their businesses for more than 50 years. They have been facing various challenges when their loan officers and I were still in high school. They have done this before, and I am confident that they will, once again, find a way. Yes, I know that 2009 has been less than favorable. However, as Dan Sullivan, president and founder of “The Strategic Coach” said, “No matter how bad things are at times, Americans believe all difficulties can be overcome. As a result, pessimists and predictors of gloom and doom eventually are ridiculed as alarmists, cranks, frauds and fools… Americans love a winner in every area of life, big or small. The country’s incessant entrepreneurism creates countless new arenas for striving, competing, and winning. If you create new value, you are seen as a winner.”

Time will tell how this financial picture develops as we complete this year, but my money will be on the dairyman overcoming the present challenges and succeeding. Be sure to review where your operation is at present. As you go through this process, be open to new ideas and making changes in the way you run your business. To conclude, I thought you might find the following quote fitting.

FYI

■ John Ellsworth of Modesto, Calif., is a consultant with the financial and strategic consulting firm Success Strategies. He can be reached at 209-988-8960, or by e-mail: je4success@msn.com.