Alternatives for dealing with down cycle

Most dairy farm businesses are not cash flowing. Some may be if they priced first half milk production using futures or options contracts when the early 2009 prices were trading considerably higher than they are now.

No sense in kicking yourself if you didn’t do that, just deal with what is.

Protecting your equity and the long-term potential profitability of your business is critical as you refine your war plan for managing through this down cycle in the dairy business.

Monitoring total debt, debt per cow and scheduled debt payments per cow are factors we discussed last week.

Clearly, the market will recover when enough cows leave production and demand increases. When it does, there will again be profitable times in the dairy business.

Question

The question is, how long can you afford to wait for them? How much equity will you have left when they come?

For some dairies, this couldn’t have come at a worse time. While many were able to catch up and get ahead in late 2007 and early 2008, others were hit hard by last year’s wet spring and localized droughts in one or both years.

Poor crops and corresponding increases in feed purchases have left them terribly vulnerable to the current cash flow difficulties.

As farms look at their alternatives for dealing with this down cycle, a very real alternative for some will be selling the cows, maybe the heifers, maybe everything.

Key to this process is recognizing the need and starting it soon enough so you are making the decisions and controlling what and how much of the business to disperse.

Perhaps selling cows, feeding out the younger heifers with existing inventories and re-evaluating the markets when the heifers are ready to freshen is an option.

A slightly earlier-than-planned retirement from the dairy business, with time to pursue a second career may be a good option for others.

Bankruptcy

While no one wants to consider bankruptcy, it may be the only choice for some businesses. Chapter 12 bankruptcy is designed for farms that, with some breathing room created through the bankruptcy, can come out on the other side as a viable business.

This is an option that has to be explored early, while there is still a potentially viable business to save.

If heifers and other critical production assets have been sold, or debt levels are too high, chances are slim that this will be a viable alternative for the business.

Robert Moore, of Wright Law Associates, has written a good summary of what a Chapter 12 bankruptcy is, what the limits are and potential benefits compared to other types of bankruptcy proceedings.

Web site

This fact sheet is posted at http://dairy.osu.edu/.

Other tools for evaluating the dairy business, also posted at the Web site, include the Calculating Your Cost of Production Worksheets, the Farm Income Tax Summary Worksheet (a quick way to evaluate how much cash income after expenses the farm has been generating over the past 5 years) and the 15 Measures of Dairy Farm Competitiveness.

A final tool for the war chest is the FINPACK financial package from the Center for Farm Financial Management in Minnesota.

Ohio has 30 educators and FBPA instructors trained to assist farm businesses review historic performance and project future profitability of alternative business structures.

A personal version is also available for on-farm use at http://www.cffm.umn.edu/.

Contact your Extension office for more information about these tools or check OSU’s “Ohio’s Dairy Industry Online Resources Center” Web site at http://dairy.osu.edu/.

If you somehow become immune to dairy disease (the uncontrollable need to dairy farm) and sell the business (and get a life), Uncle Sam would also get his share of the sale proceeds.

Why talk about leaving the dairy business? Sometimes it is a very real alternative to consider if the equity that you have built through long years of hard work is in jeopardy.

Cold, hard look

Every dairy has to take a cold, hard look at their numbers and project how long they can continue to milk cows if prices stay where they are.

About the Author

(Dianne Shoemaker is an OSU Extension dairy specialist located at the extension center in Wooster, Ohio.) More Stories by Dianne Shoemaker

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