Fiscal cliff! Dairy cliff! If you were to manage your farm like the federal government does, I can guarantee you that your farm would definitely go down a very steep cliff. Because you cannot print money.
Over the years, our federal government has managed to accumulate nearly 16.5 trillion dollars of public debt. And this debt keeps increasing at a rate of over 3.5 billions per day, seven days a week.
To support this increasing debt, the Feds have to print money — lots of money. Unfortunately (or fortunately, depending on the point of view) you cannot print money and your lender expects you to pay back your loans.
You may experience negative cash flows for some time and even negative profitability, but as 2009 showed us, you cannot do this for very long. Successful dairy producers now have to be as capable with the management of their finances as with the management of their crops, animals and labor.
You have no choice because for you, printing money is not an option.
The last few months of 2012 were generally good to dairy producers. Relatively strong milk prices finally have canceled large increases in feed costs experienced during the summer.
Overall, 2012 was nothing stellar, but for most producers it was not a bad year. Mind you, those that were severely affected by the drought of last summer might be facing difficult times until the new crops are in.
All major capital expenditures should cash flow even in bad dairy economic times, should be profitable in average times, and should improve the farm productivity. But don’t look at our government for consistent models of wise investments. There is no free lunch.
Let me share an example of an ‘investment’ that sounds wonderful until someone pushes the “financial” pencil.
Recently, the Ohio Agricultural Research and Development Center received a $46,000 Clean Fuel Grant to pay for the conversion of three Ford Fusion sedans and a Ford F150 pickup truck into bifuel vehicles. These vehicles can now run on either gasoline or compressed natural gas. OARDC can thus utilize biogas-derived CNG produced by one of its industrial partner.
According to OARDC, “at a gasoline price of $4 a gallon, burning CNG in the vehicles could save OARDC about $1,000 per vehicle per year, based on their estimated use and on CNG costing the equivalent of $2.25 a gallon”.
This sounds so wonderful. But let’s examine the true economics of this investment. First, we make the very reasonable assumption that the vehicles will be driven for 15,000 miles per year for eight years (for a total of 120,000 miles). Even at a dismal interest rate of 2 percent per year, the $46,000 initial investment and the $4000/year in annual flow for eight years result in a net present value of -$16,371.
Put differently, this “investment” is earning an interest rate of -7.4 percent. Yep, you read this correctly: negative seven point four percent.
Now, from an OARDC standpoint, this ‘investment’ makes all kind of sense because the grant is essentially a gift; a free lunch. It is free for OARDC, but not for Joe Taxpayer, who was the unwilling loan originator. For you and me, our little share of the $46,000 grant is returning -7.4 percent per year.
Sen. Everett Dirkson is best remembered for the quip “A billion here, a billion there, pretty soon, you’re talking real money!” Maybe I should be remembered for saying “A thousand here, a thousand there, pretty soon, you’re talking real money — at least from the standpoint of a dairy producer!”
Invest wisely. Contrary to urban myths, there is no such a thing as a free lunch on a dairy farm. Average margins are tight and nobody gives you a free tractor or a spanking new milking parlor. You cannot afford negative returns — at least not for long.
As you plan major capital investments, make sure they will increase profitability and financial resilience during bad times. Contact your local OSU Extension office if you need assistance during planning. For you, it may be the closest thing to a free lunch.
(The author is an Extension dairy specialist at Ohio State University. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)