Five consecutive months of a declining Class III price. Price moves for the two months preceding the decline consisted of two, 2-cent increases after a dollar crash.
No doubt that the “tough times” we should always be planning for are here.
Decrease. The Class III price for the first 5 months of 2006 averaged $11.69, compared to $14.26 a year earlier. That $2.57, or 18 percent decrease, represents all the potential profit and some of the expenses on many dairy farms.
Factor in the Producer Price Differential, and we’re looking at a 15 percent decline in the Statistical Uniform Price for Federal Order 33 producers for the first five months of 2006.
Debt. A dairy farm may operate with no debt, and a few do. The majority of dairy farms, however, use some form of credit to finance their operations.
As a result of poor milk prices and increasing input costs, some farms will quickly find themselves owing more money than they can cash flow.
Farms with and farms without debt are susceptible to cash flow challenges. Watch for early warning signs.
Symptoms include balances on open accounts that are higher than normal, existing lines of credit that are maxed out, loan payments made late or missed, family living that may have been dramatically reduced and no cash in the checking account.
This situation is uncomfortable for the farm family and the creditors. How can both parties work through these situations? Important actions for both parties are to talk, evaluate, talk, plan and talk.
Talk it over. The best time to start talking to creditors is when you first see a problem developing.
Many commercial lenders’ customers understand that paying their notes first is a priority because they call the soonest if a payment is late.
However, supplier’s margins are tight just as dairy producer’s margins are. Suppliers are much less likely to carry open accounts for as long or for as much money as they did in the past.
Many have hired specialists to help keep their open accounts to smaller, more manageable levels.
Call or stop in and visit with the business that you will not be able to pay in full as scheduled. Explain the situation and discuss payment options.
Can you stay current from now on and pay off the existing balance over the next few months? Can you negotiate an interest rate less than the 18 to 30 percent frequently charged on open accounts?
Farm suppliers also have businesses to run and bills to pay. They will be much more willing to discuss options before a big balance develops which hurts their ability to do business as well as your farm’s.
Evaluate. When accounts have unpaid balances, you forgo opportunities to get cash or early payment discounts which costs your farm additional money.
At some point, you will need to discuss an operating line of credit with your lender. If your current line is maxed out, you may be able to refinance some or all of the debt over a longer term.
Extreme caution must be used before this strategy is followed. You must take a serious look at why the credit was maxed out.
Was the line of credit truly used for operating expenses (such as feed, seed, fertilizer, supplies, etc.) or was it used to buy cattle, equipment, machinery or other items that should have been financed over a longer period of time to begin with?
If longer-term assets were purchased with the line of credit, the lender may be able to refinance them over a longer term. If not, refinancing may be more difficult and costly.
Necessary. It is vital for the long-term survival of your dairy business that current debt (whether it was used for operating or longer term expenses) not be rolled over into longer-term debt without determining why it was necessary.
A successful farm cannot afford to do this more than once or twice during its business lifetime. Then, top priority must be carefully planning and monitoring profitability and cash flow in the future.
Plan. Planning is important from two perspectives.
First, thoughtfully and realistically develop a payment plan to pay off balances on open accounts while keeping current with new purchases.
No one is saying that this process will be easy. Planned purchases or projects may have to be delayed. The “extra” labor that just quit may temporarily not be replaced.
If a workable plan cannot be developed, then hard questions have to be asked about the long-term viability of the farm as it currently operates.
What were the factors that brought the farm to this situation? Each farm’s situation will be slightly different. Ask the hard questions such as:
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