With lower milk prices, many dairies are entering a negative cash-flow situation.
This is when you start hearing the term “burn rate.”
At the World Ag Expo last month in Tulare, Calif., one accounting firm suggested having a burn rate of $40 per cow per month for 18 months. In other words, a dairy can afford to dig into its equity that much in order to stay viable.
But Sean Haynes, vice president of agribusiness at Rabobank in Modesto, Calif., cautions against taking these types of thumb-rules too literally.
Each dairy will have a different burn rate based on how it operates, he says.
To establish a farm’s burn rate, Haynes says a bank will appraise the value of real estate, cattle and other assets to get a pool of lendable equity. Then, the bank will subtract from that anything owed, such as cattle and feed payables. With the net equity established, the bank will see how far that equity will stretch over a worse-case scenario, such as a $10 milk price and high feed cost. The scenario is set up to see how much the farm can afford to lose on a monthly basis. The amount of loss divided by available equity provides an idea of how well the farm can survive in a downturn.
It is also known as the burn rate.
“If you have 12 months behind you (to withstand the worse-case scenario), you are pretty safe,” Haynes says. “You might get a loan done with less; you definitely will get a loan with more,” it just depends on the particular situation, he adds.
“You have to have good numbers — a CPA financial statement so you can see what that cost of production actually is,” Haynes says.