Many farms must deal with the challenges of cash-flow constraints imposed by low-milk prices, increases in the cost of production and a lack of interest in the business from their children.
Even though innovations and management practices have improved milk production per cow on many dairies, the amount of milk sold may not significantly improve profit margins. In fact, operating expenses, such as insurance, taxes, labor, fuel, replacement heifers, and farm equipment, have increased while today's milk prices mirror 1978. Keeping up and maintaining depreciation costs can be a daunting task. And sometimes, it results in a farm consuming its assets and being unable to replace them.
To remedy the situation, many dairy producers milk more cows. However, this strategy may not be achievable nor desirable for some producers. Therefore, some of you need to develop an exit strategy, whether it is needed today or several years from now. Certainly, before you exit the business, you need to consult with financial advisers to avoid any unforeseen financial liabilities.
Producers should meet with their accountants to discuss the value of the farm, along with future uses of the land, debt service and capital gains taxes. Once an operation ceases, it becomes critical to repay the debt obligations that were pledged against the farm's assets.
Decisions will have to be made on which assets to sell. Will the farm sell just cattle and equipment, or will real estate be involved? Will there be sufficient cash reserves available to sustain the owner after resolving all of the tax and debt obligations?
And, be sure that your assets are valued accurately.
- If you're planning to sell real estate for uses other than farming, you many need to pay special attention to lagoons and other manure disposal areas. Many banks require an environmental impact study on exiting dairy farms when the property is considered for urban development. It could take thousands of dollars to clean out and dismantle a lagoon system prior to a real estate transaction.
- If you have leased farm equipment, look carefully at the contracts to see if penalties apply when terminating the contract prematurely.
- Gauge the value of your farm equipment. The agricultural community is currently inundated with used farm machinery, which may discount the value of your tractors and other farm equipment. With a reduction in farm numbers, used milking equipment on small farms may not be of much value to expanding herds.
- Specialized farm buildings may not be worth much more than salvage value. Milking barns, free stalls and silos have little or no value in the eyes of a developer.
Lease or rent?
A dispersal may not be the only option available to a producer who wishes to exit the dairy industry. Due to the high capital cost of starting a dairy farm, it is nearly impossible for young dairy producers to enter the industry. Existing dairy producers can finance cattle and equipment for a prospective tenant and then lease them the facilities and land.
However, leasing presents considerable risks. You must be acutely aware of the capabilities and business skills of the proposed tenant. Decisions regarding who's responsible for property taxes, insurance and repairs must be determined in advance and must weigh in the decision. And, long-term leases may preclude you from selling the asset.
Many farms today do not get a decent return on assets, but they remain in business due to little or no debt. Continued declines in the margins due to inflation will erode their asset value, unless escalating land values occur due to urbanization.
It is inevitable that people cannot sustain their business forever. While planning is critical when expanding your business, exiting the business takes just as much planning.
Paul Johnson is a veterinarian and consultant in Enterprise, Ala.