These are trying times for agriculture, especially the dairy industry. To compound matters, banking relationships are probably more strained than they have ever been. Banks are responding by making changes.
Many lending institutions are revising policy, and asking dairy producers to incorporate more working capital into their operations. In addition, financial industry partners are making changes — and many of those changes have dairy producers concerned.
Looking for profitability
Cash flow is king. Everyone is looking for profitability. The dairy industry is no different than other industries in that regard. Even in tough economic times, some operations will continue to expand and increase their level of efficiency.
While cow numbers remain somewhat constant, the number of dairies is declining. The newer, more efficient operations or the more established operations with minimal debt are becoming the survivors.
The unfortunate reality is that some dairy farm businesses will not survive. Some of them may have been on a retirement timetable anyway, and the current economic situation will simply cause them to step up that timetable a bit. Others will face a financial squeeze that will force them to exit the business before they are ready to do so. What compounds the difficulty of this life-changing decision is that many of these operations have been in the business for generations.
Part of the decision to exit the business must include gauging the right time to exit. Hopefully, decisions will be made in time to preserve equity. Bankers and accountants who work with dairy producers have a duty to provide producers with the kind of information that will help them gauge the economic impact of exiting the business.
Use your team
As I have said numerous times over the years, it is critical to have full family participation in the business. It also is critical to maintain proper accounting records and make your banker and accountant part of your management team. A strong team — with family members and outside advisers — is a required ingredient for success on most operations.
With proper accounting records and budget projections that are compared to actual income and expenses, you should never have any surprises. And by using your management team to help identify problems early, you will have more time for well-thought-out decisions.
The single most important question each dairy producer must ask today is, “Am I profitable and can I sustain this profitability?” If the answer is “no,” then your next step must be to ask, “What changes can I make? What can I do to restore profitability?” The most successful dairy producers today are those that have continued to change, reduce debt and monitor their businesses closely.
An industry of survivors
This industry will continue to change, but there will always be survivors.
Many banks are tightening their credit structures. Banks will have to make some tough financial decisions to maintain the soundness of their businesses. Often, that means helping a business owner see that it is in his best interest to exit the business.
However, that does not mean banks are no longer interested in the dairy industry. Quite the contrary is true. Most banks still want to be involved with the dairy industry. Make your banker a part of your management team. Your future success may depend on it.
Anthony DeRose is a executive vice president of Wells Fargo Bank in Visalia, Calif.