During periods of low milk prices, many farms are forced to try and survive on credit cards and vendor credit. But, it doesn’t have to be that way.

In order to remain financially viable, one must seek a financial structure that helps bridge the gaps in cash flow during the low cycles. Dedicated planning, combined with a lending institution that understands your business and accepts your business plan as valid, can help you achieve this.

The situation

It is my opinion that unique financial forces are affecting farm profitability. Real estate values have escalated, and this increased equity has fueled dairy expansion. This growth, in combination with better cow comfort, more efficient diets, improved herd management, and other innovative technologies, will help producers achieve more milk per cow — further evidence that milk prices will continue their high and low cycles.

These forces require that debt be structured in a manner that preserves cash flow.

Banks in different parts of the country use different lending strategies. And from what I have seen, the West has enjoyed a more cash-flow-friendly structure than other regions. Banks there use lines of credit based on the collateral value of cows. This allows producers to access the collateral equity in their cattle at any time without having to create another loan and, therefore, another loan payment. Structuring the lines of credit on a seven-year amortization payment schedule also has been a positive influence on cash flow and herd expansion.

In today’s market, barring any catastrophic event, dairy cattle are as liquid as cash.   Cattle can be sold and moved within hours or a few days, yet most lenders value cattle at slaughter prices. Is this incorrect perception their fault or ours?  The buck stops with you. 

If a dairy has sufficient equity and a business plan that is profit-based, securing longer-term lines on cattle is definitely more cash-flow friendly than numerous 36-month-term notes. Many farms with cash-flow problems have incorrectly structured debt.

Make your case

If you want a lender to work with you, you have to present yourself and your farm as a business that poses a limited amount of risk to the bank. That means you will need to provide documentation to convince your loan officer that your operation is a place where repayment failure is minimal. As a producer who recently completed such a process, here are a few items you will need to prepare.

  • History of your business, including strengths and weaknesses.
  • A detailed financial analysis of your business.
  • Minimum of five years of tax and production records, with a short summary to outline your financial needs.
  • Financial and production benchmarking against similar operations in your geographical region.
  • Comparisons of three to five years of budgeted vs. actual results.
  • Worst-case-scenario projections.
  • Cost-of-production comparison over last three years, with the impact of the new loan structure over the next two years.
  • Environmental assessment of your operation by a licensed or recognized expert in the field of dairy environmental management.
  • An exit strategy if unforeseen circumstances occur and require the business to shut down.
  • Proof of sufficient insurance coverage for property, cattle, liability and life.

Set up a meeting at the farm with your loan officer. This will provide an opportunity for that person to get to know you and learn how your operation works. If the lending institution will not use the structure you need, arrange a meeting between your loan officer and one at a bank in another part of the country that does lend money within the guidelines you seek.

In order to get the terms and debt structure you desire, you need to take charge of your debt. That means seeking a bank and banker that will take time to understand your business. You will have to prove you need it, that you can manage it, and that you are a good loan for the bank. Banks are always looking for “good” loans, so let them see that in your operation. 

Paul Johnson is a veterinarian and dairy producer in Climax, Ga.