Riding out the downside

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As I visit with dairy producers throughout the major milk-producing areas about the current roller coaster ride we are on, I hear a wide range of assessments. Some think the downturn is temporary and that a new government support program is necessary and inevitable. Others think this downturn could last for up to two years. 

What is universal, however, is that dairy producers who have used risk-management tools to lock in some or all of their milk production and feed supplies are feeling much better than those who did not. I have many dairy-producer clients who locked in milk production early when prices were well above $13 per hundredweight and some when prices were still above $12 per hundredweight. In addition, many producers have forward-contracted feeds at favorable prices.

This attention to business is great, but it makes me wonder why it hasn’t become part of every producer’s everyday practices. It seems that when times get tough, dairy producers improve their management practices but many fail to follow through and use those tools consistently. For the long-term health of the business, dairy producers should strive to use best-management practices everyday.

Ask the hard questions
As I have said numerous times, follow your budget plan and make necessary adjustments as they arise.  Include all of your decision-makers in the planning and review processes.

You and your team must continually make the following comparisons:

  • Here’s what I planned.
  • Here’s what I did.
  • Here’s what I’ll do going forward. 

Rising interest rates
The prime rate has climbed from 4 percent to 7.25 percent in a matter of months. And I think Greenspan’s replacement, Ben Bernanke, will continue to raise rates another 0.5 percent to 1 percent.  Have you thought about what these increases will do to your cost of doing business?

I think dairy producers should take a serious look at fixed-rate loans. There are still some attractive fixed rates available for both long- and short-term borrowing. This is a major expenditure, so knowing your cost of production can be valuable for the budgeting process.

And, you can still take advantage of attractive prices on certain feed ingredients.

Looking forward
During the last two years when milk prices were at all-time highs, I hope you were paying down debt, reducing leverage and preparing yourselves for the inevitable downturn. This type of discipline demonstrates your management ability. If you have always followed this “debt-reduction” mode, hopefully your bankers will work with you during the tough times, too.

Dairy producers are some of the most resourceful people in all of agriculture, and I respect them for that. They will continue to ride this roller coaster, even though it seems to be getting tougher and tougher to get into the front seats.

One thing is for certain. The roller coaster will head up again. We just don’t know when, or if all of the same passengers now on board will finish the ride. History tells us that in times like this, some producers will depart. But maybe, just maybe, we will pick up a few new riders along the way.

Anthony DeRose is an executive vice president of Wells Fargo Bank in Visalia, Calif.



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