Finally, after the toughest time we have seen in this industry, the pendulum has started to swing. And many in the industry are starting to wear smiles again due to higher milk prices.
But that doesn’t mean that it’s time to relax. Dairy producers who have a business plan know exactly what to do during this time:
Take ALL surplus income and reduce debt.
Get your bank and trade payables current.
Begin to rebuild some cushion in your equity base and borrowing capacity.
I would suggest that you do these three things before you think about adding livestock or making physical improvements to your operation. Surely, just as the milk price has increased, so, too, has the cost of replacements as dairy producers try to fill their facilities as fast as they can. There will always be “economies of scale” to consider; however, you need to be certain that expansion will truly be beneficial for your dairy farm business.
Prepare for the future
During the past six months, I have seen a number of other changes taking place, creating a new “landscape” for the industry.
One big change is the increased use of risk-management tools — forward contracting and hedging. Instruction is available to producers. Accountants, feed companies, brokers, banks and processors all provide educational assistance. Producers should attend classes until they have a clear understanding of the tools available and how to use them. Adding protection to a profitable return is a good thing.
I also see dairy producers working toward more efficient ways to produce milk and reduce expenses. If history repeats itself, we will see lower prices again. No one knows when that will be, how low prices will go, or how long it will last. So, use this time to help position your business for the long-term.
This is the time to reconsider some of the same questions that I have mentioned before. For instance, some of you are asking, “Should I remain in this business? Is it time for an exit strategy?”
Every dairy producer should know his cost to produce 100 pounds of milk. Then, he can compare his cost to the “average price paid” by the industry over multiple years and see if he can be profitable at that price. Knowing your “break-even price” is crucial.
As efficiencies continue to accumulate, it becomes more difficult for smaller operations with older facilities to compete. They are continually challenged to implement a planned expansion or modernize facilities. If this is you, you must ask yourself the hard question: “How much longer can I compete with operations that can produce milk at lower break-even prices?”
It’s time for every dairy producer to undergo a reality check. Take some time to determine if your business is positioned to compete — and be able to seize opportunities — now and in the future. If not, what will you do to change that?
Anthony DeRose is an executive vice president of Wells Fargo Bank in Visalia, Calif.