It’s been another great year for the dairy industry and profits are up. It’s also the end of the calendar year and producers need to do some planning.
You may want to look at tax-strategy moves to improve net earnings and increase “real profitability.”
Three to look at include: income deferrals, prepayments and repairs and maintenance.
The first strategy is income deferral. Talk to your milk handler about pushing back receipt of income from milk sold this year until next year. Generally, these funds are paid during the first week of January.
Another option is deferred sales of harvested crops. When selling feeds, ask about deferring payment until next year. In some instances, dairy farmers may receive a premium for allowing the purchaser to pay for the crops over an extended period of time. However, this also comes with some risk.
Another way to manage expenses is through normal prepayment of feeds. Dairy producers can prepay for feed purchased today, but not consume this feed until the following year. Paying in advance may allow the dairy producer to receive premium discounts or volume discounts. For added protection, some financial institutions can set up “escrow”-type accounts where the funds are held by a third-party and released to the vendor when feed is delivered. This can reduce some risk. With rising fuel prices and power charges, dairy producers may want to look at contracting for some of these resources for use the following year. On the farm side, producers may want to look at prepayment of fertilizers, seed and repairs, to name a few.
The third strategy is repairs and maintenance. Ask yourself if there are improvements that could be made this year that might have been deferred due to tough times in the past? Making these needed repairs would increase expenses for the year and reduce potential tax liability by reducing the net taxable profits of the operation. Hopefully, the needed improvements also will increase efficiency for the operation going forward.
This is also the time of year to finalize projections and plans for 2006. We all know expenses will be up. Consider the high cost of feed, replacements, fuel, heating oil, fertilizers and power. You have heard me say many times how important budgets and projections are to any operation and how this is an “ongoing” strategy for success.
Producers must manage each month’s income and expense and compare budget projections to actual. This includes updating and making necessary changes to projections and staying focused on the changes that occur. This monthly review will prevent year-end surprises and give you time to react to changes.
If this is not something you have been doing, make a commitment to implement it in 2006.
Meet with your accountant regularly, and ask your financial adviser what you might be doing and make all of this part of the “full year” plan. Talk to your banker to see what ideas he can share. It’s all about knowing and understanding your cost per hundredweight and doing what you can to increase profitability with a more efficient operation.
One last step for your year-end planning should be to calculate your anticipated cost of production based on your income and expense projections. From there, you should look at milk hedging, locking up interest rates or entering into agreements for interest-rate protection. It’s all about prices received for your products and the expenses incurred to produce or grow these products. It’s all about profit. Though it is “ongoing,” it is most critical at year’s end. It’s about the things you can still do in 2005 -— and making sure that you have a plan for 2006.
Best wishes for a successful and profitable 2006!
Anthony DeRose is an executive vice president with Wells Fargo Bank in