The dairy business climate remains challenging, to say the least. Milk prices may be up, but the overall economy remains sluggish and the cost of inputs has certainly not gone down. Therefore, astute managers must be at the top of their game to guide business profitability and manage risk in these turbulent times.
“Everybody says that cash is king, but that’s only half the equation,” says Mike Boehlje, Purdue University ag economist. “It’s the cash you generate from a profitable business that’s the key.” In reality, he says, profitability is the kingdom.
While not every facet of profitability is within your direct control, several key business tactics that can help improve your bottom line are within reach. Here are seven areas you should address in your quest for business success.
1. IMPROVE RISK MANAGEMENT
You’re going to hear more and more about risk management and risk-management tools, whether it’s from lenders, other business advisors or even politicians as the Farm Bill debate heats up and the economy flounders. When it comes to risk management, your goal is all about protecting margins and cash-flow, not about maximizing prices, explains Alan Zepp, Center for Dairy Excellence risk-management program coordinator.
And it’s not going to be enough just to say you have a risk-management plan. You must have a written plan that includes action triggers and your overall strategy, regardless of whether you use risk-management via your co-op, a brokerage firm, the livestock gross margin for dairy insurance program or any combination thereof. Plus, these plans must be followed, not simply written up and then put in a drawer and forgotten.
Lenders want to be able to track performance, so if goals are missed, they can determine how close you came to meeting the targets. Or, be able to adjust your plans and strategies as needed.
Given the choice between lending to a dairy with written risk-management plans in hand that has slightly lower equity vs. another dairy that does not have written plans and goals, most lenders will offer the dairy with the written plans preferential treatment, observes Mike Hosterman, AgChoice Farm Credit agricultural business consultant.
2. CAREFULLY MANAGE BORROWED CAPITAL
The Federal Reserve may have signaled that it will hold interest rates to near-zero levels until mid-2013, but that doesn’t mean you shouldn’t use caution when it comes to borrowed capital. “We’ve been in a cheap capital market,” says Boehlje, “but it still makes sense to lock in the lowest interest rate possible on term debt. The prediction is for a 4-percentage point increase by later this decade.”
Furthermore, he suggests that you take advantage of higher commodity prices to pay down debt if you are highly leveraged. Focus efforts on building working capital reserves and rebuilding equity that was lost in the dairy market downturn of 2009. It’s a worthwhile exercise to explore what would happen to your business if interest rates were to double in the next five years so you can plan ahead.
“If you want to gamble, go to Las Vegas,” he advises. “Otherwise, run a business.”