Three Financial Tips to Capitalize on Record Milk Prices
With near-record milk prices this spring, it certainly appears to be a good time to be a dairy producer. The long over-due market turnaround has dairy farmers across the country smiling, but financial experts advise producers to sit down and look through their profit and loss statements to truly understand the strength of their farm’s financial portfolio.
Independent business financial consultant, Gary Sipiorski says that it is up to the owners to think through and make their own decisions. However, he offers these three tips to help bode the future for dairy owners.
- One of the first things a producer needs to do is determine what their real cost of production (COP) is so far this year. Has their COP increased 10% or 20% due to inflation and other causes of the price increase? For some, this could mean COP is now $20 to $22/cwt. If the mailbox milk check with premiums ends the year at $25/cwt, this could be a $3 to $5/cwt profit. We have not seen much first-quarter P&L yet and we are now into the 2nd quarter of the year. It’s time to calculate.
- If a farm is showing a true profit, the first thing to do is clean up any payables, including credit card balances. Paying down the lines of credit should be next with an agreement with the lender that the lines can be available in the future if needed. Be careful about paying down debt if you have long term locked-in interest rates. If money is needed in the future, new loans will have different terms.
- If the farm business plan is to continue to remain a dairy business or grow, then new investments are necessary. A thought-out business plan, including what to invest in to make the farm more efficient must be drawn up.
Virginia Tech professor emeritus, Dr. David Kohl, underscores the importance of producers zeroing in on their management mindset, which he says is very critical in putting the odds in their favor. “A proactive attitude is critical in executing and monitoring specific management strategies for overall success,” he remarks.
Tips to Capitalize on a Margin
Tanner Ehmke, the lead economist for dairy with Co-Bank, shares three tips for producers to help obtain as strong of a margin as possible, to help push them forward.
- Talk with your milk processor and ask what their needs are in the future. This will help you understand the revenue side of the business.
- Regarding costs, Ehmke recommends figuring out how to control your feed costs. This takes a lot of planning on not only what you can do on the farm if you're growing your own feed, but also is there some other way you can contract with other local farmers. Perhaps you've got a neighbor or someone in the area who can grow silage? You must evaluate what your opportunities are. And it all comes down to understanding what those numbers are.
- Talk with your entire team – banker, accountant, processor, nutritionists, etc. about strategies.
As the milk price continues to look strong, producers must take time to understand their financial ledger to maximize on a profit that can help position them well into the future.
