Managing Through Turbulent Times- Geoff Benson

Managing through Turbulent Times

Geoff BensonDept. of Agricultural & Resource

EconomicsNorth Carolina State University

& Jack McAllister

Department of Animal and Food Sciences

University of Kentucky

2GEOFF BENSON, ARE, NCSU

Financial Trends A 20-year history of large and unpredictable

price swings causing cash flow problems Historically, periods of really low and high

prices are short Length of time from peak to peak or trough

to peak varies widely Profit margins per cow and per cwt of milk

are slim, on average, and getting slimmer Cost increases will (must) mean higher

average milk prices in future but likely will not change past trends

3GEOFF BENSON, ARE, NCSU

Trends Current trends are for fewer and

larger dairy farms and regional shifts in production

Key QuestionsCan I make it through this downturn?Do I want to?

4GEOFF BENSON, ARE, NCSU

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Financial Performance for Selected New York Dairies, 2005 & 2006

Item

2005 2006

Low 10%

Ave-rage

High

10%

Low

10%Ave-rage

High

10%

Total Cost, $/cwt $23.73 $15.45 $13.38 $24.96 $15.30 $12.93

Net Farm Income, $/cow

-$132 $551 $1,268 -$653 $118 $811

Return on Assets, % (+ apprec.)

-4% 10.7% 19% -11% 4.0% 12%

Source: 2005 & 2006 Dairy Farm Business Summary, Cornell University

Items in each column are ranked independently

STEPS IN DECISION MAKING(RADAR)

R - Recognize the problem (or opportunity)

A - Analyze the alternatives

D - Decide on a course of action

A - Take action R - Take responsibility

and monitor results

Source :S. G. Isaacs, UKY6GEOFF BENSON, ARE, NCSU

“What financial shape are you in?” Is the farm profitable most years based on

returns on assets & to management? Does you have cash flow to meet operating

expenses, debt service, family living needs in a timely manner?

Is the business solvent – is debt load low and equity high as collateral for loans and as a reserve?

Financial performance cannot be predicted from farm performance There are relatively few production practices that can be recommended in all situations

7GEOFF BENSON, ARE, NCSU

“Do you know your cost of production?”

Long run competitiveness depends on relative profitability

There is wide variation among farms, for a variety of reasons

You cannot control your milk price You can only manage your cost of

productionCowsHeifer raisingCrop production

8GEOFF BENSON, ARE, NCSU

“Do you know your cost of production?”

Operating cost - out of pocket expenses, e.g. bought feed, forage production, vet, fuel, repairs

Fixed/Ownership/Investment costsDepreciation InterestTaxes & insurance

Labor cost or charge for the value of your time

How do you compare to other farms? Specific benchmarks are needed

9GEOFF BENSON, ARE, NCSU

“Do you know where the money went?” Four sources and uses of cash:

Farm OperationsNew investments & asset salesFinancing – new debt & debt repaymentsNon-farm income and family living

Severe problems can have several causesLow profits

High cost of production Low milk price

Recent large new investments Large debt repayments Large family living needs

10GEOFF BENSON, ARE, NCSU

Cash Flow “Stretchers” Draw on financial reserves Sell non-farm assets, e.g., timber Postpone non-essential maintenance

and new investments Reschedule (extend) debt payments Borrow more (if you will be able to pay it

back) Family members seek new off-farm

income Cut family living expenditures

11GEOFF BENSON, ARE, NCSU

Herd Management Re-evaluate the profitability of your

production practices Focus first on areas that have the biggest

potential impact on profitability and cash flow

Milk still pays the bills and feed is the biggest costMilking herd rations must still be

nutritionally sound – cows don’t care what the price of milk is

Continue with recommended practices for transition cows, cow comfort, cow health

GEOFF BENSON, ARE, NCSU 12

Herd Management Revisit practices most affected by lower

milk prices and higher input costs, e.g. feed, fertilizersVoluntary culling decisionsHerd health, including mastitis,

involuntary culling, death lossGenetic progress for yield, productive

life and reduced mastitisReproduction management programsHeifersCrop production

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Conclusions You pretty much manage the farming

operation in low price periods the same way you should be managing when prices are favorable

Stay in control – Measure, monitor and evaluate financial, herd and farm performance to identify problems promptly Set farm and financial performance

benchmarks, e.g. Milk income over feed costs, feed costs per cwt.

Measure performance regularly Bring in outside advisors to help evaluate

financial and farm performance

14GEOFF BENSON, ARE, NCSU

Summary The future will look a lot like the past --

volatility and low average returns will remain – but milk prices will average higher

Financial information on profitability, cash flow and solvency are essential

Financial management must be continuous – Plan for the bad times during good times

The recommended approach to herd management practices is not much different than when prices and margins are healthier

15GEOFF BENSON, ARE, NCSU

Contact information

16

Geoff Benson Phone: 919.515.5184 Fax: 919.515.6268 E-mail: Geoff_Benson

@ncsu.edu Web page: http://www.ag-econ.ncsu.edu/

faculty/benson/benson.html

Jack McAllister Phone: 859.257.7540 Fax: 859.257.7537 E-mail: [email protected] Web page:

http://www.uky.edu/Ag/ AnimalSciences/faculty/

mcallisterjack.html