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Changing how we get paid: A dairy farmer’s suggestions for commodity pricing

Theo Scholze for Progressive Dairyman Published on 15 November 2016

As we wrap up the fall harvest and start to prepare for next year here on our dairy farm, I have been doing some reflecting. There are a couple of practices rather common in agriculture we as farmers should maybe push back against. These practices are:

  • Prepaying for seed and fertilizer long before we take possession of them
  • The delay on getting paid for our commodities

These two practices make us farmers a bank for our suppliers and processors – and they aren’t paying us any interest.

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I understand there are times when we prepay for inputs as a tax avoidance strategy, but that isn’t always the most profitable way to deal with taxes. There are other investments or opportunities that might be better for us as individuals and businesses. I also find the idea that seed companies need the money to help with cost laughable; maybe if they didn’t give away trucks or vacations, and just had good pricing, they would run on better margins. I get that they want to know quantities of varieties, but they can get preorders and get paid upon delivery. On our relatively small farm, if I were to figure the cost of money using 5 percent interest (similar to our RLOC), there would be a few thousand dollars of interest due or money that would be available for other use.

The other thing I scratch my head at is waiting to get paid for our commodities. Grain commodities aren’t as bad – they are paid within a week, generally – but for our milk, we are paid anywhere from 13 to 33 days after the commodity has been delivered, long after it has been processed and is either an asset or cash flow for our creamery. Once again, the cost of money is small, around $800 a month for us on a small dairy, but there are bills that could be covered by that amount, and in the case of my feed bill (due four days before the milk check comes), in years like this we are borrowing from our RLOC to pay the invoice before we actually get paid – thus losing more money to interest cost. I also think of other invoices we could pay immediately, allowing our other suppliers to charge less by not having to finance what they have done for us – a win-win for all.

When samples are taken and tested in a matter of minutes after arriving at the processing plant, coupled with the ability to transfer money electronically, there is really no reason we can’t be paid immediately. I concede that there are issues to be worked around – contracts, fluctuating prices, milk marketing orders, etc. – but contracts are easily worked into this delivery/payment method.

Federal Milk Marketing Orders are archaic. I have yet to meet anybody who understands them – so they need to go away, and a more modern, effective way to pay for milk needs to be developed. The technology for asset transfer, product and money is already in place. It’s called block chaining, which is an electronic method of accounting that allows for easy transfer of assets. Bitcoins are, at this point, the most famous use of this technology – but others are following. Currently, for the 2016-2017 season, a company called Full Profile is beta-testing a program in Australia, called Agridigital, on grain commodities that will allow farmers to get paid as soon as they deliver commodities.

I am super-excited that companies are starting to look at this technology to help our industry move along at a faster pace, leaving behind archaic practices and moving into the 21st century. Early adopters of this technology, both suppliers and processors, are going to have a huge advantage in the marketplace. In fact, I wouldn’t be surprised to see some new startups embrace this type of technology and upset the apple cart, negatively affecting some big players in our industry, such as DFA, ADM, Cargill and CHS.

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Like so many things in our industry, I look forward so much to the changes this may bring to our industry to make it a better place to do business.  end mark

Theo Scholze
  • Theo Scholze

  • Dairy Producer
  • Humbird, Wisconsin
  • Email Theo Scholze

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