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Consider a timely financial tune-up for your operation

Mark A. Brady for Progressive Dairyman Published on 09 March 2017
... we expect dairying to become a much more expensive endeavor.

If you thought dairying has been volatile the last few years, shifts in fundamental economic drivers could make dairying a much more expensive endeavor in the years ahead.

The dairy industry has experienced and become more accustomed to volatility throughout the last decade. Dairy owners went from experiencing the lowest milk prices in history in 2009 to the highest milk prices in history in 2014.

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All the while enjoying incredibly low interest rates and great lease rate options. What should we do when certain financial advantages we’ve relied on start changing? How can we mitigate some of the risk to our operating costs if interest rates go up and workers become more and more difficult to find?

Let us first examine interest rates. Low interest rates or “free money” can help make decisions to acquire equipment and invest in your operation through expansion fast and easy. As interest rates rise like they did in December of 2016, the access to funds and the required cash flow to repay loans become more critical in the decisions to acquire equipment or expand.

It is anticipated that rates may increase three times in 2017, but some are questioning that and proposing the Federal Reserve will carry through on only one of those three interest rate bumps.

“The median projection is for an increase of three-quarters of a percentage point by the end of 2017, most likely in three additional one-quarter-point moves. I don’t believe that the Fed will actually raise rates more than once,” wrote Bill Conerly in Forbes’ Dec. 15, 2016 issue.

The increase in interest rates will require a shift in mindset when it comes to how we spend money within the dairy operations. One practice that has become common is financing equipment purchases on lines of credit instead of taking out term loans. Using lines of credit in this way can be dangerous since the variable rates attached to lines of credit increase as the Federal Reserve increases rates.

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Lease rates have the same possible increase. When your current lease is up, you will be faced with the new rates that can be more expensive and increase your operating costs.

According to an August 2015 report, “The Economic Impacts of Immigrant Labor on U.S. Dairy Farms” by Texas A&M University: “Survey results indicated approximately 150,418 employees work on dairy farms, with 76,968 being immigrants.” In the same report, they note the importance of immigrant labor for U.S. dairies as reflected in herd sizes and milk prices.

“Eliminating one-half of those immigrant workers would reduce U.S. dairy herd size by 1.04 million cows, leading to a 24.2-billion-pound decline in milk production and 3,506 fewer farms. As a result, retail milk prices would rise by nearly one-third. Total elimination of immigrant labor would reduce herd size by 2.08 million cows, lower milk production by 48.4 billion pounds and result in 7,011 fewer farms. As a result, retail milk prices would increase by 90 percent.”

Already, we’re seeing changes in the availability of labor and the cost of labor. We believe these changes are likely to continue. While we don’t have a clear vision of how that will unfold, we expect to see labor costs go up and the availability of labor to become even more scarce.

In short, we expect dairying to become a much more expensive endeavor. We would recommend you look at your current line of credit: Investigate the idea of converting your short-term lines of credit into long-term loans, with favorable rates for equipment purchases and expansions to be paid through them.

You might also review your leases and their termination dates and identify any options available to lock in longer, more favorable terms. Be sure to only make these changes after having consulted with your management team, banker, accountant and financial adviser. Your situation is unique to you, and your own team of experts who know your operation will be able to guide you best in response to the specific risks you face.

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Lastly, stabilize your labor force. Identify your most valuable workers and do what you can to inspire loyalty now before other dairies start looking for workers to replace their shrinking labor force. If you have good workers whose legal status is temporary, expired or close to expiring, consult with an immigration attorney to see what you can do as their employer to keep them or reinstate their good standing with immigration authorities.

Find out what your best workers value: Do they need health insurance provided by the farm for their families? Are they looking for a bigger paycheck? Would they benefit greatly from company-provided transportation? Or would quarterly bonuses bolster their morale more effectively?

Not everyone will respond best to a simple raise, and often you’ll find other employers steal workers away for a pittance more or simply better benefits along with a reasonable salary. Figure out what your best people value most and then provide it. It will be cheaper and more effective in the long run.  end mark

ILLUSTRATION: Illustration by Thinkstock.

Mark Brady has 23 years of experience as a CPA and 14 years of experience as a certified valuation analyst.

Mark A. Brady
  • Mark A. Brady

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  • Cooper Norman

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