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Cow comfort: Do you have a game plan for funding it?

Greg Steele Published on 31 March 2014

When dairy industry consultants recommend facility or management improvements, more often than not, it’s assumed these types of cow comfort investments are automatically justified. What lenders need to understand, however, is how the investments will provide the returns to justify the expense.

Lenders want producers to build an economic case: How will it be funded, with cash flow or through financing? Both have a business impact. A reduction in cash flow decreases working capital. Financing improvements increases debt.

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Then, would not making the investment have negative financial implications? A case may be made that the investment is needed to keep the operation competitive. The price of not making the change could mean leaving too much money on the table.

What your lender needs to know and why

It’s the lender’s job to understand how investments or changes will lead to more milk and profitability for your dairy business. For example, switching to sand as a bedding material has shown to positively impact profits; however, this change impacts the labor and efficiency of waste-handling systems.

This might be an example where the change has a very significant impact on performance. Improved milk production and quality, reproductive performance and cow health add profits to the bottom line that far outweigh any costs added to the system.

To take this a little further, think about the cost lame cows have on reproductive performance. Days to first service, days open and services per pregnancy all increase. Depending on severity, the cost of lame cows can range from $200 to $600 per case.

The bottom line is inadequate cow comfort leads to less milk, more expenses and lower profits. In addition, as we all know, cow comfort is closely correlated with animal welfare matters and can be viewed positively from a consumer relations standpoint.

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Some improvements are big ticket items that take significant financial resources to build. Transition housing, feed centers, cross-ventilated barns, and waste-handling and recycling systems fall into this category.

When considering these types of investments, lenders need to take obsolescence, maintenance and what the potential expenses would be for operating the new investment into account. It is best to plan these kinds of investments well in advance so the budget and cash flow can accommodate these larger expenditures.

What dairy consultants need to know

As important as it is for lenders to understand the details of cow comfort investments, it’s equally helpful for consultants to understand the importance of the financing issues that come into play for the dairy business. All lenders have credit standards that require compliance by borrowers.

While there may be differences among lenders on their tolerance of risk, all lenders would likely agree that base levels of equity and working capital are needed to withstand volatility and unforeseen risk.

A proven track record of profitably and projected debt repayment ability is another major part of the financial analysis evaluated by lenders. In addition, other indicators such as income over feed costs, debt repayment per hundredweight and loan advance rates are monitored.

Production trends and business practices tell your operation’s story

Lenders have become more interested in collecting and evaluating production information as an indication of future trends. The logical and most common data requested are milk production, component values and quality data.

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Many times, reproductive performance measures are also obtained. This information, when analyzed and evaluated by the lender, can paint a picture of the dairy business. By putting together the pieces a lender can do the following:

  • Understand the direction of the dairy: goals and objectives
  • Detect future problems
  • Keep minor problems from becoming major issues
  • Identify problems that have the greatest impact on profitability
  • Determine opportunities to provide a value-added service to the business
  • Understand overall business performance

Lenders also look for key success factors when evaluating a dairy business. Certain best practices and measurements are good indications of the dairy’s performance and can show if the business is positioned for future success. These factors include the following:

  • Proven financial performance
  • Budgets and accrual accounting systems
  • Use of margin management as part of their marketing plan
  • Milk and crop production records systems
  • Available land base to grow feed and use home-grown nutrients
  • Control of enough land to cover the majority of the forage needs
  • Use of outside consultants and experts on a regular basis

Don’t assume lenders understand how you plan to achieve the economic benefits you are predicting through your improvement plans. Illustrating the benefits can be a very useful communication tactic.

Include your lender in the discussion early in the planning stages, particularly when the investments will take significant financial resources to implement. It’s also important to invite lenders on-site to make their own assessments and observations of the dairy’s management.

The bottom line is lenders do have a keen interest in the economics of investments that can lead to the growth and prosperity of your dairy. Consultants can support the lending process by better understanding the impacts and role financing plays when investment decisions are made. PD

Greg Steele is vice president and dairy industry team leader at AgStar Financial Services. More content for dairy producers, such as articles, blogs and webinars from Greg and AgStar’s other industry experts can be found on their website .

Greg Steele
  • Greg Steele

  • Vice President & Dairy Industry Team Leader
  • AgStar Financial Services
  • Email Greg Steele

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