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Farm transitions, low milk price and your bank

Jon Holthaus for Progressive Dairyman Published on 07 August 2017

Dairy farming can sometimes feel like a merry-go-round. There are times when things are going well. The cows are comfortable and milking at their full potential. You’ve got a great crew operating at exceptional efficiency. The only thing higher than the morale is the milk price.

The value of cattle and land continue to increase due to the healthy dairy economy, and your balance sheet shows your net worth increasing.



After surviving many tough years, you swell with pride as you start to see significant and measurable progress, and finally have some operating cash reserves built up for “breathing room.” Being the entrepreneur you are, your imagination ignites, and you allow yourself to dream about an optimistic future.

But what’s the next move? The options are endless: Reward loyal employees, pay ahead on the farm mortgage, expand or improve the operation. Maybe you want to finally start the process to include your children as a partner and help to build their equity.

Just when you get your head above water, the milk price starts to drop. It drops again – and yet again. You remain optimistic, but the price stays low. Weeks pass with no change. Those weeks turn into months, and those months turn into a year. You don’t know how long this will last, and the stress starts to set in.

With the weakened dairy economy, the valuation of your land and cattle starts to drop on your balance sheet. Cash flow starts to go backwards, and cash reserves start to get squeezed. The low milk price has now been here for over two years. Slowly, your outstanding bills start to rack up from your suppliers and service providers: the vet, the feed mill, custom operators, the repair shop.

Before long, the high interest starts getting charged – 10 percent, 15 percent, 18 percent – and moves you backward faster. It’s time to strap in for the long haul and take uncomfortable measures. You need to refinance the farm.


It pains you to borrow from the equity you’ve worked tirelessly to build over the past decade. You feel like you’re back to square one. You feel like all you do is work for a few good years to pay down debt and build equity – only to borrow that same equity back again to operate during the bad years.

Sound familiar? The fear and questions start to swirl in your mind, “What if I would’ve dragged my kids into this? I wouldn’t want to put them through this stress,” or “What if I would have transferred too much in assets or equity when times were good and weren’t able to secure financing when times are unfavorable?” These circumstances and thoughts are as disheartening as they are common in the current dairy economy.

Don’t agonize so much over this. While borrowing from your equity may have an emotional effect, it is important to separate an emotional decision from a business decision. You’ve heard it before: Farming can be an equity-rich, cash-poor business at times. Turning equity into usable cash can be invaluable to your dairy operation.

For many successful operators, it is viewed as a normal course in this business. Refinancing to help cash flow, expand or to take advantage of opportunities in the suppressed market may propel you to new heights in your operation. Stay positive; keep faith alive.

With the stresses of trying to just stay afloat in times like this, starting plans or implementing actions for a farm transition is probably the last thing on your mind. But even during the good years, you may feel it’s not ideal because you are behind on bills. There will never be a perfect time to start the conversation.

By starting the discussion now, it will allow you to establish a real, measurable goal to shoot for. Of course, include your banking officer in the discussions.


When I am working through or contributing to a family’s transition plans, having a competent loan officer with specific knowledge or background in agriculture can help make everyone’s life a little easier, along with a banking institution that keeps agriculture lending at the forefront of their long-term target portfolio.

The fluctuation of the milk and commodity markets can make the on-paper values on your balance sheet look very different in a down market. Along with your other professionals, a bank with intimate working knowledge of the dairy and agriculture industry will help to anticipate these fluctuating values and how it may affect your future borrowing power.

How a new partner affects cash flow and equity

As you already know, cash flow and equity in a dairy operation are equally important. One is not complete without the other, and finding the perfect balance is vital to a successful transition and a prosperous, sustainable future. When bringing in an heir, family member or outside partner to the active ownership, there are some critical elements to consider. Two of them are: Type of asset exchanged and asset value exchanged.

Simply put another way: For your situation, is it better to try “getting the next generation started” by transferring equity, transferring/paying cash or a combination? In addition, how much is practical? It’s a tough question to answer if you don’t analyze the current and future impact it will have on the sustainability of the operation, and it’s the reason most folks procrastinate on firming up their plans.

“Consider how and when to transfer assets in your transition or succession plan, as well as the ‘cash-flow’ impact. Many times there are several ways to execute such a plan that could have an impact on asset values, collateral availability and tax implications, both now and in the future.

Transferring shares, sale of assets or the sale of ownership to the next generation/owner may mean substantial dollars being borrowed by the farm with little to no increase in income-generating assets,” says Curtis Gerrits, assistant vice president and agricultural banking officer for Investors Community Bank.

While working extensively with farmers and agriculture-related businesses in Wisconsin and Minnesota, Gerrits is exposed to these situations on a consistent basis. He states, “It is common that by default a succession plan may prompt the farm to borrow money to buy a partner out or to increase in size to accommodate owner draws. Consider the following items if more borrowing is required:

  • Can the farm cash flow the additional debt?

  • What happens to the business’s equity? Allow for sufficient equity to combat low commodity cycles.

  • Will there be adequate collateral to borrow more money when needed? Having an abundance of excess collateral will assist in borrowing capabilities in the event low commodity price cycles require your business to borrow for input needs.”

As you can see, the considerations and structuring of an operation’s transition/succession can be cumbersome even without considering outside factors. Be sure to address unexpected risks such as a death, disability, divorce or extended care of an owner or key employee; this can add an additional layer of complexity and considerations on multiple fronts.

Of course, no two circumstances are the same, so your individual situation should be analyzed independently by your tax, legal and other advisers. Be open-minded to exploring new ideas, and coordinate a team of professionals who openly communicate, corroborate and review your case regularly. The good times will return again. Preparing now will allow you to maximize its potential.  end mark

Note: Comments from third parties are not an endorsement or recommendation of any commercial products, processes or services by Jon Holthaus, Holthaus Financial Group LLC or its affiliates. Any tax, legal or financial information provided is merely a brief summary, an interpretation of hypothetical situations and is not exhaustive.

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