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High financial priorities for dairy operators in 2011

Scott E. Plew Published on 03 February 2011


You are in the business of dairying to make money, not to lose it. We know it doesn’t always happen that way. As you know, milk and feed prices are volatile at best these days, and it takes more and more financial planning to stay in the business.

In our article this past September, we briefly discussed our philosophy as it relates to creating a “dairy team” of financial advisers. In today’s market, it is critical that a team of advisers is available to you to help navigate through the ups and downs and more importantly, maximize the ups and minimize the downs.

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This dairy team consists of some or all of the following: your accountant, banker, attorney, consultant, investment adviser, and any other stakeholders that can add value by having a seat at the table.

In this article we are going into more detail regarding the creation of the dairy team, managing the dairy team, and making the most out of the time together to add value to your operation.

Where to start
So let’s begin with creating the dairy team. You might be asking yourself: “Who should I have participate? When and where should we meet? What should we discuss, and does anything need to be prepared in advance of the meeting?”

We recommend that a team member other than you take the lead in organizing and facilitating the meeting. In other words, allow someone else to play quarterback.

When we are part of a team, we prefer to be the quarterback and make sure each participant is aware of their responsibilities and have enough time to prepare in order to make the most of the meeting time together.

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We understand that your time is a precious commodity and strive to provide ideas and strategies you can take away and implement into your operation.

High priorities
Now that we have a good idea of who should be at this table, it’s time to look at what topics should be included. While each dairy operation is different, there are several high priorities that you will find on almost every agenda this year.

The big issues we are putting at the top of the dairy meetings we participate in are risk management and financing options.

Milk and feed prices are becoming more and more unpredictable. Your team should sit down and work out your risk management policy. This conversation should involve someone with a high-level understanding of the markets and the different tools you can use to hedge your price risk.

Decide with your team at what margins you are comfortable and set up a plan of when to contract and when to stay in the open market.

There aren’t too many dairies out there that can operate without any outside financing and with most of our dairy clients, financing issues and bank relationships has become one of the most important issues, if not the most important issue.

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Your team should include your banker. You want to make sure you are honest with your banker and they are aware of your situation up-front rather than on the back end.

Your team should try to project your financing needs for the upcoming year and when you leave this meeting, your banker and you should be on the same page, feeling joint ownership in decisions and solutions produced.

Timing is everything
Remember that while others, such as accountants, play critical roles on your team, you’re the owner and boss. It is important that you set the expectations up front which include your wants, needs, expectations and desired outcome. We work with our clients to set up agendas for meetings and, at a minimum, annually get a clear expectation of goals and objectives.

Once you set these, it is a good marker to see if your dairy financial team is delivering, or if it needs to bring more to the table.

A set agenda and minutes from the meetings allow you to manage, review and benchmark professional progress as you move forward.

The timing and regularity of your meetings might vary depending on the financial sturdiness of your operation and the size. It is critical that you discuss the options and the value of monthly meetings versus annual, or meet somewhere in the middle with quarterly meetings.

Case studies and closing
Following are three varying scenarios and the conversations those dairies should focus on in 2011. Remember, not every dairy is in the same financial situation, so the conversation should shift accordingly.

When the dairy team meets with a dairy in good financial health, the conversation generally centers around their long-term goals and options. Their short-term prognosis is very good, so we try to find ways to help them reach their long-term objectives.

The compliance requirements of a dairy in good financial health are usually less stringent than that of a dairy struggling to meet its loan covenants. Because of this, less time can be spent on appeasing the bank and more time discussing the goals of the dairyman.

Some of the topics we bring up are: Is the dairy actively growing or attempting to reduce debt? What is the dairyman’s transition plan or retirement strategy? Are there opportunities for improvement in the operations? Once these questions are answered, a long-term plan can be discussed to help the dairyman meet the goals they have set forth.

When the dairy team gets together with dairies struggling to meet their loan covenants, the conversation focuses more on the short-term with an eye on the impact short-term decisions can have on the dairy’s health in the long-term.

The number one objective with these dairies is to make sure there are no surprises for the bank and that the bank is comfortable with the dairy’s plan to return to compliance.

In these cases it is very important the dairy has a solid relationship with the bank and that both sides trust each other. The bank is more likely to work with you if they trust you and believe in your plan to get back in line with your loan covenants.

One of the key services the dairy team can provide in this situation is the creation of a budget and discussion of ways to stay within the budget created.

Finally, in a situation where a dairyman’s financial position has deteriorated and the bank is no longer willing to extend financing, the dairyman can look at filing for protection under bankruptcy or try to liquidate.

For most, if not all, dairymen and dairywomen, dairying is more than a job; it is a way of life. To give this way of life up without exhausting all options available is highly unlikely. This may not work for every situation, but it is important to sit down with your team and have that conversation before making any critical decisions.

Highest priority is active communication
No matter what you decide are the most important issues facing your dairy, it is always helpful to have a team of advisers giving you different perspectives on the same issue.

The way you view the benefits and risks of a potential business decision may be different than the way your accountant or attorney sees that decision, and discussing risks and rewards prior to making the decision may save you time and money over the long run. PD

Scott E. Plew

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