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Keep eroding equity or exit dairying? It’s time to take control of your future

Pauly Paul for Progressive Dairyman Published on 11 June 2019
Cows in a pen

“We are just going to hang on and hope for better days ahead.”

How many times have you heard fellow dairy producers proclaim those words – or even uttered them yourself?

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Throughout the years and the up-and-down milk price cycles, many people were able to do just that, and it worked in their favor. Eventually, prices rebounded, bills got paid, and businesses recovered. But that is not the world we live in today.

The hard truth is this: Hope alone is no longer a viable strategy, and hanging on could mean the difference between having something or nothing left at the end of your dairying career.

That said, let’s have an honest conversation here about how you can take control of your future:

1. Know your equity situation at all times

Five years ago, a dairy at 50 percent equity could get by pretty well. The banks made the loans, and operations grew, expanded and modernized. Fast-forward to today. After half a decade of depressed prices, that equity position has eroded to a dangerously low 30 to 35 percent mark for many. At this level, lenders have their hands tied and, for perhaps the first time in their lives, some dairy producers are being denied the money they need to keep the doors open.

What’s a dairy producer to do when they’ve been told “no”? The short-term plan might be some Band-Aids: increase cash flow by switching milk plants, communicate with vendors to structure payment plans or even rent out land to other dairies for corn silage to reduce input costs.

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In addition to employing such strategies, it’s just as important to take a good look at reality. Sure, we see some glimmers of hope on the horizon but, if equity is next to nothing, it’s very difficult to make enough changes to dig out of that hole. Put realistic numbers into play of what the business assets are worth if they were sold right now at current market values. Are these numbers in line with your personal and business goals?

2. Set goals

Dairy farmers are very good at setting targets for performance, like milk production or somatic cell count, but many struggle to articulate goals for their own future. Ask yourself these critical questions and write down the answers:

  • At what age do you want to retire?

  • Is the dairy your retirement, or do you have other money set aside?

  • How much money will you need to live?

  • What do you want your life to look like after retirement?

  • Without the dairy, how will you support your income needs from now until the point of retirement?

Don’t wait until age 55 to establish retirement goals. Whether 25, 35 or 45 years old, start where you are at today. Your equity may be eroding by the minute. Every day counts. If there’s $5 million worth of equity in your dairy right now, would that be enough to get you where you want to be?

Keep a little flexibility within those goals. If the goal is to retire in five years, and milk price and cow values jump up four years from now, strike when that iron is hot if it allows you to meet financial goals for retirement. One of the biggest mistakes I see people make is hanging on too long, suddenly being forced to sell when they are not prepared to and, having eroded all their equity, they are left with nothing.

3. Get help

Understanding equity position and planning for retirement goals can be challenging. Enlist professional help to put together accurate budgets and cash flows, and work with someone to lead you through important conversations about the future. Pride and emotions can run high when family, legacy and business collide, so a third party can be an effective facilitator. Get everyone in the room and on the same page.

What about filing bankruptcy? An outside adviser can also be helpful in understanding what bankruptcy is and how it plays out in a particular situation. There are pros and cons to carefully consider. I’ve seen dairies use bankruptcy as an opportunity to adhere to a court-mandated plan for making management changes and paying debts, and they’ve followed that plan with success.

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But more often than not, I see filing bankruptcy just dragging out the inevitable. The plan is not followed, and equity continues to erode to the point of no recovery. If a dairy is forced to sell in the current environment, that 30 percent equity can turn into zero percent equity. The 30 percent may be based on $1,500 per cow, but if those cows are only worth $750 in this market, that’s a 50 percent loss or more of equity. In this case, the owner is left with nothing.

Planning for a graceful exit

Once equity position is determined and held up to the light next to your goals, the numbers may tell you whether or not continuing to dairy is a viable solution. Sometimes it’s just not. You have the power to make that call, and you also have the ability to make the most of that decision. Set a goal for when to be done, and follow these tips to put yourself in the best position possible:

  • Sell when the greatest portion of cows in the herd are fresh to capitalize on a market that wants milk now. The highest demand is for first-, second- and third-lactation animals.

  • Get these animals looking their best. Clean them up, and have udders filled with milk when buyers come to view the cattle, even if this means changing the milking schedule.

  • Clear the tank of pathogens like mycoplasma and Staph. aureus by identifying carriers and culling them promptly.

  • Put weight on other less desirable cows and then cull for beef as soon as possible. This includes those past their third lactation, open and out in days in milk, as well as older dry cows. Some packers may even offer a premium for cows carrying calves.

  • Watch the beef market and contact packing plant buyers for bids to make an educated decision on the best time to send these cows to market.

  • Breed open cows to beef semen. Buyers value this more than cows bred to sexed semen.

  • Evaluate the market for youngstock and considering selling as prices show signs of increase.

  • Prepare DairyComp and DHI records, particularly for individual cow reproductive status and milk production.

Today’s dairy economy doesn’t favor the “hang on and hope” approach. Each producer is in a unique position based on their own circumstances, whether they are just a few years into dairying or have been doing it for 40 years. However, every dairy has options. It’s just a matter of what you do with them.  end mark

PHOTO: Cattle in a holding pen. Staff photo.

Pauly Paul
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