Surviving Dairy Downturns: Unconventional Strategies for Cash Conversion
“High prices cure high prices and low prices cure low prices.” Early in my lending career, a mentor of mine told me this statement and it left a lasting impact. In 2022, the dairy industry experienced great prices and near record profits. However, we are currently facing the reality of low prices, and our hope is that this downturn will be short-lived. During periods of suppressed milk prices, it is crucial to manage loans, available credit lines and farm finances carefully. Monitoring the farm checkbook and revolving lines of credit can provide early indications of financial stress. Reviewing budgeted expenses for the upcoming months will help determine the urgency of necessary actions. Open and honest communication with your lender and industry partners will lead to better outcomes. Regardless of how long low milk prices persist, it’s essential to start considering ways to conserve cash and maintain availability on revolving lines of credit.
When searching for ways to preserve cash, one of the first steps is to identify underutilized or underperforming assets on the farm. This might include equipment taking up shed space or cows not performing as expected. Selling these assets can generate cash to cover shortfalls. Additionally, some may consider refinancing or rebalancing loans but rising interest rates make these options less advantageous due to increased interest costs. Therefore, thinking outside of the norm becomes necessary.
Dairy farming heavily relies on industry suppliers and the supplies they provide. Many suppliers understand the challenges of farming and the dairy industry. Collaborating with suppliers on payment plans for supplies can help spread out the costs over several months, reducing short-term cash drain. Open communication with suppliers is crucial in establishing a workable payment plan. However, it’s important to consider any late changes or interest charges that could affect the decision to go with a payment plan.
If cash was spent on capital purchases in 2023 or around the end of 2022, farmers may consider taking out a term loan to reimburse those capital expenses. This preserves cash and aligns the asset’s useful life with the repayment term. Analyzing revolving lines of credit and the principal balances used can help determine whether certain purchases could be termed out to free up available commitment on revolving lines. Terming out loans in this manner helps with short-term cash availability during periods of losses. However, it’s essential to understand how these additional payments will impact future cash flow.
Another option to discuss with your lender is interest-only payments on loans for a specific period. Farmers should carefully weigh the benefits and drawbacks of this approach and consider the short-term cash flow impact before deciding. Start early and brainstorm various survival strategies for dairy market downturns. Involving your management team and industry partners in these conversations can lead to valuable ideas that have proven successful on other farms. Preparing and analyzing different scenarios will enable farmers to implement the best possible plan for navigating the uncertainties of this downturn.
For additional information and resources on the Dairy Industry, visit Compeer.com.