Financial Tips for 2001

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Financial Tips for 2001

• Winter Dairy Management Workshop
• Randolph Center, Vermont
• January 30, 2001
• Bob ParsonsExtension Assistant Professor
• Vermont Cooperative Extension

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One question of concern facing todays dairy
farmersHave the financial rules for managing
dairy farms changed?
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And if the rules have changed.

• What does that mean for MY role in managing MY
  FARM?

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By-gone circumstances

• High government price supports
• Prices generally went up over years
• Minimal growth in large dairies
• Farm Success based on working hard and taking
  care of cows and crops!

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Todays Situation

• Change in government policy
• Market based supply-demand pricing
• Consumers not concerned about farmers
• Just want affordable dairy products
• Lenders requiring detailed business plans
• No more asset based lending

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The Rules have Changed!

• Government policies have changed
• No sign of going back
• Dairy farms expanding in size
• Becoming highly capitalized
• National competition
• Idaho and California do affect your milk price!
• Bewildering market conditions!!

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Todays dairy farmer must be financially savvy to
be in business tomorrow!!!!!

• New risks
• New challenges
• Uncharted future
• Greater responsibility for own destiny

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Key Financial Tools for the Dairy Farmer in the
New Millennium

• Marketing strategy
• Cost control
• Financial plan
• Financial monitoring

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Marketing Strategy 1. Maximize Your Dairy Income

• Become educated on milk marketing
• Dont forget about milk when truck pulls out!
• Be aggressive on bonuses and premiums
• Capture extra when possible
• 0.10/cwt 2000/yr for 100 cow herd

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2. New tool Learn about Plant/Coop Contracts

• Short and long term contracts
• Lock in base prices
• /cwt for set base for certain time
• Assures cash flow stability
• Caution - difficult with fluctuating production

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3. Learn about Futures and Options

• Markets are complex to newcomers
• Takes time to become familiar with markets
• Learn how the use of markets can lock in prices
  of milk and feed inputs!

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Example 150 Cow Dairy Farm in 2000

• Locked in base Class 3 milk price w/Coop
• Locked in corn and SBOM prices
• Results for 2000
• Protected from downturn in milk prices
• Protected from upturn in feed prices
• Locked in margin
• But gave up any favorable price swings
• Allowed farmer to concentrate on production

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To get up to speed on Markets

• Attend education sessions to learn!
• Extension, brokers, dairy industry
• Become familiar with broker
• A broker interested in YOUR future!
• Establish strategy - Protect profits
• Have to decide if its for you!

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Market Terminology

• Futures contract - Sale at a set time and price
• Option - option to exercise buy or sell
• Put - option to sell at a certain price
• Call - option to buy at a certain price

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II. - Must Exercise Cost Control

• Nothing new - farmers have done for years
• But do you know your cost of production?
• Feed, labor, supplies, overhead costs?
• Cost to produce milk cwt.?
• Farmers must invest to generate sales...
• But You Must Have Profit to Survive!

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Classic Farm Cost Situation...

• If your cash costs are 14.00/cwt.
• And your milk price is 13.50.
• Classic farm solution.
• Make it up in Volume!!!!

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Farms Need to Implement Cost Control...

• Examine each cost including
• labor, feed, cropping, expenses
• Allocate among enterprises
• Identify costly enterprises and practices
• Identify profitable enterprises
• Examine how to reduce or eliminate costly
  enterprises

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Example Mason-Dixon Farms

• Believed feed production expenses were too high
• Put in record system on a field basis
• Results
• Some rented land was losing money!
• Dropped that land next year!

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Other Cost Control Tools

• Take advantage of discounts
• Seed, feed, supplies
• Contract hi invest/low return enterprises
• Heifers, cropping, manure handling

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Basic Need for Cost ControlRECORDS!!!!!

• Accurate, up to date,
• Assessable and easy to use
• Split into workable enterprises
• Farm, field, enterprise levels
• Use a method convenient for you
• Pocket notebook may be better than computer!
• People keep records, no computers.

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Word of Caution

• Remember Controlling Expenses IS NOT..
• Slashing Expenses!
• Cost control is investing to make a profit!

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3. Develop a Financial Plan

• Provides a map for future financial needs and
  investments

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The Plan Addresses.

• Where the farm is headed
• size, objectives, enterprises
• Identifies future farm investments
• Scrutinizes each investment
• Considers financing options
• Considers owning vs. leasing

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Financial Plan Includes...

• Where will we be in 5 years and how will we get
  there?
• By
• Linking investments with cash flow
• Linking with lender
• Linking farm growth and adding new owners

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4. Monitoring Farm Finances

• Examine financial statements
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Examine Financial Ratios

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Key Financial Statements

• Balance Sheet
• Defines farm net worth
• Accrual adjusted Income Statement
• Shows farm profitability
• Cash Flow Budget
• Shows projected cash surplus and borrowing needs

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Key Financial Ratios

• Asset Turnover (Sales/Assets)
• Tells how hard assets are working to generate
  sales (greater than 0.30)
• Return on Assets (Net income interest/assets)
• Indicates return on investment (greater than 8)
• Return on Equity (Net income / equity)
• Indicates return on owners equity (greater than
  6)

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How to Monitor Farm Finances

• Need to work with financial advisors
• You work with other farm advisors
• Vet, nutritionist, crop management, etc.
• Require the same from financial advisor
• Require explanation of farm finances
• Require update of statements and ratios

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The Dairy Farm Manager of Tomorrow Will

• Monitor farm costs by enterprise
• Monitor farm financial health
• Frequently update financial statements
• Understand the impact of investment decisions on
  net worth and profitability
• Invest in the most profitable ventures
• Likely lead to greater specialization

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Example Cash Flow Monitoring

• Use 12-month projected cash flow budget
• Update weekly - compare actual to budget
• Recognize shortfalls and surpluses
• Work with lenders to assure cash flow
  availability

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Summary Financial Needs of Tomorrows Dairy
Farms...

• Marketing expertise outputs and inputs
• Cost controller - know costs of production
• Financial planner - know where farm is headed
• Financial monitor - know farms finances and
  impact of changing circumstances

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RememberThe dairy farm financial rules have
changed.
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so its up to you to adjust the financial rules
on your farm.
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SET YOUR PLANS IN MOTION!
Become financially savvy to lead your farm into
the new Millenium!