Financial Tips for 2001

							  Financial Tips for 2001

Winter Dairy Management Workshop
    Randolph Center, Vermont
         January 30, 2001

            Bob Parsons
    Extension Assistant Professor
   Vermont Cooperative Extension
One question of concern facing
    today’s dairy farmers:

 Have the financial rules for
managing dairy farms changed?
And if the rules have changed….


  What does that mean for
  MY role in managing MY
          FARM?
        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!
           Today’s 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
     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!!
    Today’s dairy farmer must be
      financially savvy to be in
       business tomorrow!!!!!
•   New risks
•   New challenges
•   Uncharted future
•   Greater responsibility for own destiny
Key Financial Tools for the Dairy
 Farmer in the New Millennium:
•   Marketing strategy
•   Cost control
•   Financial plan
•   Financial monitoring
Marketing Strategy 1.: Maximize
     Your Dairy Income
• Become educated on milk marketing
  – Don’t 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
      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
    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!
 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
  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!
         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
 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!
  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!!!!
    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
 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!
     Other Cost Control Tools
• Take advantage of discounts
  – Seed, feed, supplies
• Contract hi invest/low return enterprises
  – Heifers, cropping, manure handling
  Basic Need for Cost Control…
         RECORDS!!!!!
• 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.
           Word of Caution:
• Remember Controlling Expenses IS
  NOT……..
  – Slashing Expenses!

• Cost control is investing to make a profit!
   3. Develop a Financial Plan

• Provides a map for future financial needs
  and investments
         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
     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
   4. Monitoring Farm Finances
• Examine financial statements:
  – Balance Sheet
  – Income Statement
  – Cash Flow Statement
• Examine Financial Ratios
     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
          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%)
 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
   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
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
Summary: Financial Needs of
 Tomorrow’s Dairy Farms...
• Marketing expertise: outputs and inputs
• Cost controller - know costs of production
• Financial planner - know where farm is
  headed
• Financial monitor - know farm’s finances
  and impact of changing circumstances
Remember…“The dairy
farm financial rules have
       changed….
…so its up to you to
 adjust the financial
rules on your farm.”
SET YOUR PLANS IN
     MOTION!
 Become financially savvy to lead
your farm into the new Millenium!