5 Reasons Producers Are Financially Better Positioned Now Compared to 2014
History likes to repeat itself. Prior to last year, the last time milk prices were great was in 2014 and we all know what followed—lackluster milk prices that challenged producers. Learning from previous financial hardships, Curtis Gerrits, a senior dairy leading specialist with Compeer Financial, outlines five points explaining why dairy producers are better positioned today vs. 2014.
Utilization of Working Capital: Many dairy producers have recognized the importance of having a strong financial and working capital position for the next turn-down in commodity prices (milk) after going through 2014 and moving into 2016-2018. Going into 2023, dairy businesses have leveraged their working capital by implementing larger amounts of pre-paids ensuring fixed pricing for better financial planning for the upcoming year.
Lines of Credit Availability: With profitability at the forefront for many dairy producers in 2022, lines of credit have been drastically paid down going into 2023. Although similar to that of 2014, indications on a line of credit availability in 2023 have been more significant, which in turn allows for flexibility with cash management for the upcoming/current fiscal year.
Financial Planning: Improvements in financial reporting and planning have been evident in recent years. A stronger emphasis by producers on overall business plans and projections going into 2023 is allowing dairy owners to have a much stronger understanding of their financial positions resulting in informed financial decision-making.
Marketing Sophistication: “I left a lot of money on the table” was a common remark heard from dairy producers in 2014 after locking in milk prices to then realize a sharp increase in milk prices throughout the year. We have seen a much larger focus on overall margin management and a shift away from “beating the market” when it comes to risk protection both in the milk and feed arenas. This shift is allowing producers to have a clearer picture of their financial outlook for the upcoming business year.
Utilization of Marketing Tools: Instead of a one-size fits all approach to hedging commodities, dairy producers in 2023 are using a wider range of marketing tools. Coinciding with marketing sophistication, producers are establishing marketing plans by utilizing programs such as LGM, DRP, DMC, 3rd party commodity brokers, and direct milk/feed forward pricing to build a marketing strategy specific to their business needs. Producers have more access to program experts and information in 2023 than in past years, allowing for improved marketing plans.
Gerrits offers producers four tips to help move forward to navigate lower milk prices and higher input prices.
Establish a detailed monthly projection for the upcoming year. Be realistic with the projection based on the information you have at hand with upcoming costs and market volatility. Having a projection based on monthly income and expenses will allow producers to identify months where cash flow may be tight and/or negative. Having this information can better prepare producers for utilizing input loans or lines of credit when needed.
Communicate with your loan officer regularly. Be sure to share your projection and business plan with your lender to establish a plan if there is a request for operating funds. Upfront and early planning can lead to better execution for loan preparation.
Know your numbers when it comes to the finances of your dairy business. Having a thorough understanding of your financial position will help lead to more informed financial decisions for your dairy operation. Informed decision-making will lead to better business strategies rather than emotional decisions.
Don’t lose sight of on-farm production. Milk and crop sales are the foundation of your dairy business. Continue to hone in on a high-quality and quantity product that can ultimately lower your cost of production and improve profitability.
Independent dairy financial consultant, Gary Sipiorski, says as dairies plan for their farm’s future, it is essential that they ask how they can keep their dairy in a good financial position.
“Profitability in 2022 was anywhere from $3 per cwt. to $6 per cwt.,” he says. “Working capital is and will be very important as we currently anticipate a declining milk price curve.”