Greg is CFO for Pagel Family Businesses in Kewaunee and he has shared his expertise about farm business around the world. We asked him for his perspective on the financial side of dairying.
DBA: What was something that surprised you in 2016 in the world of farm finances?
GB: Dairy markets are extremely cyclical with large swings in income over feed cost. It was very surprising to me that the current downturn was not worse than it was. As difficult as 2016 was for many dairy farms, it could have been much worse. Black Swan events occur rarely, but when they do they are game-changers. Last year was nowhere close to a Black Swan event, which makes one wonder if the expected upswing will be lower than expected.
DBA: Where do farmers have the greatest room for improvement in handling finances?
GB: Measuring and monitoring financial performance. When consulting, it amazed me how many dairies did not have accurate accrual financial statements. I would be equally surprised to find a dairy farmer who did not measure how much milk the cows were producing. But financial performance trumps milk production. Dairy farms, like all businesses, need to regularly measure financial performance and set goals for future success. If the dairy does not have this skill set within the management team, they should seek an outside adviser.
DBA: What is one thing dairies can do in 2017 to ensure financial success?
GB: Strive to ship the most amount of milk possible given the resources available. Every dairy has bottlenecks that limit Greg Bethard: Advice, predictions productivity. It may be capital, land, people, desire, goals or other things. Removing or minimizing bottlenecks to ship more milk is an opportunity for most dairies. A basic premise of manufacturing businesses is to dilute fixed costs over more sales, and a dairy business is no exception in most cases. Every dairy is unique and there is no blanket strategy that will work for everyone. But a thoughtful look at financial statements, resources and bottlenecks may be enlightening. Some dairies achieve success by finding a niche that enables them to produce milk cheaper, or garner a higher price, without the necessity of shipping more milk.
DBA: What are some things you would encourage farmers to stay away from doing when they are faced with financial challenges?
GB: One, avoid staying in business if it results in depleting equity that has been hard-earned over many years. There is no shame in making the decision to close a business that is no longer competitive or requires investment beyond what ownership is willing to commit. Two, avoid selling income-generating assets to remain in business. This will make it more difficult for the dairy to regain financial strength when markets improve. Three, avoid borrowing more money unless you have a sound business plan with projections that demonstrate future profitability when markets return. Four, avoid cutting costs in areas that impact the dairy’s ability to recover during the next up cycle. Keeping the barn full of healthy and productive cows that are reproductively efficient is key to leveraging the next up cycle.
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