Seven strategies to mitigate the financial impact of COVID-19

By Jim Moriarty, director, dairy team, Compeer Financial

We are encountering dramatic disruption to our lives and economy as we respond to the COVID-19 pandemic. As an essential part of our food production system, dairy farmers continue to work every day to care for and milk cows. They’re producing food for our country in the face of a sharp drop in milk prices and change in demand channels. They are working to adapt to dramatic changes while preparing for recovery.

Here is a look at seven strategies dairy farmers can put in place to mitigate the financial impact of this market disruption and prepare for the future.

1. Utilize the Payroll Protection Pro-gram (PPP) available through the U.S. Small Business Administration. Labor is often the second highest expense on a dairy farm. PPP provides a forgivable loan to cover eight weeks of payroll plus other expenses. This could provide funds to cover over $3/cwt of dairy farm costs over the next two to three months. We have seen a high response from dairy farms to apply for this program and are now starting to see funds flow to farms. Documenting use of the funds for payroll expenses will now become a key step in the program. Initial funding for PPP ran out and more funds were added on April 24. Contact your lender to learn about your options.
   
2. The USDA also recently announced direct payments and product purchases to farmers as an additional relief measure. Understanding program rules and working with FSA to sign up for payments will be important next steps.
   
3. Work with your creditors on payment deferrals. First, seek deferral of principal payments on term loan payments for the next three months of low prices. This will help preserve cash to cover operating expenses on the farm, particularly as we work through spring planting.
   
4. Delay discretionary capital purchases if possible. Adjust plans for major equipment purchases or facility upgrades to preserve cash and borrowing capacity.
   
5. Use a combination approach to me-et requirements if you need to reduce production. Multiple steps will likely provide the best outcome: earlier dry off, pulling culling forward, moving from three to two times milking, and adjusting feed rations for later lactation cows.
   
6. Take advantage of low interest rates to lower interest expense now and into the future. Both short-term and fixed interest rates have dropped significantly. There are opportunities to reset fixed rates and perhaps term out debt at low fixed rates to preserve cash and lower interest expense for the next several years.
7. The sharp and completely unexpected decline in milk prices does reinforce the need to consider risk management as we move forward. Rather than focus on opportunities missed, set targets and be ready to use DRP and other hedging tools for later this year and into 2021. We can anticipate that we will see futures market rallies as recovery begins and we need to take the opportunity to protect against potential setbacks.

While it certainly won’t be easy, we will be able to work through this if we adapt and take opportunities as they are available. Ongoing communication with your lender, advisers and peers within the industry is essential. We also need to engage with industry organizations to provide our input on policy proposals to make sure our voices are heard. We need to position dairy to survive the next several months while preparing to respond to demand as markets open back up.

Webinar series
DBA and Compeer will be hosting member-only webinars on the topic of mitigating financial impact during COVID-19. Watch your email for registration information

• May 15: Strategies for survival during COVID-19
• May 21: Dairy industry outlook
• May 29: Preparing for recovery during COVID-19

Need to add a team member to our email list? Send contact information to
info@dairyforward.com.