By John Ellsworth
As I stated in my last article, the world as we know it has certainly changed since the economic meltdown of October 2008! And 2009 has been the most trying time ever for the dairy industry as a whole.
We started the year with continuing high feed prices from 2008 and a general uncertainty about whether sufficient financing would even be available for most producers to endure this downturn. Milk prices plummeted before 2009 began, compounding an already difficult situation.
Some improvement seen
With two CWT herd reduction programs behind us already and another one in the works as I write this article, we are just now starting to see some improvement in milk prices. Hopefully, by the time you read this, we will be at a much higher price level.
Regardless of numerous government intervention programs that have been instilled this year, our economy remains anemic at this point. Funding provided to the banks in late 2008 was intended to stimulate their lending and keep businesses going forward. Thus far, I’m assuming that this must be set up on a “delayed reaction” basis since I observe a great deal of anxiety on the part of most bankers about lending additional funds.
Recently, I was waiting to meet with a client’s loan officer and one of the bank’s credit administrators, regarding a possible restructure of their loans. The loan officer informed me that his credit administrator was in no mood for “negotiations.” I won’t share with you what I was thinking in response to his comments, but I sort of felt like the guy who, along with another gentleman, was being escorted to the “firing squad.” When the guard escorting them asked if they would like to be blindfolded before being shot, the more feisty one replied, “No, I’m going to stick my tongue out at them when they lift their rifles to execute us,” to which the other prisoner replied, “Shhh! Don’t make trouble…”
Many vendors impacted
Of course, the challenges in the dairy industry have carried over to many vendors, such as feed companies, who are also under pressure from their lenders to remain profitable and keep their accounts receivable as close to current as possible. Yet, producers are being asked to cash flow when they are getting less than $10/cwt for their milk.
What can we do?
I’m not sure that anyone knows with absolute certainty, but listed below are my “Top 10” steps that have worked very well in practice. Producers who have adhered closely to these steps have been positioned to handle this downturn relatively well, several with a positive cash flow year-to-date.
Please keep in mind that positive results do not necessarily come from any one or two of these steps, but rather are a direct result of each and every step contributing to the others to have both a positive and compounding effect.
Additionally, as a foundation, I believe it is important that we establish a positive attitude. Believe me; this year has tested mine, too. Periodically, I have had to check my own outlook, because it is so easy to become negative in this financial environment. However, these are the times when people are looking for positive leadership, whether in your business, your community or your family. So keep it positive and take full advantage of these “Top 10” steps:
1.) Setting Annual Goals – The beauty of this process is that it forces us to really think. I am not suggesting that you haven’t been thinking, but the goal-setting process changes our focus from “problem solving,” which we all have been doing during 2009, to process improvement and overall achievement of our objectives. As author Lee Brower stated in his book, The Brower Quadrant – Live Life Deliberately, “Goals exist to get us in motion. They serve no other purpose.” As he goes on to explain, breaking through the inertia of standing still and get started is what separates achievers from dreamers. This is further reinforced by management guru Peter Drucker who said, “The best way to predict the future is to create it.”
2.) Development of a Disaster Agenda – This leads us to think about the three worst items that could happen to our business. Then, in response to those, we outline what the best response would be. Even if those items don’t occur, but something similar happens, we will be better prepared to respond successfully. This process can really stimulate great business thinking, which leads to greater success.
3.) Regular Management Team Meetings – These sessions are centered on dairy herd management issues, nutrition, reproduction and other challenges being faced. As a result, they should involve your nutritionist, veterinarian and key management personnel. Of course, we also focus on making managerial changes that fit well with the goals we set in No. 1 above.
4.) Regular Finance Team Meetings – During these sessions, I discuss with clients multiple issues that are forthcoming such as capital expenditures, monthly and annual budgets, financing needs, and other items that can impact our ongoing cash flow and profitability.
5.) Cash Flow Comparisons – These are completed every month to monitor how we are doing in terms of ongoing cash flow vs. our annual budget. Then, of course, we can make adjustments as we proceed through the year. These comparisons are the quickest method to catch costs that are getting out of line vs. our plan.
6.) CPA Prepared Financial Statements – These are an absolute must for two reasons. First, they are an excellent tool to have for the ongoing financial management of your dairy operation. Additionally, they assist both you and your lender to truly understand what is going on in your business, because these accrual financial statements account for the changes in inventories, prepaid amounts and accounts payable within your business, not just the cash inflows and outflows that we watch monthly.
7.) Bank Meetings 2X per year – This can be critical to your operation since you need your banker to be involved as part of your overall team. He or she needs to understand what your business’ strengths are and what items are areas for future improvement. They also appreciate being kept up to date on challenges you are facing and any plans you may have in mind for expansion, managerial changes, and incorporation of the next generation into your business. This is particularly true if the proposed changes will require added financing.
8.) Milk Marketing Plan – This is an absolute must today, particularly with the increasing amount of volatility and fluctuation in milk prices. Understanding your break-even price level and knowing how to position your business to achieve that price will continue to be essential to your financial future. Get involved in your own marketing plan by working with an options broker that you trust. He or she can be invaluable to your business.
9.) Nutritionists – While my personal preference is to use an independent nutritionist to develop feed rations for your herd, the most important item is to get advice from someone you trust. Not only is this beneficial from a nutrition perspective. It can also be helpful in keeping up to date on what commodities are doing in terms of price and availability, as well as the outlook for current and projected costs of hay and silages.
10.) Quarterly Inventories – These are valuable for your accountant to measure changes in your feed supply (remember the cash to accrual basis adjustments), and they are also crucial to your overall feed management. As you know, there is nothing worse than running out of a feed item that is not readily available or that has skyrocketed in price. It is difficult to buy corn silage in December. Additionally, bank auditors are really zeroing in on feed lines that are out of compliance, in other words where there is more feed loan than there is inventory to support it. Keeping close track of your inventories will help to keep you out of this painful situation.
I hope you find these “Top 10” steps helpful as you move forward in the coming year. Remember that now is the best time to plan for your success in 2010. As a help in getting started, be sure to utilize the “Gratitude Principle,” as defined by Dan Sullivan, president and co-founder of The Strategic Coach organization. In spite of the industry downturn in 2009, we all still have a great deal to be thankful for. Thus, Dan suggests that we ask ourselves, “What can I be grateful for?” Try it. I think you’ll be glad you did!
“Just remember – when you think all is lost, the future remains.” –Bob Goddard