6/09 Accounting for Profits: Passing thoughts

By Bob Matlick

 

“Farming is becoming more of a business than a way of life. To compete in today’s market, producers must understand everything from genetic crop engineering and satellite mapping of soil to hedging on futures exchanges and how international markets impact local markets.”

Bob Matlick, CPA, is a partner in the Agriculture Department with Moore Stephens Wurth Frazer and Torbet, LLP,  in Visalia, Calif. Contact him by e-mail at: bmatlick@mswft.com or call, 559-732-7140.

Bob Matlick, CPA, is a partner in the Agriculture Department with Moore Stephens Wurth Frazer and Torbet, LLP, in Visalia, Calif. Contact him by e-mail at: bmatlick@mswft.com or call, 559-732-7140.

After reading this quote in Scythe and Spade Co. Spring 2009 Agriculture Newsletter, I began to think about my 30 years in agriculture finance and consulting. While not specific to the dairy industry, I believe the statement holds true to any agriculture enterprise – especially dairies.

The “average” size of a dairy continues to rise on an annual basis, with the average California exceeding 1,000 cows for the first time, compared to an average herd size of approximately 275 cows when I began my career in 1978. It is not uncommon for dairies to be 4,000 to 6,000 cows, plus replacements. With the larger operations, the issues of running a business become more burdensome, expending the energy and time of the owner/operator.  Here are some thoughts I reflected on recently.

Finance/lenders

Gone are the days of the lender coming to a dairyman’s house to discuss the issues at hand, borrowing needs for the upcoming year and assisting in the preparation of a two-page balance sheet. Lenders now require accrual basis financial statements on a quarterly or semi annual basis prepared by accountants, monthly borrowing base reports, not to mention answers to borrowing covenants that are out of compliance. These tasks require assembly of information, understanding that information and in times of economic distress lengthy negotiations. Additionally, there are a multitude of various interest rate options that can change over a short period of time that must be tracked, evaluated and acted upon.  The days of prime-plus-1% as the annual rate are gone.

Environmental regulations

Air and water regulations on a state and federal basis are in a constant state of flux influenced by the political authorities and special interest groups. Ongoing reports must be completed on a timely basis in an effort to stay within today’s compliance terms. Various mitigation solutions must be evaluated for efficiency and cost. All of the reporting and evaluating takes considerable time and energy from the day to day operations of the dairy, which dairy operators did not deal with in the early 1980s.

Price volatility

The Class III milk price for the period from 1980 to 1990 ranged from a high of $12.57/cwt. (on an annual basis) to a low of $11.03/cwt. or a range of $1.54/cwt.  For the period of 2000 to 2008, the Class III price ranged from a high of $18.04/cwt. (on an annual basis) to a low of $9.74/cwt. or a range of $8.30/cwt. Obviously a dairyman could project income for a 12-month period in 1985 with a much larger degree of accuracy as compared to current markets. To make matters worse, the volatility has become even more severe. The July Class III 2009 contract traded around $15/cwt. in early April 2009. Forty-five days later at the time of this writing, the July contract is trading at $11.85/cwt., a range greater than the whole 10-year period during the 1980s. The use of using the futures markets to hedge milk positions was not even a vehicle that could be utilized in the 1980s.

That is just the income side of the equation, couple the income volatility with the large swings in corn (in excess of $7 per bushel to $4 per bushel) and fuel in the past 18 months and the ability to forecast a 12-month period has become a very difficult and time consuming task on each dairy. A dairyman has had to become familiar with terms like “burn rate,” “puts,” “options,” etc. In other words a new language has entered the industry.

 

Management practices

Recombinant bovine somatotropin (rBST), sexed semen, TMR and RoundUp Ready corn were terms not heard in the 1980s. Today they are commonplace in the dairy vocabulary. Each new practice, product or technique requires evaluation and devotion of owner/management time and energy. In some cases the time expended is prolonged, with uncertain outcomes making decisions difficult. Couple the additional management challenges with the “instant” flow of information provided by laptop computers, scanners, Blackberries and cell phones and the dairy manager can be quickly overwhelmed.

 

Parting thoughts

While the average herd size has grown tremendously in the past three decades the drain on management time, energy and expertise has far surpassed the herd growth. Dairying has become a business and an owner/manager must decide on where their skills are most beneficial to the operation as a whole. Is it with the cows? Is it in the office collecting and analyzing information? Or is it overseeing a group of managers and professionals that provide input and guidance and then making the best decision possible with the best and timely information possible?  

Just my thoughts. 

 


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