Focus Management Group

A Better Outlook for Milk Producers?

By: Juanita Schwartzkopf – Managing Director

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Over the past several years, the comparison of milk prices to feed costs has resulted in ongoing difficulties for the dairy farmer, and, therefore, the dairy farm lender.  Based on current prices for both sides of the dairy farmer profit equation, the relationship between milk prices and feed costs would provide improved performance for the dairy farmer for the upcoming twelve months.

The chart below compares the actual prices and futures prices for milk, corn and soybeans.  As shown in the chart below, over the next twelve months the relationship between milk prices and feed costs is forecast to be more stable than it has been, with the relationship able to provide better opportunities for profitable operations.

 

 Please see PDF to view chart in Detail

How does this impact the dairy farmer?

Consider a dairy farmer receiving $18.00 per hundred weight (per cwt) for milk and paying $7.64 per cow per day for feed.  If that feed cost changes to $5.85 per cow per day as a result of recent declines in prices for corn and soybeans, the opportunity to produce positive EBITDA improves dramatically.

The table below considers the EBITDA performance for a farmer under these two feed cost scenarios.  With $7.64 daily feed costs the farmer produces negative EBITDA in three of the six production scenarios.  With $5.85 daily feed costs the same dairy farmer produces positive EBITDA in all six production scenarios.

The first set of performance summaries is based on $5.85 daily feed costs and is highlighted in yellow to represent positive EBITDA at all production levels.  The second set of performance summaries is based on the $7.64 daily feed costs and results in three negative performance production levels and three positive performance production levels, with the red highlighting showing the negative EBITDA production levels.

 

 Please see PDF to view chart in Detail 

How does this impact the lender?

This example shows the potential performance improvement the dairy farmer could experience over the next twelve months.  Farmers will react to this change in performance in many ways, and the lender and the advisors need to be aware of the range of reactions and how those responses might impact repayment.

Some farmers will use this opportunity to hedge milk and/or feed components.  It is important that a farmer using hedging works to lock in performance on a portion of their production, rather than trying to outsmart the market.  Lenders should understand the hedging plan being undertaken and the impact on performance.  A request for a summary of the hedging plan, and the statement of account for the placed hedges should be received.

Some farmers will react by acquiring new assets or performing deferred maintenance on facilities or equipment.  This may improve the farmer’s facilities, which could have deteriorated during recent periods of reduced cash flow.  At this time, a lender with fixed assets as collateral may want to be involved in discussions regarding deferred maintenance.  The purchase of new assets may improve efficiency.  A lender may want to discuss the expected return from the acquisition of new assets.   Countering those aspects of the decision to purchase new assets or perform deferred maintenance would be that liquidity would not be improved.

Other farmers will react by repaying debt – even if it is to the detriment of their operation.  Some lenders may encourage this approach – especially for farmers with limited opportunities to produce positive EBITDA.

Next Steps

Lenders and their advisors should work with dairy farmers to understand the approach the dairy farmer is taking to financial management during the next twelve months.

Discussions with dairy farmers will occur over the next few months, and should focus on:

  • Performance review of 2012.
  • Expectations for feed and milk prices for 2013 and in to 2014.
  • Sourcing of feed over this next twelve month period –
    • Grown on site,
    • Contract growers,
    • Third party purchases.
  • Hedging strategies.
    • How the hedging contracts are being placed?
    • Availability of statements reflecting hedges placed?
    • Any contracts with the milk buyers which would act similarly to hedging contracts
  • Asset acquisition & deferred maintenance
    • Financing strategies.
    • Expected repayment of investment.
    • Any problem with the facility or equipment that are not being addressed.
    • Site visits.
  • Current line and loan repayment strategies and loan renewals.
    • Restructure as necessary.

Most farmers are in the process of providing, or have already provided, year end 2012 financial results to their lenders.  This is an opportunity for both the lenders and the farmers to discuss expectations for the next operating period.  The discussion outline above, coupled with the futures pricing outlook, provides a strong base for the discussions specific to each farmer.

Focus Management Group is able to provide assistance to farmers and their lenders related to financial performance, cash management, hedging and milk contract strategy review, accounts payable management, inventory review, etc.  We have served in a full spectrum of financial advisory and asset review roles for lenders in the agricultural market. Focus Management Group is a leading business restructuring firm headquartered in Tampa, with offices in Atlanta, Chicago, Cleveland, Dallas, and Los Angeles. For more information on our experience with successful turnarounds or restructuring in the Dairy Industry, please contact us.

 

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One Response to “A Better Outlook for Milk Producers?”

Professional Farmer 2014 Key Generator says:

I am genuinely happy to glance at this blog
posts which contains tons of valuable information, thanks for providing these kinds of statistics.

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