May 20, 2020
Jim Dickrell
With all the turmoil in milk markets and government programs, lenders are strongly recommending dairy farmers do a quarterly—or 13-week—cash flow to help them spot impending cash shortfalls.
“It’s good to do an annual cash flow, but the benefit of a 13-week cash flow is that it looks at and allows you to make changes and meet seasonal needs,” says Matt Lange, a business consultant with Compeer Financial. He spoke recently at a webinar sponsored by the Minnesota Milk Producers Association.
“Thirteen-week cash flow budgets can help you understand the timing of your cash needs and you can then see if you’re short,” says Lange. In turn, you can then see if those cash shortages can be covered by your existing operating line of credit or if you will need more.
Lange notes that many producers will receive direct government payments due to the COVID-19 pandemic, and some will receive risk management payments via Dairy Margin Coverage (DMC) payments, Dairy Revenue Protection (DRP) or other futures contracts. But the timing of these payments is typically delayed. DMC payments can be a month or more behind; DRP payouts are often several months out from the current quarter.
If your cash inflows are late, that can cause late payments of bills. “Delayed payments can accumulate and cause problems,” says Lange.
The late spring and summer months can also be huge drains on cash flow. For example, manure pumping and hauling bills often come due. Seed, fertilizer and crop chemical bills are also typically due in the summer months. Plus, if you use custom forage harvesters, those operators must be paid. Semi-annual land rents are typically due in July as well.
If you will have shortfalls, now is the time to communicate with lenders, says Cassie Monger, a dairy lending specialist with Compeer. She urges producers to first review the loans they currently carry and look at the obligations and timing requirements. Then evaluate your operating line of credit and assess your working capital.
If you expect you will be short of cash, you might work with your lender to make interest-only payments for a few months and defer principal payments. You might also be able to lock in lower interest rates to reduce future loan payments and costs. Or, you might rebalance, restructure or consolidate loans to either extend payment terms or lower costs.
Also visit with vendors whom you have lines of credit or bills due. You may be able to work out the timing of payments or the amount paid each month. “The frequency of keeping up with those vendor payments is as important as the amount you pay each month,” add Lange. Again, communication is key.
Finally, understanding your cost of production and what goes into it is also key in managing both cost and productivity. “Use inventoried forage as much as possible to reduce purchased feed costs, but don’t ignore feed quality,” says Lange.
Targeting forage to the right groups of cattle based on feed quality is critical. And with corn as cheap as it is, it might actually make sense to purchase some corn if it will boost production in early lactation cow groups, he says.
milkbusiness.com
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