Dairy Operators Encouraged To Watch Finances During Pandemic

The dairy industry has experienced extreme uncertainty over the past decade, only to be followed by even greater concern caused by the global COVID-19 pandemic. During these times, one financial expert said it’s even more important to keep a close eye on farm finances. Cornell University Ag Economics Professor, Chris Wolf said it’s important dairy producers remain resilient as they face uncertainty.

“The last really good year for dairy farms in this country was 2014. We’ve been in a boom or bust type situation, as far as dairy farms go, but the last boom was 2014.”

Distressed profit margins, he noted, over the past six years has resulted in many dairy farmers being forced to drain away any financial cushion they may’ve had. But there’s still reason to remain hopeful.

Wolf said that downward path cannot continue forever. He noted that given the number of farm exits that have happened in the last couple of years, there will be a better return year. But, between now and then, Wolf says dairy producers will need to run their operations “lean and mean.”

“What I think farms need to do is, first of all, take a hard look at their profitability, solvency and liquidity positions. Once you do that, you can have some idea of what kind of strengths and weaknesses are in regards to production and profitability, but also what your risk position is relative to solvency and liquidity.”

The closer an operation gets to some of those important thresholds, the more critical it is to pay attention to every detail on the farm’s financial analysis, Wolf added.

“Things that you could do. First of all, is to start by measuring and paying attention to that, which is not so fun to do—farm financial analysis—when things don’t look great, but that’s actually when it’s the most important.”

Wolf also recommends identifying the available risk management opportunities and listing where any future liquidity will be used in the future.

“First of all, again, current on my debts and then, thinking about required maintenance that — things that may have been put off over the years. Then, when I have an opportunity to invest, where can I put that that’s going to generate revenue?”

Dairy producers should conduct a complete financial analysis of their operation, Wolf said, and be sure to evaluate all aspects, from feed to labor costs.

“Feed is the single biggest cost to production, and I think that a lot of dairy farmers, rightfully, pay a lot of attention to feed. But the single biggest indicator over time on the farms that we deal with on profitability is the labor cost. I think understanding what the labor cost is, including and accounting for unpaid family management and labor.”

With all this in mind, dairy farmers can have a clear picture of where they are, what they need to move forward; and hopefully, be well-positioned for brighter days.

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