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Managing through Turbulent Times  Geoff Benson Dept. of Agricultural & Resource Economics North Carolina State University ...
GEOFF BENSON, ARE, NCSU
Financial Trends <ul><li>A 20-year history of large and unpredictable price swings causing cash flow problems </li></ul><u...
Trends <ul><li>Current trends are for fewer and larger dairy farms and regional shifts in production </li></ul><ul><li>Key...
Financial Performance for Selected New York Dairies, 2005 & 2006 GEOFF BENSON, ARE, NCSU Source: 2005 & 2006 Dairy Farm Bu...
STEPS IN DECISION MAKING (RADAR) <ul><li>R - Recognize the  problem (or opportunity)  </li></ul><ul><li>A - Analyze the al...
“ What financial shape are you in?” <ul><li>Is the farm  profitable  most years based on returns on assets & to management...
“ Do you know your cost of production?” <ul><li>Long run competitiveness depends on  relative  profitability </li></ul><ul...
“ Do you know your cost of production?” <ul><li>Operating cost - out of pocket expenses, e.g. bought feed, forage producti...
“ Do you know where the money went?” <ul><li>Four sources and uses of cash: </li></ul><ul><ul><li>Farm Operations </li></u...
Cash Flow “Stretchers” <ul><li>Draw on financial reserves </li></ul><ul><li>Sell non-farm assets, e.g., timber </li></ul><...
Herd Management <ul><li>Re-evaluate the profitability of your production practices </li></ul><ul><li>Focus first on areas ...
Herd Management <ul><li>Revisit practices most affected by lower milk prices and higher input costs, e.g. feed, fertilizer...
Conclusions <ul><li>You pretty much manage the farming operation in low price periods the same way you should be managing ...
Summary <ul><li>The future will look a lot like the past -- volatility and low average returns will remain – but milk pric...
Contact information <ul><li>Geoff Benson </li></ul><ul><li>Phone: 919.515.5184 </li></ul><ul><li>Fax: 919.515.6268 </li></...
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Managing Through Turbulent Times- Geoff Benson

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Dr. Geoff Benson of North Carolina State University and Dr. Jack McAllister of the University of Kentucky collaborated to create this presentation. Dr. Benson presented this on November 10, 2008 as part of DAIReXNET's "Financial Outlook for the Dairy Industry" webinar.

The webinar is archived at http://www.extension.org/pages/Archived_Dairy_Cattle_Webinars.

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Managing Through Turbulent Times- Geoff Benson

  1. 1. Managing through Turbulent Times Geoff Benson Dept. of Agricultural & Resource Economics North Carolina State University & Jack McAllister Department of Animal and Food Sciences University of Kentucky
  2. 2. GEOFF BENSON, ARE, NCSU
  3. 3. Financial Trends <ul><li>A 20-year history of large and unpredictable price swings causing cash flow problems </li></ul><ul><li>Historically, periods of really low and high prices are short </li></ul><ul><li>Length of time from peak to peak or trough to peak varies widely </li></ul><ul><li>Profit margins per cow and per cwt of milk are slim, on average, and getting slimmer </li></ul><ul><li>Cost increases will (must) mean higher average milk prices in future but likely will not change past trends </li></ul>GEOFF BENSON, ARE, NCSU
  4. 4. Trends <ul><li>Current trends are for fewer and larger dairy farms and regional shifts in production </li></ul><ul><li>Key Questions </li></ul><ul><ul><li>Can I make it through this downturn? </li></ul></ul><ul><ul><li>Do I want to? </li></ul></ul>GEOFF BENSON, ARE, NCSU
  5. 5. Financial Performance for Selected New York Dairies, 2005 & 2006 GEOFF BENSON, ARE, NCSU Source: 2005 & 2006 Dairy Farm Business Summary, Cornell University Items in each column are ranked independently Item 2005 2006 Low 10% Ave-rage High 10% Low 10% Ave-rage High 10% Total Cost, $/cwt $23.73 $15.45 $13.38 $24.96 $15.30 $12.93 Net Farm Income, $/cow -$132 $551 $1,268 -$653 $118 $811 Return on Assets, % (+ apprec.) -4% 10.7% 19% -11% 4.0% 12%
  6. 6. STEPS IN DECISION MAKING (RADAR) <ul><li>R - Recognize the problem (or opportunity) </li></ul><ul><li>A - Analyze the alternatives </li></ul><ul><li>D - Decide on a course of action </li></ul><ul><li>A - Take action </li></ul><ul><li>R - Take responsibility and monitor results </li></ul><ul><li>Source :S. G. Isaacs, UKY </li></ul>GEOFF BENSON, ARE, NCSU
  7. 7. “ What financial shape are you in?” <ul><li>Is the farm profitable most years based on returns on assets & to management? </li></ul><ul><li>Does you have cash flow to meet operating expenses, debt service, family living needs in a timely manner? </li></ul><ul><li>Is the business solvent – is debt load low and equity high as collateral for loans and as a reserve? </li></ul><ul><li>Financial performance cannot be predicted from farm performance </li></ul><ul><li> There are relatively few production practices that can be recommended in all situations </li></ul>GEOFF BENSON, ARE, NCSU
  8. 8. “ Do you know your cost of production?” <ul><li>Long run competitiveness depends on relative profitability </li></ul><ul><li>There is wide variation among farms, for a variety of reasons </li></ul><ul><li>You cannot control your milk price </li></ul><ul><li>You can only manage your cost of production </li></ul><ul><ul><li>Cows </li></ul></ul><ul><ul><li>Heifer raising </li></ul></ul><ul><ul><li>Crop production </li></ul></ul>GEOFF BENSON, ARE, NCSU
  9. 9. “ Do you know your cost of production?” <ul><li>Operating cost - out of pocket expenses, e.g. bought feed, forage production, vet, fuel, repairs </li></ul><ul><li>Fixed/Ownership/Investment costs </li></ul><ul><ul><li>Depreciation </li></ul></ul><ul><ul><li>Interest </li></ul></ul><ul><ul><li>Taxes & insurance </li></ul></ul><ul><li>Labor cost or charge for the value of your time </li></ul><ul><li>How do you compare to other farms? Specific benchmarks are needed </li></ul>GEOFF BENSON, ARE, NCSU
  10. 10. “ Do you know where the money went?” <ul><li>Four sources and uses of cash: </li></ul><ul><ul><li>Farm Operations </li></ul></ul><ul><ul><li>New investments & asset sales </li></ul></ul><ul><ul><li>Financing – new debt & debt repayments </li></ul></ul><ul><ul><li>Non-farm income and family living </li></ul></ul><ul><li>Severe problems can have several causes </li></ul><ul><ul><li>Low profits </li></ul></ul><ul><ul><ul><li>High cost of production </li></ul></ul></ul><ul><ul><ul><li>Low milk price </li></ul></ul></ul><ul><ul><li>Recent large new investments </li></ul></ul><ul><ul><li>Large debt repayments </li></ul></ul><ul><ul><li>Large family living needs </li></ul></ul>GEOFF BENSON, ARE, NCSU
  11. 11. Cash Flow “Stretchers” <ul><li>Draw on financial reserves </li></ul><ul><li>Sell non-farm assets, e.g., timber </li></ul><ul><li>Postpone non-essential maintenance and new investments </li></ul><ul><li>Reschedule (extend) debt payments </li></ul><ul><li>Borrow more (if you will be able to pay it back) </li></ul><ul><li>Family members seek new off-farm income </li></ul><ul><li>Cut family living expenditures </li></ul>GEOFF BENSON, ARE, NCSU
  12. 12. Herd Management <ul><li>Re-evaluate the profitability of your production practices </li></ul><ul><li>Focus first on areas that have the biggest potential impact on profitability and cash flow </li></ul><ul><li>Milk still pays the bills and feed is the biggest cost </li></ul><ul><ul><li>Milking herd rations must still be nutritionally sound – cows don’t care what the price of milk is </li></ul></ul><ul><ul><li>Continue with recommended practices for transition cows, cow comfort, cow health </li></ul></ul>GEOFF BENSON, ARE, NCSU
  13. 13. Herd Management <ul><li>Revisit practices most affected by lower milk prices and higher input costs, e.g. feed, fertilizers </li></ul><ul><ul><li>Voluntary culling decisions </li></ul></ul><ul><ul><li>Herd health, including mastitis, involuntary culling, death loss </li></ul></ul><ul><ul><li>Genetic progress for yield, productive life and reduced mastitis </li></ul></ul><ul><ul><li>Reproduction management programs </li></ul></ul><ul><ul><li>Heifers </li></ul></ul><ul><ul><li>Crop production </li></ul></ul>GEOFF BENSON, ARE, NCSU
  14. 14. Conclusions <ul><li>You pretty much manage the farming operation in low price periods the same way you should be managing when prices are favorable </li></ul><ul><li>Stay in control – Measure, monitor and evaluate financial, herd and farm performance to identify problems promptly </li></ul><ul><ul><li>Set farm and financial performance benchmarks, e.g. Milk income over feed costs, feed costs per cwt. </li></ul></ul><ul><ul><li>Measure performance regularly </li></ul></ul><ul><li>Bring in outside advisors to help evaluate financial and farm performance </li></ul>GEOFF BENSON, ARE, NCSU
  15. 15. Summary <ul><li>The future will look a lot like the past -- volatility and low average returns will remain – but milk prices will average higher </li></ul><ul><li>Financial information on profitability, cash flow and solvency are essential </li></ul><ul><li>Financial management must be continuous – Plan for the bad times during good times </li></ul><ul><li>The recommended approach to herd management practices is not much different than when prices and margins are healthier </li></ul>GEOFF BENSON, ARE, NCSU
  16. 16. Contact information <ul><li>Geoff Benson </li></ul><ul><li>Phone: 919.515.5184 </li></ul><ul><li>Fax: 919.515.6268 </li></ul><ul><li>E-mail: Geoff_Benson @ncsu.edu </li></ul><ul><li>Web page: </li></ul><ul><li>http://www.ag-econ.ncsu.edu/ faculty/benson/benson.html </li></ul><ul><li>Jack McAllister </li></ul><ul><li>Phone: 859.257.7540 </li></ul><ul><li>Fax: 859.257.7537 </li></ul><ul><li>E-mail: amcallis@uky.edu </li></ul><ul><li>Web page: http://www.uky.edu/Ag/ AnimalSciences/faculty/ </li></ul><ul><li>mcallisterjack.html </li></ul>

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