By Phil Durst
The thermometer may not indicate the approaching cropping season and your equipment may continue its winter hibernation, truly the time to prepare for that season is upon us. Before equipment is readied and inputs are ordered, the finances must be lined up.
The economics of dairy farming over the last couple of years have been challenging to say the least. Low milk prices have meant that many dairy farmers will not show profits for 2017. Considering that smaller profits may have also been repeated in 2015 and 2016, many lenders are moving toward an increasingly cautious approach to pumping more money into dairy businesses.
While spring planting may be months away, farmers cannot assume that just because they have had a line of credit approved in the past, that money will be renewed again for 2018. Michigan State University Extension recommends that right now is the time to start preparing for the financial aspect of spring planting and the real cost of the summer of 2018.
Here are some items you should consider for preparing for the upcoming season:
- Don’t delay. Even if your taxes are not completed, it is time to assemble your records and open discussions with your lender. They need time to evaluate your records and the prospects for the coming year. If your lender tells you that they will not extend you additional credit, you will need 60 to 90 days to work through credit requests with other potential lenders. Lenders will want to see your balance sheet as of December 31, 2017, 2018 projected cash flow and profit/loss reports for 2017, 2016 and 2015.
- Project your cash flow for the year. It is critical to anticipate your cash flow in years like this because understanding how income and expenses intersect with time will let you communicate to a lender exactly how much you will need, when and for how long. Make your cash flow detailed, considering all costs, and use market values for milk price, adjusted according to how your prices have been relating to Class III market prices. Michigan State University Extension has a Farm Cash Flow Spreadsheet available at: http://www.canr.msu.edu/farm_management/finances/budgets-production-costs-decision-making-tools
- Reexamine your crop plans. It is a good time to question the way you have been doing things. Should you be planting the same number of acres that you have in the past to the same crops? Is there marginal land that you could leave fallow or rent out? Are there cooperative arrangements that you could enter into for ground and crop work?
- Consider your long term plans. If profits have been negative for several years then consider that it is time to change your business. Either change to develop a more profitable model or consider alternatives to farming. That may include transitioning part of your farm to the next generation or selling land.
- Seek advice. Bring together a team of advisors to help you think through alternatives and strategies. Extension Educators can be an important part of helping farmers evaluate alternatives and think through the consequences with them. Include other key advisors such as your lender, feed consultant and managers who can look at opportunities and constraints with you.
- Make it a priority. There are always things that can take you away from doing the paperwork and business analysis that many don’t enjoy, especially in times like this. However, getting your house in order in regard to upcoming expenses should top your list of priorities.
There is a real concern that some farmers may be surprised this year by the response of their lender when they go looking for a seasonal loan. The point is not to assume that your credit will be renewed but to start early and consider changes to your business plan.