Dairy is a volatile market, affected by multiple factors including the war in the Ukraine, inflation, weather, plus supply and demand. Currently, a long downturn in prices is now being followed by a major upswing, with the U.S. reaching the highest ever monthly average all-milk price this year. When dairy farmers have cash on hand, they can look at their business management practices to prioritize where it would make the most sense for them to spend the money.
Although each farm has its own set of unique circumstances and priorities, there are some guidelines for how to best spend money made from higher milk prices.
Accounts payable - Have you been working with vendors who have agreed to a longer pay period? Happily, now is the time to get current with your past vendors. This could also make sense for farmers who are paying a higher rate on deferred payments. In most cases, righting your accounts payable should be the first priority on your list.
Repairs and overhauls – In past years, profit margins were thin or sometimes non-existent. This is the time to look at deferred repair or maintenance, and even more than that, look at major overhauls or updates. In lean times, farmers commonly have to wait to perform such an undertaking, but with the increased prices, this could be the year to get back to baseline, or even move ahead on a bigger modernization.
Operating debt – One of the best parts about paying down operating debt is that if there’s a downturn again soon, that money can once again be available. If farmers get to the point where they have been able to repay operating debt, and they are still accumulating cash, they can look at using money for long-term debt, perhaps that has a higher interest rate. Plus, interest rates are increasing, so this is a good time to evaluate the current offerings.
Automation – Every industry is experiencing labor shortages, and if there’s an opportunity to streamline operations and reduce the requirements on your workforce, this would be a good place to use your dollars. Depending on your farm operation, common automation purchases a dairy farm might consider could be robot installation, feed pushers, and automatic feeders.
Capital investments – In lean years, farmers are in a maintenance state of mind, but in flush years, it’s time to grow the business. Barns, lagoons, cement pads, increasing the herd size –talk with your local loan officer about the best investments for your particular situation.
Employee compensation – It’s great being able to reward key employees, as they are providing an incredibly valuable service and are difficult to replace. If possible, explore health benefit packages and retirement plans to reward your team members.
A factor that will temper the higher milk prices is the combined increased cost of feed, fuel, and fertilizer. Currently, farmers can continue to use as many homegrown forages as possible, and some took advantage of prepaying in 2021. In addition, farmers have been able to use feed inventory from last year. However, in 2023 when feed inventories are gone, and higher input costs continue, farmers may need to depend on some of the cash from the current year. Making use of DRP, forward contracting, and other hedging strategies can be used to try and manage margins.
With the current instability of the market, prices have been moving rapidly, and farmers have to be just as quick. Planning ahead as much as possible is helpful, and with the input from your advisors, you can work to make the best financial decisions for your business.
*Written for the Michigan Farm News Dollars and Sense Column