A Nontraditional Look at Dairy Financial Strategies

by Dean W. Moreau, president and CEO, Yankee Farm Credit

I’ve been asked to talk about “Financial Strategies for Dairy Farm Success” in a few weeks. With significantly lower milk prices in the forecast, it seems like a good time to share my thoughts on this subject with you.

Let’s take a nontraditional look at this issue. Here are the key financial characteristics of dairy farms:

• High capital investment
• Volatile prices with little pricing power
• Slow growth market at the consumer level
• Dramatic industry consolidation
• Rapidly changing technology

Many of these attributes are common to automakers, computer makers, most consumer goods manufacturers, even ski area managers. The challenge of developing a successful financial strategy in a business with these characteristics is not unique to dairy.

Think of yourself as a consumer products manufacturer as much as you do a dairy farmer. It will broaden your focus and help you learn from the financial successes (and mistakes) of Ford, Dell, Maytag, American Ski Company and Kodak.

"Think of yourself as a consumer
products manufacturer as much as
you do a dairy farmer."

Here are my top five financial strategies for dairy farm success:

1. Set a long-term financial goal.
In today’s highly competitive, volatile markets, you’ve got to pick your spot, then drive toward it. Unfortunately, too few dairy farmers can define how they measure financial success in 10 words or less. A simple goal of “so many dollars of net worth or % net worth” does the trick, if you can defend A nontraditional look at dairy financial strategies why the measure is right for your circumstances.

2. Keep accurate, timely records.
You must be a “numbers person” as you substitute more capital for labor. You don’t need to be an accountant, but you do need the right facts to make good business decisions. If you don’t like numbers, or don’t feel qualified, get professional help.

3. Keep two budgets: An operating budget and a capital budget.
Figure out your capital needs over the next five years. Then decide how you’ll finance them and what your balance sheet will look like. Each year create an operating budget for income and expenses. This should be your blueprint for making a decent profit. Every month, or at least each quarter, compare how you are doing currently with how you did last year and against your budget. Investigate reasons for variances and take quick corrective action.

4. Cost containment and asset efficiency are crucial.
You simply can’t take too much time analyzing big capital investments, because overspending on capital purchases is a killer. Focus on a strategy to maximize the amount of income you can get from every dollar of capital that you spend.

5. Keep a 10-year (or less) schedule for capital debt.
The pace of technology changes in agriculture has been remarkable. The future will be no different. Pay back your debt over the real useful life of each asset. (It’s probably a shorter time than your depreciation schedule.) This will put extra pressure on cash flow, but it reduces interest costs and saves you from paying old debt and financing new assets at the same time.

Our most important goal at Yankee is simple: We want to help you achieve a future of financial success.

This letter appeared in the Winter 2000 issue of Financial Partner (F.P.) magazine, Yankee Farm Credit's customer publication. Click here if you would like to start receiving F.P. magazine in the mail.

© 1999-2005 Yankee Farm Credit, ACA. All rights reserved.