The ag economist details the characteristics of top managers.
“High oil prices, spiking farmland values, inflation and rising interest rates is like 1978-79 all over again,” ag economist David Kohl told dairy producers attending the Professional Dairy Producers Annual Business Conference at Wisconsin Dells, Wis., on March 16.
Kohl said these are volatile economic times, and dairy producers need to manage their farms carefully.
“Milk prices are headed up,” he said. “USDA said they’re going up to $25. But be careful of this run-up in the milk price. Milk prices go up, and your costs for everything go up as well — feed, fuel, fertilizer are already high. Then the milk price drops but your costs stay up for 12 to 18 more months. I’ve seen this happen several times before. I call it the flipper. You have to prepare for this.”
Kohl added, “High prices cure high prices. Farms will add cows, and that will kill the milk price.”
He warned that producers need to watch dairy exports. “China can giveth and China can taketh away,” he said. “One-sixth of all milk produced in the U.S. was exported last year.”
Kohl cautioned producers from looking at their finances only once a year. “That’s a bad idea. You need to look at your finances every month,” he said. “And you have to take ownership of your numbers.”
Kohl said dairy producers need to manage the big three: milk price, fuel cost and interest rates.
“You need to ask yourself — can your business handle a 10% decline in income and a 3% rise in interest rates?” he said. “Good managers will manage the controllables, and they will manage around the uncontrollables. What are the uncontrollables? Washington, Kyiv, Moscow, weather and trade policy.”
Qualities of good managers
Kohl said good managers focus on milk production, milk quality, budgets, cash flows and efficiencies.
He reported that among all farm types in the U.S., less than 50% of farmers know their cost of production, less than 30% have a strategic plan, and less than 50% have cash flows and budgets.
Kohl acknowledged that it is hard to manage through financial volatility. The top 20% of farmers are in the top 20% 7 out of 10 years.
“It’s very difficult to be a top manager 10 out of 10 years,” he said.
He said dairy farmers who have debt-to-asset ratios that exceed 50% can still be successful if they meet the five following conditions:
They are in the top 25% in production and cost efficiency.
They make modest personal withdrawals.
They have working capital backup.
They have a marketing risk management plan.
They have luck with weather and disease.
Write down goals
Kohl said only 4% of people write down their goals. “It’s very important,” he said. “People who write down their goals make nine times more money than those who don’t.”
Kohl said it is important that parents show their children who are involved in the farm business the books. “Get them started young on financials so they understand them,” he explained.
He also advised farmers to develop a transition plan to the next generation. “This isn’t going to happen overnight,” he said. “It often takes three years to finalize a transition plan, but you’ve got to get it done.”
He said he has worked with a lot of families where the grandparents don’t want to transition the farm to the next generation because they have to give up all the perks like gas, insurance and the new Gator.
“All producers need to have a sound relationship with their ag lender,” Kohl said. “They need to be conservative when we are at the top of an economic cycle and courageous when we are at the bottom of an economic cycle. They also need to be consistent all of the time, and they should understand the dairy industry.”
