Our banker wants us to sell our dairy cows and heifers because we lost money milking cows in 2015, 2016, 2017 and 2018. I’ve heard that cows are selling for as little as $600 each. I told him it makes more sense to keep milking them until the milk price rises and cow prices go up instead of selling them now. We are not being forced to sell, but he is suggesting we may not want to wait. I’m willing to give it another year before pulling the plug. Selling the cows now seems like the wrong thing to do. We farm 200 acres and milk 70 cows, and we have a 24,000-pound herd average. My wife works full time off the farm, and we are basically living on the money she earns from her job and her health insurance to pay our family living expenses. We have a $220,000 mortgage that we are paying interest only on. We are current with the co-op, the vet and all of our suppliers. What are your thoughts?
Doug Hodorff: All the information you shared seems to raise many questions. First suggestion would be to understand your banker’s thoughts. You stated you are current on day-to-day expenses and paying interest only. I would suggest you look at a longer-term strategy. Your banker is saying you haven’t been in a positive cash flow for four years. In my view, you have to have a longer-range plan than to continue as is.
In these times of low cash flow and not a good positive outlook, it is tough, to say the least. When you are current on bills, you will need to have a plan to continue at that financial position. You will need to be open to all options if you continue to farm. There is always some low-hanging fruit in your business. Reduce some feed costs, raise only enough heifers, sell some low producers. In these tough times, we will need to make some really tough decisions about the future.
Sam Miller: Unfortunately, your situation is all too familiar in the dairy sector today. Four years of losses erodes both your equity and energy. The decision to liquidate the business hinges on many factors, including the value of the assets, your plans for the future and your financial circumstances. Analyze several scenarios: liquidating the herd now, operating the business through 2019, and operating the business until milk prices historically peak during the fall of the year and then selling the herd. Make some assumptions as to what you could get for the herd if you were to liquidate, and then compare the cash flow, equity and cash implications if you were to sell.
You should also consider what you will do with the farm and for employment if you were to exit dairy farming. This is not an easy decision and will take some time to evaluate. An Extension ag agent, farm technical college trainer, your accountant or your banker can assist you in analyzing several scenarios. There is no right answer, but completing this analysis can guide you to making an informed stay-or-exit decision. Good luck with your analysis.
Katie Wantoch: Unfortunately, I fear that you are not alone. Farmers are having to make difficult decisions, and it becomes stressful when you are pressured to do so. First, I would encourage you to find someone who will listen nonjudgmentally. During challenging times, it can be helpful to find someone to share your distressing emotions and thoughts with before they offer any options and resources to aid you in your situation. Seek out a person who can provide reassurance and practical help.
Hopefully you and your banker have analyzed the cash flow of the dairy farm. Have you also done an enterprise analysis? The enterprise budget is a means to analyze the profitability of a particular enterprise, such as only the dairy or crop piece of your whole farm. Reviewing each enterprise helps uncover where there are potential opportunities to improve your income and openings to reduce costs. By conducting this exercise and looking for these options, you can prove to your banker that you are dedicated to your business and that they should continue to work with you during this next year.
Land leasing challenge
I am a 75-year-old widow. I live on Social Security and the money I receive from my neighbor who rents my 160-acre farm. He pays $150 an acre for 150 tillable acres. Another farmer who farms 10 miles away offered me $175 an acre, but I don’t know him. I’m concerned that he may not be able to pay me, and then I won’t have enough income to live on. Should I continue to rent my farm to the neighbor who I have known for 40 years and take less money, or should I gamble and go with this farmer who is willing to pay me more money? Please advise.
Hodorff: You should stay with the sure thing. It’s not worth the aggravation for $3,750. You are taken care of adequately now, so feel blessed that you have such a great neighbor. Too many times we look for that extra dollar, and it becomes very elusive. At the very least, talk to your present renter and ask for a small increase over last year’s rent. The amount of rent per acre seems fair. I don’t know where you are located, but you must feel you are being treated fairly. My suggestion would be value your relationship more than those dollars. You will be rewarded.
Miller: Fortunately, you have choices for the farm rent. If you are interested in the higher rent, you have two courses of action: Contact your existing tenant indicating you have been offered a higher rent and see if he would increase his rental rate; or check references on the other farmer to see if he is reputable and will pay you. If the existing tenant agrees to increase rent from the existing rate, at least you know who you are renting the land to, and you’ll have slightly more to live on. If you decide to rent to the other farmer, you may want to require payment upfront. If you are not comfortable with references for the other farmer, you may want to continue renting to your long-term neighbor.
In either case, protect yourself by having a written agreement between you and the tenant, preferably drafted by an attorney. Good luck with your negotiation.
Wantoch: Farmland cash lease payments have gone through a cycle similar to commodity prices, though not as tumultuous. Rent adjustments may be made for this upcoming year due to continued low prices; however, local demand, soil fertility levels, etc., may keep prices at or above previous levels. Land is an expensive resource, and operators may consider leasing farmland versus purchasing land if they have limited capital.
You should treat the leasing of your farmland as a business agreement between yourself (the owner) and the farmland operator. A farm lease is a legal instrument that describes that agreement and should always be in writing. The lease is described as the basis for combining the landlord’s and the tenant’s resources of land, labor, capital and management to efficiently produce farm commodities. A good lease is the first step toward a satisfactory operating relationship, although it does not take into account emotions, history and how comfortable you should be with the operator of your farmland. Weigh the pros and cons. Farming is a gamble year after year, but stick to playing with chips at a casino.
Agrivision panel: Doug Hodorff, Fond du Lac County dairy farmer; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Dunn County Extension agriculture agent specializing in economic development.
This article provided by NewsEdge.