Financial Expert Says Know Your Dairy’s Numbers

4/13/2013 7:00 AM
By Charlene M. Shupp Espenshade Special Sections Editor

LANCASTER, Pa. — There is a lot happening in the world today — financial crises in the European Union, the U.S. national debt and rising tensions in the Middle East.

However, one of the most important things dairy producers can do is know what is happening in their own barnyards, according to one dairy financial expert.

“If you are going to be in this business or any business, you have got to know your numbers,” Gary Sipiorski of Vita Plus said at last week’s National Dairy Calf and Heifer Conference in Lancaster.

“You have to know your balance sheet and your cash flow,” he said. “You have got to know your cost of production. It is not going to work unless you know this stuff.”

Talking to the heifer producers, he asked, “Do you know what it costs you to raise a heifer per day?”

Sipiorski calculates the average heifer costs $3.49 per day, including labor and facilities, but said, “You have to have your own numbers, and I hope you are keeping track. It’s got to be yours not mine.”

Corn could be $4 a bushel or $8. Soybeans could be $10 a bushel or $15. The wide spread is because of weather, and Sipiorski said the indication for 2013 crop prices will come around the Fourth of July.

If farmers have good weather conditions in the Corn Belt, corn prices will drop, he said. If they are hit with adverse conditions, corn will climb to $8 or beyond.

Sipiorski said he is worried about where additional corn and soybean acres will come from, because that could mean fewer acres for forage, cotton, peanuts and other crops.

He said there is a change afoot in the feed industry because of higher ingredient costs, with feed companies in the West moving to cash on delivery.

He said he expects prices will average $19 per hundredweight for Class III milk this year. March and April margins look tight, but then the market will turn upward.

He touched on California dairies, saying, “There is a lot of hurt out there. Some of your folks did not recover from 2009, and then you got hit with these higher feed prices.”

Sipiorski said there are a lot of dairy bankruptcies. Dormant dairies are bulldozing facilities and planting high-value crops like grapes.

Looking to the dairy product market, he said there are plenty of export opportunities. There is a drought in Oceana, reducing that region’s milk production. Currently, 13 percent of the U.S. milk supply is exported, adding $3 to $4 per hundredweight to milk checks.

Fluid milk consumption has dropped in the past 30 years, he said, in part because of an increase in other drink options. In contrast, cheese and yogurt consumption has grown.

Talking about Cyprus and Greece, Sipiorski said he has heard people say “big deal” regarding their financial crises because their gross domestic product levels are so small.

However, if a domino effect happens where other countries fall onto hard times, it will have a greater impact on the marketplace, he said, pointing out that several U.S. cities have declared bankruptcy because they can’t cover their debts.

“You keep doing things like this and pretty soon it becomes real money,” he said.

Interest rates are at record low levels, Sipiorski said, because the Federal Reserve has decided to keep them low until unemployment drops or inflation begins to rise.

Does that mean you should lock in your interest rates?

Sipiorski said farmers should talk to their lenders about that and also ask to have their financial benchmarks reviewed.

Three benchmarks a lender should look at are the percentage of equity in the operation, the debt to repayment ratio and liquidity.

“Ask your lender where you stack up,” he said.

A dairy farm should try to sustain more than 50 percent equity, a debt to repayment ratio greater than 1 to 1 and a liquidity score of 1.25 or more, he said.

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