Making the Numbers Work for a Robotic Dairy

2/1/2014 7:00 AM
By Charlene M. Shupp Espenshade Special Sections Editor

When it comes to securing the financing for a robotic dai ry system, the basic lending principles remain the same as if it were a conventional dairy operation.

Tim Beck, Penn State Extension dairy educator, and Lamar King, a Fulton Bank ag lender based in Lancaster, discussed the key principles of securing financing for a robotic dairy barn on Tuesday as part of Penn State’s Technology Tuesday webinar series.

There has been a growing interest in robotic milking, but both speakers said that opting for a robotic expansion banks on the concept that the high costs of the robotic system will offset by lower labor costs.

Beck advised farmers that they have to “own their plan. It’s not just finance, it’s what you are doing for the long term of your company.”

Farmers have to understand their plans and have bought into them completely, he said.

King said his bank has worked with several dairies that have transitioned into robotic operations. He said that when evaluating a proposal for a robotic dairy, in addition to the traditional financial standards for credit, he looks for someone with a love of cows and technology.

“The robots don’t do all of the work,” he said. “You still have to be eyeing the cows. It goes beyond the data you see on your screen.”

This system will not work well for a farm looking to “get away from the cows,” he said.

Beck described several farm financial benchmarks he reviews when working with robotic dairy proposals.

He said he evaluates the repayment capacity of the farm, liquidity, farm debt to asset ratio, net farm income and loan payments per cow.

King said he uses five C’s to evaluate a proposal —character, cash flow, capital, collateral and conditions.

“That is the basis for making a decision, no matter the deal,” he said.

For a traditional dairy parlor/freestall barn, the entire loan will be packaged for a 15- to 20-year program, he said. With a robotic proposal, it will be organized differently because the robotic technology will change before the end of the loan.

King said he also looks to see if the farm has any other businesses, such as contracted livestock or excess crops to market.

Fulton Bank has organized several lending packages with the robotic system in a seven-year operating lease.

King said that right now, with the right proposal and today’s interest rates, robotic dairies work. But looking down the road, that could change with rising interest rates unless robotic milking systems become cheaper.

Beck said a robotic dairy expansion will have a high debt per cow to historical numbers and farmers will have to make sure “milk production will cover it.”

Farmers also cannot assume they will see large production jumps just because of new facilities. Management is just as important.

“If you are not practicing excellent dairy management, you can’t look to facility alone for all of the improvement,” Beck said. “If the plan is reaching too far, you are going to get some resistance to the plan” from the lender, who is going to look at the historical management data.

Beck also said that with any expansion or new construction, there will be environmental planning to improve manure handling and stormwater management.

“This can add costs to a project very quickly,” he said.

Farmers may have to work with conservation districts or a nutrient management adviser to seek grants to offset these costs.

Beck also said persistence and patience will be part of the process. He said it likely will take at least a year before a project is ready to start and there will probably be many revisions to the proposal.

“Be persistent and willing to redesign your plan if the first edition isn’t considered fully viable,” Beck said.

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