Working with Dairy Working with Dairy Businesses in Businesses in
Challenging TimesChallenging Times
Kimberly, WISeptember 11, 2009
Kevin BernhardtUW-Platteville/Extension
Participant Case Study Comments:
• What is the son thinking!• What is the daughter-in-law’s education• Operation performance, yield, production• Why does the profitability look the way it does?• Family living expense / lifestyle• Condition of facilities • How much does the son want• Relationship with suppliers • Capital assets • Why is milk production dropping
ContextContext
Annual Class III Prices
02468
101214161820
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Series 1
Series 1
Annual Class III
9
11
13
15
17
19Series 1
Series 1
Monthly Class III Prices
0
5
10
15
20
25
Sep
1999
Mar
200
0Se
p 20
00M
ar 2
001
Sep
2001
Mar
200
2Se
p 20
02M
ar 2
003
Sep
2003
Mar
200
4Se
p 20
04M
ar-0
5Se
p-05
Mar
-06
Sep-
06M
ar-0
7Se
p-07
Mar
-08
Sep-
08M
ar-0
9
Class III Price
Class III Price
14 18
23 19-24
Per cwt costs, prices, & income after charge for Labor/Mgt
CFFM: 101-200 cow dairies, Free stall, no organic or pasture
CDP: 100-250 Cow Dairies in WI (freestall, no pasture, not organic, cost basis of assets)
0
2
4
6
8
10
12
14
2000 2001 2002 2003 2004 2005 2006 2007 2008
ROROEROROA
5 of last 6 years ROE>ROA
CFFM Data (cost)
-10
-5
0
5
10
15
20
25
30
1996199719981999200020012002200320042005200620072008
ROROEROROA
Net Farm Income From Operations (cost)CFFM: 101-200 cow dairies, free stall, no organic, no
rotational grazingCDP: 100-250 cows, all else the same
020000400006000080000
100000120000140000
1996199719981999200020012002200320042005200620072008
CFFMCDP
WE ARE NOT WE ARE NOT ALL THE SAME ALL THE SAME
and and NOBODY IS THE NOBODY IS THE
AVERAGE!AVERAGE!
ROROE (cost basis w tax depreciation)CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, no organic)
-20
-10
0
10
20
30
40
2006 2007 2008
Low 25%Middle 25%High 25%
ROROE (mrkt basis w economic depreciation)CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, not organic, cost basis of assets)
-10
-5
0
5
10
15
20
25
2006 2007 2008
Low 25%Middle 25%High 25%
2008 ROROE & ROROA (cost w tax depr.)CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, not organic, cost basis of assets)
-4-202468
101214161820
Low 25% Middle 25% Top 25%
ROROAROROE
2006 ROROE & ROROA (cost w tax depr.)CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, not organic, cost basis of assets)
-21-18-15-12
-9-6-30369
121518
Low 25% Middle 25% Top 25%
ROROAROROE
Net Farm Income (Mrkt w. Econ Depr)CDP (same farms): 100-250 cows, freestalls, no organic,
no pasture
0
50000
100000
150000
200000
250000
300000
2006 2007 2008
Low 13%Low ThirdAverageTop 25%
Net Farm Income From Operations (cost w. Tax Depr)CDP (same farms): 100-250 cows, freestalls, no organic,
no pasture
0
50000
100000
150000
200000
2006 2007 2008
Low 13%Low ThirdTop 25%
2006 (CDP, 100-250 cows)Mrkt Value of Assets and Economic Depreciation
Performance Measure Low 25% Middle 25% Top 25%Current Ratio 2.06 12.71 3.81
Working Capital:Total Expenses 13.3% 39.84 21.8
Working Capital:Gross Revenue 12.5% 34.3 17.4
Debt:Asset 44.2% 26.9 36.9
Assets:Equity 1.79 1.37 1.59
ROROE -5.1% 3.0 11.6
ROROA -.55% 3.8 9.41
OPM -1.48% 12.1 19.8
ATO 37.0% 31.5 47.6
Interest $35,947 $29,799 $31,205
Interest:Assets 2.3 1.5 2.2
Total Assets (Mrkt) $1,561,716 $1,918,484 $1,403,604
Number of Cows 168 150 160
2007 (CDP, 100-250 cows)Mrkt Value of Assets and Economic Depreciation
Performance Measure Low 25% Middle 25% Top 25%Current Ratio 2.11 9.50 5.15
Working Capital:Total Expenses 13.9 50.7 23.2
Working Capital:Gross Revenue 12.5 39.4 17.0
Debt:Asset 37.6 24.9 32.5
Assets:Equity 1.60 1.33 1.48
ROROE .72 7.11 20.43
ROROA 2.72 7.08 15.46
OPM 8.34 20.78 25.34
ATO 32.6 34.0 61.0
Interest 44,667 35,182 29,334
Interest:Assets 2.25 1.70 1.48
Total Assets (Mrkt, ending) 1,979,979 2,067,714 1,517,532
Number of Cows 151 147 178
2008 (CDP, 100-250 cows)Mrkt Value of Assets and Economic Depreciation
Performance Measure Low 28% Middle 28% Top 28%Current Ratio 2.57 8.52 12.32
Working Capital:Total Expenses 16.6% 30.6 54.1
Working Capital:Gross Revenue 15.8% 24.9 38.6
Debt:Asset 47.5% 23.2 33.4
Assets:Equity 1.90 1.30 1.50
ROROE -3.17% 7.06 17.6
ROROA .92% 6.79 13.6
OPM 2.28% 17.02 27.6
ATO 40.4% 39.9 49.1
Interest $44,062 $29,836 $34,540
Interest:Assets 2.55% 1.35 1.8
Total Assets (Mrkt) $1,726,032 $2,202,736 $1,888,622
Number of Cows 155 172 177
2008 (CDP, 100-250 cows)Mrkt Value of Assets and Economic Depreciation
Performance Measure Low Middle TopBasic Cost:GR 69.7 59.0 52.0
Wages Paid:GR 8.3 10.4 10.3
Interest:GR 6.6 3.5 3.9
Depreciation:GR 7.8 8.4 4.7
NFIFO:GR 7.6 18.8 29.1
Milk sold per cow 18,980 21,090 21,912
SCC 234,611 208,500 213,917
Crop Acres per cow 3.0 3.0 2.4
Forage Acres per cow 1.6 1.7 1.4
Debt per cow 5,048 2,942 3,438
Net Milk Price 19.26 19.48 18.92
Cows 153 172 177
Total Assets (Mrkt ending) 1,824,600 2,202,736 1,888,622
Our Economic World Today
• Interdependent– As trading nations
• VOLATILITY• Dairy Industry structure• Energy• Technology• Interdependent
– As businesses
I’m ProcrastinatingI’m Procrastinating• What’s your mission
– Profits for bank– Satisfied and profitable customer – Reasonable risk-return
• Farm Customer Choices1.Path back to profitability (SR & LR)
• Underlying structure (finance) - Dupont• Mgt capacity (adaptability, business sense)• Personal condition (age, family help, equity, off-farm income)
2.Financially “happy” exit (Phil)
Path back to profitability may Path back to profitability may take some bridge buildingtake some bridge building
– Short Run• Debt restructuring • Increase working capital• Innovative payment arrangements
– Long Run• Financial Analysis• Partial Budgeting• Operational/Strategic alignments• Strategic and Business Planning
Is there current cash flow?(through harvest, through
Spring planting)
Is there sustainable profitability?
YES
Liquidation Liquidation SituationSituation
NO
Generate Cash Flow NO
They Cash Flow, Now is there sustainable
profitability?
YES
Liquidation Liquidation SituationSituation
NO
Financial & Management Diagnostics
-Efficiency -Efficiency-Scale -Turnings-Debt structure -Leverage-5 C’s -Character
GOGO Re-Engineer Operation
Accept & Finance Plan? YES
NO
• Are cash receipts expected to cover cash costs? • Is there some contribution to overhead?• Is current ratio 1.5 and working capital at least
enough to cover family living and debt payments– WC:GR > 20-25%
• Is Ending cash flow:All cash expenses >10%
– If Yes: Move onto next question (profitability)• Cut cash costs where possible
– Don’t throw the baby out with the bathwater.
Is there current cash flow?(through harvest, through Spring planting)
NO:
– Cut cash costs where possible – Don’t throw the baby out with the bathwater
– Outsource low return activities and sell assets– Interest only payments– Restructure and lengthen amortization– New or increased operating lines– Sale of non productive capital assets– Sale of inventory (sale and re-own)– Elimination/Sale of non profitable enterprises
Generate Cash Flow
NO:
– Investment partner– Delay new capital asset purchases– Lower family living– Off-farm employment
Generate Cash Flow
• Is ROROE at a sufficient level to meet business and family objectives?
• Is ROROE competitive with other opportunities?• Is ROROA > interest rate
– And thus ROROE > ROROA• Is the value of unpaid labor and management
covered?• Is depreciation covered?• Is a payment to equity capital covered
Is There Sustainable Profitability?
– Multiple years (trends)– Cost and market basis– Accrual– Benchmark– Search for
Where should Where should management time management time and creativity be and creativity be
targeted?targeted?
Financial & Management Diagnostics
And
Introducing the DuPont System for Financial Analysis
DuPont System• “DuPont Financial Analysis Model is a
rather straightforward method for assessing the factors that influence a firm’s financial performance.” (Gunderson, Detre, and Boehlje, AgriMarketing 2005)
DuPont System – What is It?• The system identifies profitability as
being impacted by three different levers:
1. Earnings & efficiency in earnings2. Ability of your assets to be turned into profits3. Financial leverage
Earnings
TurningsLeverage
Operating Profit Margin
Asset Turnover
Return On Assets (less interest adj.)
Financial Structure
Return On Equity
X =
X =
IncomeStream
InvestmentStream
Earnings
Turnings
Leverage
DuPont System
NFIFO – unpaid labor/mgt + interestTotal Revenue
Total RevenueTotal Assets
Return On Assets
Total AssetsTotal Equity
Return On Equity
X =
X =
Earnings
Turnings
Leverage
cash income +(-) inventory changes
cash expenses +(-) accrual exp changes + purch lstk Depr
labor + depreciation + interest expenses
OK
Too Low
OPMR
ATO OK
Too Low
Total Revenue =
Basic Costs =
Non Basic Costs =
OK
Too Low
NFIFO – unpaid labor/mgt + interestTotal Revenue
Total RevenueTotal Assets
Return On Assets
Total AssetsTotal Equity
Return On Equity
X =
X =
Earnings
Turnings
Leverage
OPMR
ATO
Too Low
OK
Too Low
OK
Too Low
- Unproductive machinery? - Buildings not being used? - Breeding livestock not producing? - Unproductive land?
NO:
• Strategic Planning• Partial Budgeting• Plan the work - work the
plan• Strategic alignments• Efficiency, Scale, Structure• Labor utilization
YES
Is There Sustainable Profitability?
GOGO
Re-Engineer Operation
Accept & Finance Plan?
NO YES
Re-Engineer Operation
Liquidation Liquidation SituationSituation
What Else?What Else?• Reduce Risk
– Loan Guarantee Programs– Marketing– Production– Fixed interest rates (secondary market)– Insurance checkup– Labor– Health
• Sensitivity Analysis
5 C’s5 C’s• Collateral
– yes, but!• Conditions
– What is the loan for?• Capacity• Capital • Character
– Not a computational task!
Be CreativeBe Creative• Is it better to stick to your rules and
policies, or find a way to get some money back?
• Good managers in bad situations could be good future & profitable customers
• How can you minimize losses
Banker on Management Banker on Management Team?Team?
There is a reason they There is a reason they put a human behind the put a human behind the lenders desk and it’s not lenders desk and it’s not for when times are good for when times are good
FinallyFinally
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