Ever since the increasing popularity of non-dairy alternatives, dairy farmers have suffered from depressed prices and marginal profitability, causing considerable stress throughout the industry. The situation became even worse earlier this year, when the price of milk suddenly dipped to historically low levels due to supply chain disruptions caused by COVID-19 — only to rally in the past few months to new highs not seen since 2014, the industry’s last banner year.
Shelter-in-place orders across the country resulted in hundreds thousands of closed restaurants, resulting in a massive milk oversupply, which in turn lead to farmers dump millions of gallons of fresh milk. And while milk prices seem to have (for now) recovered, there are concerns that when government subsidy programs end, the oversupply issue could reemerge and again threaten the long term sustainability of this essential industry.
Moreover, not all businesses in the dairy industry have been lucky enough to benefit from the recent rally in milk prices. The dip in dairy profits has had a particularly acute effect on farmers and distributors whose milk is intended for the restaurant industry. Even when restaurants reopened and the price for milk rebounded, the weakened supply chain made it difficult for customers to actually procure milk. All the meanwhile, operations distributing through grocery stores and to cheese producers have been mostly insulated from these misfortunes.
The upshot of this discrepancy is that in a market as unstable as milk currently is, there is no telling what can happen. The recent volatility coursing through the dairy industry underscores the need for shrewd financial planning to ensure the continuing operability and profitability of one’s business. To that end, BPM’s Agribusiness Industry Group has compiled its top three steps for businesses whose cash flows have been negatively affected by the turbulence in milk prices, to take immediately to preserve the financial health of their business.
Get a Real-Time Budget
Most businesses are accustomed to creating budgets on a yearly or quarterly basis — and usually that is enough. But when a business’s revenue is so heavily tied to the fluctuating price of a commodity, like milk, traditional budget planning may not be accurate enough to keep the business in good financial standing. For instance, if a dairy farmer’s budget planned expenditures under the assumption that milk would be fetching $18 per hundredweight, but the prevailing price is only $14, that very well could lead to a dairy spending quite a bit more on feed, labor and other direct costs than it is bringing in.
Real-time budgeting aims to minimize the obstacles that result when a business’s costs or income deviate from what traditional budgeting assumed. Unlike traditional budgeting or even AI- or analytics-assisted budgeting, its purpose is not to predict the future. Instead, it deals in the present. It takes stock of the business’s current financial condition and determines where to allocate spending on that basis. So, for instance, if there is a significant dip in milk prices, real-time budgeting tells you where you need to pull back.
And it is not only helpful for making sure you have enough cash to pay your bills, as it can also allow businesses to take advantage of opportunities. Real-time budgeting can identify situations where there is unexpected room in the budget to increase spending on, say, capital investments or other strategic improvements.
To be sure, real-time budgeting is not a replacement for quarterly budgeting. You still need a long-term plan for where you would like your business to be one year or one quarter from now, and a budget is essential to that planning. And while software definitely speeds up the process, real-time budgeting definitely requires extra work. But that extra work can pay off massively in the form of not finding your business overextended, avoiding putting your business in a bad place with creditors or vendors, and being able to take advantage of the opportunities available to your business.
Sell Assets, if Necessary
When there is a gap between how much the farmer is bringing in and how much they are spending, the difference has to come from somewhere. Dairy farmers (and other businesses along the dairy supply chain) negatively affected by today’s milk market have a lot of decisions to make. They can try to cut costs. For instance, farmers could adjust the feed they give to their cows. Of course, lower quality feed means less milk production — which means less money coming in. Indeed, many cost-cutting measures can have these kinds of downstream effects.
The other option is finding a way to bring in more money, and in a tough milk market, that may very well entail selling assets. Unfortunately, business owners typically tend to be averse to selling assets, and dairy farmers are no different. Psychologically, no one wants to see the size of business shrink. But there can be tremendous power in selling off assets. A business is a dynamic entity; most will grow and shrink many times throughout their lifecycle, whether the business owner likes it or not. A savvy business owner knows it can be advantageous to scale down, especially if the only other option is bleeding cash, and then scale back up again when conditions are better.
It is understandable to not want to lose all that work you put into growing your business. But ultimately, it may be your best bet. Plus, if you truly commit to real-time budgeting, you can be sure that you will have the chance to take up all the future opportunities to grow your business that come your way.
Communicate With Lenders and Vendors
There is a tendency among business owners to try to hide their business’s distressed condition and just hope it will all work itself out. This is the exact opposite approach business owners seeing budget shortfalls should take. The sooner you communicate your status to banks and vendors to whom you owe money, the better chance you will have to work out a payment plan acceptable to all parties. Cluing in these parties early and with transparency establishes a stronger sense of trust and may even encourage them to take a more flexible approach to your situation.
Communicating with banks in particular is essential, if your business hopes to negotiate new credit lines in the future. Typically, banks will want to see proof that your distressed business is still capable of servicing its debt. To do that, they often require distressed business to bring in a trusted, third-party expert to ensure forecast accuracy and credibility. In most cases, these corporate finance experts will help you put together a feasible plan that preserves your business while appeasing the bank’s desire to see its money and interest.
Trust Your Financial Advisors
While the collapse of milk prices was outside the dairy industry’s control, it is the country’s dairy businesses that must shoulder the burden of this turbulent market. But they do not have to go it alone.
One of the top agribusiness accounting and consulting firms on the West Coast, BPM’s dairy client base numbers in the dozens, furnishing us with unparalleled insights into the nuts, bolts and nuances of the dairy business. Our large and diverse client base is not only a testament to our efficacy as advisors and consultants, but it also provides us a strong frame of reference from which to immediately identify any anomalies in your business’s financial statement and help you swiftly rectify them. And for businesses seeing budget shortfalls as a result of the industry’s current instability, our Corporate Finance Consulting Group’s proprietary five-step turnaround approach gives your business the best chance at renewed success.
To learn more about how BPM can help your dairy business solve its cash-flow difficulties, contact us today.