Working with Dairy
Businesses in
Challenging Times
Kimberly, WI
September 11, 2009
Kevin Bernhardt
UW-Platteville/Extension
Participant Case Study Comments:
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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
Context
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
Annual Class III Prices
Series 1
20
18
16
14
12
10
8
6
4
2
0
Series 1
Annual Class III
Series 1
19
17
15
13
11
9
Series 1
15
10
Sep 1999
Mar 2000
Sep 2000
Mar 2001
Sep 2001
Mar 2002
Sep 2002
Mar 2003
Sep 2003
Mar 2004
Sep 2004
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Monthly Class III Prices
Class III Price
25
20
14
18
23
19-24
Class III Price
5
0
Per cwt costs, prices, & income
after charge for Labor/Mgt
25
20
15
10
5
0
-5
CFFM: 101-200 cow dairies, Free stall, no organic or pasture
Avg Milk Price
COP
Income
CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, not organic, cost basis of assets)
14
5 of last 6 years ROE>ROA
12
10
8
ROROE
6
ROROA
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
CFFM Data (cost)
30
25
20
15
ROROE
10
ROROA
5
0
-5
-10
1996199719981999200020012002200320042005200620072008
Net Farm Income From Operations (cost)
CFFM: 101-200 cow dairies, free stall, no organic, no
rotational grazing
CDP: 100-250 cows, all else the same
140000
120000
100000
80000
60000
40000
20000
0
CFFM
CDP
1996199719981999200020012002200320042005200620072008
WE ARE NOT
ALL THE SAME
and
NOBODY IS THE
AVERAGE!
ROROE (cost basis w tax depreciation)
CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, no organic)
40
30
20
Low 25%
10
Middle 25%
High 25%
0
2006
-10
-20
2007
2008
ROROE (mrkt basis w economic depreciation)
CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, not organic, cost basis of assets)
25
20
15
Low 25%
10
Middle 25%
5
High 25%
0
-5
-10
2006
2007
2008
2008 ROROE & ROROA (cost w tax depr.)
CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, not organic, cost basis of assets)
20
18
16
14
12
10
8
6
4
2
0
-2
-4
ROROA
ROROE
Low 25%
Middle 25%
Top 25%
2006 ROROE & ROROA (cost w tax depr.)
CDP: 100-250 Cow Dairies in WI (freestall, no
pasture, not organic, cost basis of assets)
18
15
12
9
6
3
0
-3
-6
-9
-12
-15
-18
-21
ROROA
Low 25%
Middle 25%
Top 25%
ROROE
Net Farm Income (Mrkt w. Econ Depr)
CDP (same farms): 100-250 cows, freestalls, no organic,
no pasture
300000
250000
200000
Low 13%
150000
Low Third
100000
Average
50000
Top 25%
0
2006
2007
2008
Net Farm Income From Operations (cost w. Tax Depr)
CDP (same farms): 100-250 cows, freestalls, no organic,
no pasture
200000
150000
Low 13%
100000
Low Third
Top 25%
50000
0
2006
2007
2008
2006 (CDP, 100-250 cows)
Mrkt Value of Assets and Economic Depreciation
Performance Measure
Low 25%
Middle 25%
Top 25%
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
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
$35,947
$29,799
$31,205
2.3
1.5
2.2
$1,561,716
$1,918,484
$1,403,604
168
150
160
Current Ratio
Assets:Equity
Interest
Interest:Assets
Total Assets (Mrkt)
Number of Cows
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
44,667
35,182
29,334
2.25
1.70
1.48
1,979,979
2,067,714
1,517,532
151
147
178
Interest
Interest:Assets
Total Assets (Mrkt, ending)
Number of Cows
2008 (CDP, 100-250 cows)
Mrkt Value of Assets and Economic Depreciation
Performance Measure
Low 28%
Middle 28%
Top 28%
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
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
$44,062
$29,836
$34,540
2.55%
1.35
1.8
$1,726,032
$2,202,736
$1,888,622
155
172
177
Current Ratio
Assets:Equity
Interest
Interest:Assets
Total Assets (Mrkt)
Number of Cows
2008
(CDP, 100-250 cows)
Mrkt Value of Assets and Economic Depreciation
Performance Measure
Low
Middle
Top
Basic 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
153
172
177
1,824,600
2,202,736
1,888,622
Cows
Total Assets (Mrkt ending)
Our Economic World Today
• Interdependent
– As trading nations
•
•
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VOLATILITY
Dairy Industry structure
Energy
Technology
Interdependent
– As businesses
I’m Procrastinating
• What’s your mission
– Profits for bank
– Satisfied and profitable customer
– Reasonable risk-return
• Farm Customer Choices
1.Path back to profitability (SR & LR)
• Underlying structure (finance) - Dupont
• Mgt capacity (adaptability, business sense)
• Personal condition (age, family help, equity, offfarm income)
2.Financially “happy” exit (Phil)
Path back to profitability may
take some bridge building
– Short Run
• Debt restructuring
• Increase working capital
• Innovative payment arrangements
– Long Run
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•
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Financial Analysis
Partial Budgeting
Operational/Strategic alignments
Strategic and Business Planning
Is there current cash flow?
(through harvest, through
Spring planting)
NO
YES
Is there sustainable
profitability?
Generate Cash
Flow
NO
Liquidation
Situation
They Cash Flow,
Now is there sustainable
profitability?
Financial & Management Diagnostics
-Efficiency
-Scale
-Debt structure
-5 C’s
YES
GO
-Efficiency
-Turnings
-Leverage
-Character
Liquidation
Situation
NO
Re-Engineer
Operation
Accept &
Finance
Plan?
NO
YES
Is there current cash flow?
(through harvest, through Spring planting)
• 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.
NO:
Generate Cash
Flow
– 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
NO:
Generate Cash
Flow
– Investment partner
– Delay new capital asset purchases
– Lower family living
– Off-farm employment
Is There Sustainable
Profitability?
• 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
Financial & Management Diagnostics
– Multiple years (trends)
– Cost and market basis
– Accrual
– Benchmark
– Search for
And
Where should
management time
and creativity be
targeted?
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 earnings Earnings
2. Ability of your assets to be turned into profits
Turnings
3. Financial leverage Leverage
DuPont System
Earnings
Operating
Profit Margin
Income
Stream
X
Asset
Turnover
Turnings
Investment
Stream
Financial
Structure
Leverage
=
Return On
Assets (less
interest adj.)
X
=
Return On
Equity
Total Revenue =
OK
cash income +(-) inventory changes
Basic Costs = cash expenses +(-) accrual exp changes + purch lstk Depr
Non Basic Costs = labor + depreciation + interest expenses
Earnings
NFIFO – unpaid labor/mgt + interest
Total Revenue
X
Turnings
Total Revenue
Total Assets
ATO
=
Too Low
OPMR
Return On
Assets
Too Low
OK
X
=
Return On
Equity
Too Low
Leverage
Total Assets
Total Equity
OK
Earnings
NFIFO – unpaid labor/mgt + interest
Total Revenue
X
Turnings
Total Revenue
Total Assets
ATO
- Unproductive machinery?
- Buildings not being used?
- Breeding livestock not producing?
- Unproductive land?
Leverage
Total Assets
Total Equity
OK
=
OK
OPMR
Return On
Assets
Too Low
Too Low
X
=
Return On
Equity
Too Low
Is There Sustainable
Profitability?
NO:
Re-Engineer
Operation
• Strategic Planning
• Partial Budgeting
• Plan the work - work the
plan
• Strategic alignments
• Efficiency, Scale, Structure
• Labor utilization
YES
GO
Accept & Finance Plan?
NO
YES
Plan
Re-Engineer
Operation
Liquidation
Situation
Act
Do
Check
What Else?
• Reduce Risk
– Loan Guarantee Programs
– Marketing
– Production
– Fixed interest rates (secondary market)
– Insurance checkup
– Labor
– Health
• Sensitivity Analysis
5 C’s
• Collateral
– yes, but!
• Conditions
– What is the loan for?
• Capacity
• Capital
• Character
– Not a computational task!
Be 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
Team?
Finally
There is a reason they
put a human behind the
lenders desk and it’s not
for when times are good