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Behind on grain bill: What to do now

Mike Evanish: Many farms are far worse off. It’s great that you’re looking for help now.You speak of adding cow numbers and borrowing money. Neither is advisable until the real issue(s) that caused the problem are discovered and addressed. How and why did the purchased feed expense get so out of hand?

The starting point on a dairy farm is always milk production per cow. Adding more cows when production is an issue simply isn’t advisable. If your feed inventory is good, a least-cost ration should be in place that maximizes the use of homegrown feed and minimizes purchased feed.

The quick-fix temptation will be to borrow against equity to pay the feed bill, continue as you always have and assume everything will work out. That won’t solve anything and, in the end, could result in your exiting the industry.

Address the cause of your purchased feed bill problem before any refinancing. A few of the questions you must answer are:

What’s your total milk production?

What’s milk production per cow?

Have you pressed your feed consultant to make sure you’re feeding a least-cost ration?

What’s your business’ overall cash flow?

Dale Johnson: If it only takes you 1½ milk checks to pay off the feed bill, you’re in better shape than many farmers. Just the same, trying to solve the problem now is a positive step.

First, project your cash flow by month or by quarter for the next year. This’ll give you a better idea how tight things really are. Then, project your cash flow for the scenarios you mention.

If you have space for more cows, forages to feed and labor to handle them, then buying more cows may be a good option. But if you have to spend more on facilities, that may not be true.

Refinancing your feed bill will spread that debt over a longer time frame to help cash flow, if the interest rate on the new loan is lower than the feed company’s interest rate. If you can’t refinance the feed bill, then explain your situation to the feed company. Maybe they’ll put you on payments and give you a break on the interest rate.

In the long run, you may have to make significant changes to stay competitive. For a small operation like yours, I’d suggest considering management-intensive grazing if your climate and farm layout are conducive to it. It may help you cut costs and improve profits.

George Mueller: I want to be very candid. Take a long, hard look at what changes can be made to make your farm profitable. Certainly, 2009 was a tough year.

But 2007, 2008 and 2010 (so far) were good years, and you shouldn’t have fallen so badly behind — especially with nonfarm income paying your living expenses. Somehow, you must find a way to cut expenses, increase production, or both!

Take an afternoon and sit down with your banker, your nutritionist, your veterinarian, and your County Extension agent to take a critical look at your farm business records to decide what changes are needed. I think you’ll find them most willing to help. Or perhaps you can seek help from a public farm management team.

In New York, we have Cornell Cooperative Extension’s Pro-Dairy team. And we have FarmNet consultants at 800-547-3276, or www.nyfarmnet.org. Both work with farms needing management advice, and will be very helpful when asked. A closer look will reveal whether adding cows and other changes are necessary to make your farm into a solid business.

(In Pennsylvania, contact the Center for Dairy Excellence at 717-346-0849, www.centerfordairyexcellence.org.)

Glenn Rogers: It’s extremely important to — hard as it is — catch up as quickly as possible. Grain-bill interest rates tend to be very high: 18% to 24%. That $10,000 feed bill can easily balloon to $12,500 or more.

If you can’t pay off that bill within a month or two of when it’s due, borrow the money on a “line of credit” and pay it off. Then pay that credit line off in three to four months. You’ll save 6% interest.

You might be able to get a discount by paying cash for the next loads of grain. Use the difference between the regular grain price and discount price to add payments to your credit line and bring that bill down.

Budget the payments into your cash flow well in advance of when you might need them. Also be sure to set up that credit line in excess of what you’ll need. Do it well in advance of the next budget crunch! Do NOT pay grain bills with intermediate- or long-term loans. Spreading grain bills over three to five years is like paying on a “dead horse.”

That feed is long gone, and you still have to buy the next load and the one after that. These are current bills and should be paid off with current cash flow. Do NOT pay them with a credit card: Those interest rates and penalties are even higher than 18% to 24%.

Buying more cows is fine if you have feed, infrastructure, labor and much more. However, my recommendation is always to get better before you get bigger.

Budget your purchases. Put aside an emergency fund. Have a hidden reserve fund as well. Remember: Good luck is when planning meets opportunity.

This article published in the November, 2010 edition of AMERICAN AGRICULTURIST.

All rights reserved. Copyright Farm Progress Cos. 2010.