American Agriculturist's Profit Planner column addresses crucial questions faced by farmers. The following question is particularly timely, and is addressed by Glenn Rogers, regional farm management specialist for University of Vermont Extension.
Q: Rumor has it that milk prices will soon head "south" while high grain (feed costs) will put the squeeze on milk prices. Is now a good time to sell my 80 cows and switch to grain production, get a fulltime town job and retire from milking? I'm 58 years old. My children aren't interested, and I have two employees.
A: Now may or may not be the right time to exit. It depends on whether you have: A) the job waiting downtown, first; B) the financial equity to withstand existing loan payments and income taxes, plus the generally large decrease in cash flow; and C) are ready for a change.
The general recommendation in a cyclical commodity market is to sell out when everyone else is buying high, and to aim it when cattle prices are at the highest. Typically the highest prices gained are when milk prices are going up or are at their peak – not when they're sliding down the backside of the peak.
Milk prices peaked in February and are headed "south" for the near and long term. So you'll lose the high price that existed then.
Hindsight is always 20/20, so don't look back. But do remember its lessons.
In a cyclical commodity market, it's surely to occur again. But the question is when and how long will it take to get back there.
Based on recent dairy industry history, it'll be a hard tough go of it for many dairy producers over the next year or more, until feed, fuel, and milk prices straighten out. However, it's still not too late to call it quits, although you might lose equity in the cattle.
Some contend we never really had (that cow equity) anyway. Some relate it to the stock market when it goes too high and then corrects itself. Some have said that it was net worth that shouldn't have been there as it was above the 10-year average, and had to correct itself.
Timing is everything. Evaluate if its better or worse to sell now or wait until the next high milk price.
Items to think about
- Planting season arrives soon. And you might be able to lock in corn and bean prices that'll more than cover the costs involved in planting and harvesting the crop, thus ensuring a profit for the year.
- Age and lack of next generation taking over also plays a factor into the scenario. What's your health?
- What about your retirement nest egg and how is the recession affecting it, home values and land values in your area? Don't be fooled into thinking that all is rosy or a shambles.
- Do some budgeting – first – and learn about the tax implications (both now and after 2010 when the law probably will change and capital gains tax rates will be higher). It's too late to change your mind if financial reality hits after the sale. Until you push the pencil hard, you really don't know where things will end up. All too often, the desire to sell greatly overshadows the real issue in the mix.
- Know your job skills and get that job downtown before you have that sale. It may seem unreal to get a job first; but high-paying jobs do wait for the right person. In addition, keep looking for a higher paying job, and stay employed. Once you quit its harder to get back into the employment game.
Rogers may be contacted by phone at 802-524-6501, Ext. 210. Or e-mail him at: Glenn.Rogers@umv.edu.
Watch for more answers to this question in April's American Agriculturist.