There’s never a good time for costs for businesses of any kind to rise, but if pandemic recovery, record inflation and a war were to drive up farm input prices, at least it happens at some point. where milk prices are also at record highs. So far, these prices seem to be able to cover the higher costs.
We are also emerging from a period of the highest farm income in years. Of course, much of that was driven by government pandemic assistance, like the Coronavirus Food Assistance Program and the Paycheck Protection Program, Sam Miller recalled April 6. Hoard’s Milkman Dairy Livestream.
“It’s really helped liquidity and helped strengthen balance sheets,” said Miller, who oversees all agricultural banking at BMO Harris. “The working capital positions and balance sheet positions of dairy farms, and farms in general, are the strongest they have been in a number of years.”
Between that picture and current milk price levels, Miller said it’s shaping up to be a good year for dairy farmers. This could be especially true if inputs were purchased in advance. However, he also reiterated that this price equilibrium will correct itself at some point, saying that in his more than 30 years in banking, expenses always seem to correct after income. This good year could be a great opportunity to prepare for this market correction.
Miller offered two recommendations on how to use that excess cash to hedge against a future when the revenue picture isn’t so rosy. The first is to build up working capital.
“If you have accounts, clean them. Be on prepayment or prepayment instead of having accounts payable,” said the experienced banker. He continued, “Pay down your line of credit to have this availability.”
The second suggestion dealt with a subject that the panelists touched on several times and that farmers know only too well: labour. The work environment changes that have developed due to the pandemic will only continue. And higher salaries too.
“It’s going to be hard to have that [labor cost] back,” added Ben Laine, dairy economist at RaboResearch. “All the investments you can make in the medium and long term to try to optimize your work are beneficial.” Automation could be a smart investment as long as it’s available for purchase, acknowledged Chris Wolf of Cornell University.
Preparing for a market correction while you can, keeping an eye on margins and managing price risk are key and, of course, more difficult when there is volatility on both sides of the equation. As Miller said, however, “The good news is that I’d rather someone had to make those decisions when you have a high price environment.”
To watch the April 6 DairyLivestream taping, click the link above. The recording of the program is also available as an audio-only podcast on Spotify, Google Podcasts, Apple Podcasts and downloadable from the Hoard’s Milkman website.
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