It’s Dairy Month so we sat down with some members of our dairy team to discuss the financial health of dairy producers.
How are dairy producers positioned following 2014’s unprecedented profits?
Vicki Wray: Their balance sheets are stronger and they have strong liquidity. This provides them with the margin to hopefully get through a significant downturn. We’re in a cyclical industry, and FCSAmerica really emphasizes and encourages margin be built within an operation to withstand those downturns – and allow producers to make some improvements where needed as well.
What improvements are dairies making?
Mike Reecy: There’s a lot of focus on efficiency within the industry -- efficiency in terms of feed utilization, labor utilization and facility utilization. The liquidity that has been gained has given them more options to look at additional facilities. They’ve used a lot of working capital to shore up their balance sheet in the event there is a downturn. There also has been some expansion, but compared to past periods like this, there hasn’t been as much willingness on the producers’ side to expand wholesale into this market.
Why is that?
Mike: They remember, number 1, what happened back in 2009 (when the industry suffered exceptional losses). Also, water is a concern in several areas where dairy is prominent, especially in California, Arizona, New Mexico, Texas -- Kansas as well. There is a fundamental shift, it appears, of cows moving from areas such as the southwest back to the Midwest because of better milk price and more plentiful feed, which is the result of more consistent water resources. It also appears the heifer development within a number of the larger operations is headed to the southwest from the Midwest. So cattle are moving a lot farther than they used to.
What does this shift mean for our territory?
Vicki: From a geographic standpoint, we’re in a good position. We have a lot of resources that other parts of the country envy. And that goes back to many aspects, including feed. Everywhere you look, there’s corn, there’s hay. It’s something we take for granted in this part of the country. Also there’s the availability of water and processor capacity.
Mike: There will be a number of cows moving to the Midwest. The challenge of that will be whether processing can keep pace with the migration of the cows. Today that is a challenge in several areas where they have more cows than they have processing capacity. Processing will catch up. It’s a matter of how much.
What two or three things are we talking to customers about?
Vicki: It’s all about the cyclical nature of the industry. The next downturn is coming, so be prepared. Know your costs and try to be the most efficient operator. While that’s a given with our customers, it’s still important. Knowing your costs helps you shave a couple pennies here, a nickel there. Also part of knowing your cost is trying to protect your margin.
Maintaining liquidity and keeping their working capital are important. If they do an expansion, if there is a change, we emphasize maintaining sufficient liquidity to handle a downturn. We’ve been emphasizing that with our customers for the past four or five years.
Mike: Another item we are discussing with customers is ensuring efficient labor utilization to include development of key personnel and trying to insulate themselves from labor challenges.