Should I be fixing my Interest Rates?

This is a question many people are asking. I believe it’s something we need to be looking at regularly. As far as when you should fix them, that depends on many factors.   *    Are you planning to stay with your current lender? Are there any Prepayment Penalties? They have committed to investors to pay a fixed rate on their funds. Thus, you will likewise be committed to the bank. If you pay a fixed rate loan off early, you may be subjected to a prepayment penalty.   *    Will you be increasing your loan amounts soon? Be certain that this doesn’t impact your rates. Often, they’ll set up fixed rates on portions of your loan at various maturities.   *    Where do you think interest rates are heading…UP or DOWN? Look at the leading indicators. Read the Economy section of The Wall Street Journal or check at www.WSJ.com. Read the Business section of your local newspaper. Look at Kiplinger’s or MONEY magazine. If the economy sounds like it is weakening, the Fed may step in and lower rates…to stimulate the economy. If it is showing signs of exuberance and growth, they might increase rates to slow the economy and reduce inflation.   *    What is the basis of your lender’s fixed rates? This matters because there is not always a perfect correlation between what the Federal Reserve Bank does to influence the PRIME RATE and what happens to other rates. It’s important to know if your floating or fixed rates are tied to the Prime Rate, LIBOR, or Treasury rates. Be sure to study the rates available to you before committing. If you don’t understand them, ask for an explanation from your banker, your accountant, or another financial advisor.   *    How tight is your budget? Interest rates you pay certainly can impact your bottom line results!!! This is true for any business that borrows money. 1)      If you are new in business or are carrying a lot of debt at present, you may benefit from fixing your interest rates. 2)      Just being certain of your interest being paid might help you sleep better at night. Each of us has a different temperament for these items! 3)      Ultimately, you’ll want to keep the bottom line positive – this is only one factor to watch!   *    Will you call all of these decisions perfectly correct? No one does. However, spend some time studying the movement of rates (trends) and talk with more experienced borrowers, your accountant, or lenders! As you study more and watch these trends, you’ll become better prepared to make decisions to increase your odds for success.

The Change Leader

“The most effective way to manage change successfully is to create it.” These are the words of business management guru Peter Drucker. He added that one cannot manage change. One can only be ahead of it. In a period of upheaval, such as the one we are living in, change is the norm. To be sure, it is painful and risky, and above all it requires a great deal of very hard work. But unless it is seen as the task of the organization to lead change, the organization will not survive. In a period of rapid structural change, the only ones who survive are the change leaders. A change leader sees change as an opportunity. A change leader looks for change, knows how to find the right changes, and knows how to make them effective both outside the organization and inside it.   Creating your future is highly risky. It is less risky, however, than not trying to develop it. According to Drucker, a good proportion of those attempting to excel at change will surely not succeed. But, he says, predictably, then no one else will either. Anticipate what the future holds and step out as a change leader. I think you will be glad you did!   In every financial turnaround situation with which I have been involved, change has been the primary necessity – change in how we manage, change in how we handle their Cash Flow! It can be slow and sometimes painful but when a business gets in financial trouble, it usually occurs over time, and likewise, it probably won’t be corrected overnight either! What does this mean? a)    When there is a lot of change you can’t manage it because it simply happens so fast. You’ll usually feel about as successful as a dog chasing its tail. b)   When we have times of tremendous turmoil – THINK commodity PRICES SINCE early 2007 or our US Economy at present – change is normal! Can you imagine what our economy would be like today if in 2008 our US leadership had said, “Yeah, I know the housing market is tough, but we’re not going to change anything! We’re not going to lower interest rates and hopefully all will be okay.” That would be insane. This demands hard work! Change is a requirement – we can’t manage it but we do need to try and stay ahead of it. Why are change leaders more successful? a)    Instead of running from change, they look for it. b)   They know how to find the right changes, and just as significantly, they know how to make it work for their organization! c)    Will they call them right 100% of the time? No, but that is no excuse for inaction!

Imagine Trying this in the Dairy Industry…

Do you ever feel frustrated with your level of accomplishment in business or in life? I believe we all do at one time or another. You know what, though, it doesn’t have to be that way at all. According to Dr. Kathryn Cramer and Hank Wasiak, coauthors of the book, Change the Way You See Everything Through Asset-Based Thinking. They state: “People from all walks of life (professionals in business, athletics, medicine and consulting, managers, mothers, fathers, teachers, journalists, administrators) suppress their current levels of excellence and achievement just by shifting, ever so slightly, the way they see everything.” Challenges on most dairy farms seem to arise on a regular basis, don’t they? Ever think what could be possible if we just focused our attention on:

  1.   Opportunities rather than problems
  2.    Strengths more than weaknesses
  3.   What can be done instead of what can’t?

The authors suggest: “When you decrease your focus on what is wrong (deficit-based thinking) and increase your focus on what is right (asset-based thinking), you build enthusiasm and energy, strengthen relationships, and move people and productivity to the next level.”

  1. Make a list of three to five things you have accomplished in the past week or so. Make a chart of these in one column. The authors do note: “Most of us did not receive a Nobel Prize yesterday, so don’t be concerned with the magnitude of your accomplishments. List those that stand out.”
  2. Next, reflect on the personal talents, strengths, and skills you used in making those accomplishments happen. Jot those down next to each accomplishment.
  3. Take a good, long look at your notes. This is your ABT profile. What patterns do you see? Think about how you can leverage this particular positive pattern of skills, talents and strengths – today, tomorrow, and next weekend! Do this reflection on a regular basis and you will be amazed at what you discover about yourself (We all have major blind spots when it comes to our own unique assets).

Authors Cramer and Wasiak conclude by stating, “You are what you feel – A study in the August 2002 issue of ‘Mayo Clinic Proceedings’ reported that people who expect misfortune and see the negative side of life (the DBT crowd) don’t live as long as those with a more optimistic view. Asset-Based Thinkers had fewer problems in daily activities, less pain and fewer emotional problems, and increased energy.” Can we afford not to clear our minds and give “Asset-Based Thinking” a chance at your dairy farm?

Controlling Your Production Costs

One of my favorite business quotes is Jack Welch’s: “Face reality as it is, not as it was or as you wish it were.” I remember reading an article in Inc. magazine written by Adam Hanft that was entitled, “The Risk of Doing Nothing.” I thought the article had some themes that were particularly fitting for the dairy industry today. Yes, I realize that it is often more comfortable to avoid talking about production costs when cash flow is so negative! However, doing nothing can often put you at greater risk than boldly moving forward with what looks like the correct option. Look what happened to Montgomery Wards as they stood by and watched Wal-Mart become, not only the largest retailer around, but also one of the largest companies of any kind. How about Starbucks’ success compared to the track record of Folgers or Maxwell House? The key is to break the “Continuum of Paralysis.” As Adam Hanft so accurately states, “No one decision to defer action ever looks all that monumental at the time.” However, over time, look out! The sad part is that indecision rarely punishes current management. It often “mortgages the future.” Thus, for those of you with another generation potentially coming into your business, is that what you want? Can you do better for them? Here are some things to do to stay on track: *     Do not misinterpret the current milk price (whether high or low) as an excuse to keep your finger on the “Hold” button. *     Look at your cost/cwt, your volume of milk, labor utilization, and how you might spread fixed costs out even further. *     Just as important – Ask yourself, “Is there a better way we could perform…?” Perhaps, your management team could offer you some suggestions. Recently, one of my clients made some changes in their feeding program that saved them over $1.00/cwt. This will be monumental to their bottom line! Along that same line, be open to new ideas. We must overcome the ongoing temptation to think that it is more risky to try new ways of completing tasks than it is to keep everything unchanged. In the dairy industry, doing nothing can get you run over! Put together an action audit and see how well you stack up against the industry. Are you currently doing everything you can to stay competitive? Are you taking time to complete and measure the small tasks that can have such a large impact on your operation? This is not just about costs per cwt. It is also about how your operation is faring in terms of cows milked per hour, labor efficiency (cwt. shipped/employee), heifer efficiency (e.g. age at first calving) and many other items. One other thought. As you compare yourself to the industry, you will likely see that you are doing better than others in terms of costs/cwt in some areas and not as well as other producers in some other areas. Don’t forget to check your current levels against those that you have historically achieved. One of the hazards of having high milk prices in the past is that we can tend to add some expenses (such as extra labor, benefits or other items) that may not seem all that cost effective in times of $13.00 milk. You may not find any problems such as this, but please make a point to at least look. “Sacred cows” can be expensive. For additional help on measuring your costs, check out www.financematters.solutions. To summarize, don’t fear change. Make an appointment with greater levels of success. As one of my favorite motivational speakers, Les Brown, stated, “Wherever you are in life, you made an appointment to be there!” Consider the possibilities!

How Well Are You Prepared?

The number one question we all should be asking is, “Am I prepared?” What an amazing difference it can make to be just step ahead in the thought process on dealing with change. This was clearly stated by steel magnate Charles M. Schwab when he said: “Keeping a little ahead of conditions is one of the secrets of business…” With that in mind, I like to develop various “What If” scenarios with clients to better understand the impact of various anticipated changes.

  • What if milk prices stay low next year? Will your operation be able to cash flow? Will you need to make any changes? If so, what will the expected impact of those changes be?
  • What if feed prices increase even more? With the economy of countries like China starting to change, who knows what their effects might be? Do we have some potential substitute products available to us? If so, do we need to contract for them now? How will they effect our production and profits?
  • What if you wanted to replace or remodel your milking barn? How will this change your bottom line results? Will the change pay for itself in terms of labor costs or by allowing you to add cows and more fully utilize your facilities?
  • What if interest rates increase? How will that change affect your results? Should you be fixing at least some of your long-term interest rates, particularly on loans that you know will not be paid off in the short term?
  • What if worker’s comp or other insurance soars up in price again? Just the inherent uncertainty of a post 9/11 world can impact these items. Are you positioned to absorb such a financial shock?

Often, when I bring up this type of question, people respond by saying, “I’m not sure that the financial information I have is perfect.” My response is that while that may be true, such uncertainty has always been the case. However, the sooner you get started on reviewing this financial information, the sooner you will be prepared to make more informed decisions. Our FINANCE MATTERS™ software should be available soon to assist with knowing your Costs/cwt and understanding your Break-Even levels. Futurists and authors Jim Taylor and Watts Wacker, in their book entitled The 500 Year Delta, contend that future success lies with those who can make sound decisions with limited information. The key is to outline all the potential outcomes for your various scenarios using the information that is available, taking into consideration the many business and political environmental forces that could affect your key decision factors. This includes not just the likely ones but the potentially unlikely ones as well! Then, develop a strategy to deal with those outcomes. Such planning will increase your awareness of the possible options, set your priorities for action and help you determine what steps you must take to achieve your long-term objectives. Philosopher Basil Walsh was right on target when he stated, “An intelligent plan is the first step to success. The man who plans knows where he is going, knows what progress he is making, and has a pretty good idea when he will arrive.” Giving full consideration to the question I asked in the first paragraph of this article and going through the process of “What If” questions listed above, along with others you might think of, will undoubtedly better prepare you for a more fulfilling and profitable future!

MAXIMIZING YOUR MANAGEMENT SUCCESS

Do you ever have that feeling that your neighbors or brother-in-law seem to be doing better than you in certain areas of their operation? I think everyone has felt that at some point. The more significant question, however, assuming that might be partly true is: “Why?” What is their advantage over the way you normally operate? One item that I have found very helpful to people in assisting them to reach their highest levels of success is the implementation of Management Team Meetings. This is a concept that I introduced to my clients over 15 years ago. As we have seen during that same time period, these sessions have guided many of our clients to achieve items that, had we asked them before, they would not have believed possible. How do Management Team Meetings work? The concept revolves around the benefits of solid communication, positive teamwork and accountability. When we meet as a group, usually every other month, we have a written agenda that we try to follow as closely as possible. The benefits of doing this are two-fold. First, it makes sure that we do not skip over any important topics we need to discuss. Second, it keeps us from getting off on tangents that almost always seem to revolve around insignificant items. In the “Tools” section of our website, www.success-strategies.com, I have included a WORD file for your consideration and use. You may rename this file however you wish to and then use it for your own Management Team Meetings. The primary benefit of keeping a set of written minutes during each meeting is that you create accountability within your Management Team. At the end of each meeting, I send each and every Team Member a copy of the minutes (usually two pages). This is sound because it allows everyone to know what items are supposed to happen prior to our next meeting (e.g. changes in the breeding program, improved heat detection, getting some help on milking procedures or milk quality issues). It is also useful for their review prior to the next meeting. Additionally, as the facilitator of these meetings, you will find these minutes very useful in setting your agenda for the next meeting and to make sure that you cover all the necessary items to keep you moving forward in your operation. For example, if you have discussed the need for improved heat detection at your last meeting and then established a set of steps to take to make improvement, having this in the minutes will remind you to revisit the current situation to see if you are indeed seeing positive results. Otherwise, it can end up on the “back burner” and not really get resolved. Of course, in the case of heat detection or other key management issues, this could spell disaster down the road. Who is involved in Management Team Meetings? This is a decision that you need to make early in the process. Here are a couple guidelines for you to consider:

  • You will want to include anyone who is a “key player” in your operation. Normally, this will include your Veterinarian, Nutritionist, Herd Manager, your Financial Advisor if you use one, your Banker if you wish and you as the owner.
  • Include only people who have something positive to contribute. These meetings are designed to improve your business, not to point fingers at each other and determine who is at fault in an area that needs improvement. The real reason for the meeting is to make sure that you are achieving everything you possibly can. My experience has been that participants who are argumentative or critical of others do not really add to the success of the Team.
  • When you hold these meetings, you can reach a point of saturation in terms of participation. In other words, you can get to the point where you have too many people in attendance. This will tend to impede your progress because it will tend to reduce the level of open dialogue between your Team members. Thus, we typically do not include anyone who is selling a product. For example, your semen salesman may be a great guy and also very intelligent. However, do you actually need him at these meetings? The same goes for feed salesmen & pharmaceutical representatives. Your Nutritionist and Vet can cover their areas of expertise sufficiently.

Why do they lead to higher levels of success? These meetings will lead to greater levels of success in your business because they generate greater:

  • Accountability
  • Teamwork
  • Common Goals
  • A reason for Celebrating Success

Management Team Meetings (MTM) Future Topics: If you want to maximize the success of your MTM, I suggest that you include the following items at every meeting:

  • Herd Management Issues
  • Herd Health Update & Concerns
  • Herd Reproductive Performance
  • Nutrition Update
  • Financial Review, including what is happening within the dairy industry. This discussion can also cover what challenges you are having and how they potentially can be overcome. You should also include your team of dairy professionals in discussions of potential Capital Expenditures, i.e. what items do you need to acquire of build in the next 12 months? A conversation about their potential payback and what your Vet and Nutritionist have seen other places may prove very helpful as well.

Monthly Reminders – W.I.N.     (What’s Important Now?) I believe it is important to position yourself to successfully handle obstacles and overcome business hurdles. Let’s say you are facing a difficult business challenge. Wow!! That sounds like a call to action. I have observed that in this type of situation people often do not want to face reality, as if it will change on its own or the problem will eventually go away. The odds of that occurring are remote. How can you deal with change? How can you turn this into a positive outcome? Here is one method that I’ve used successfully with clients and seems to work even better with tougher problems:

  1. Surround yourself with your entire team. Yes, multiple brains works better here…
  2. Develop a chart on paper or on a marker board. At the top, list the problem to be overcome or the goal that you want to reach.
  3. Work as a group to complete a “brain drain” where every possible idea that the team comes up with gets written on the board. Do not evaluate them, judge them or criticize them at this point. Just write them down with no judgments or laughter (later, it could turn out to be the best response…)
  4. Additionally, each member of the team needs to participate. This is not a passive activity where some of us can just watch. We can only capture the best ideas if we get them all written down.
  5. Finally, after every idea that you can think of is written down, start to evaluate the pros and cons of each idea. However, this should not begin until you have a minimum of 20 ideas listed. I know what you are thinking – “You are kidding, John!” The fact is – I am not joking. This is the only way you can be assured of not overlooking a great option.

To give you an example of how this works, I was working with a client whose facility had become overcrowded. After listing 20 possible options, we concluded that he could reduce his herd, lower his debt levels and improve efficiencies or he could change his facility, which would add to his debt levels. Another option that surfaced was that he could diversify his operations. Eventually, he decided to decrease his herd size and diversify into some tree crops, and this is working out very well. This process of brainstorming for all possible options can be used to work through a crisis. It can also be utilized on a regular basis for ongoing business decisions, as well. Why not try it in your operation today?

WHERE HAS ALL THE MONEY GONE?

Are you tracking your monthly cash flows? This probably sounds like a silly question, but there are some producers who, believe it or not, still don’t do this on a regular basis. The rationale behind this is questionable, but, for whatever reason, they just simply pay bills as best they can and move forward or, sometimes, backward. Some possible reasons I believe people fail to do this include the following:

  1. They may not feel that they have the time. For some, this can be a daunting task. It can also be overwhelming if you get done and realize that you’re going to run out of money before you run out of month. Of course, this has been happening to a lot of dairymen lately.
  2. They might not want to face reality, especially if it is indeed negative.
  3. They may not know where to start. That challenge I can deal with. Let’s talk about it and review the benefits of monitoring your cash flow regularly.

Matt and Diane had operated their 600 cow dairy for over 20 years and had been quite successful, both in terms of production where their herd averaged close to 80 pounds per cow per day and, as a result, in selling purebred Holstein bulls and heifers. Yet, they had an issue to confront. They never really felt comfortable with the cash flow of their business. It often seemed like “feast or famine.” When milk prices were good, they had a lot of cash, and the IRS was always standing by waiting for their share. Additionally, it seemed that these good times also boosted their purebred sales and gave them even more cash to account for. However, when milk prices started to skid, Diane, who did most of the financial tasks at their dairy, was struggling just to keep their suppliers current. She was simply writing checks and hoping that this process would all work out for the best. What could she do? I’ll explain in a moment… Reasons to consider this: Most everyone has been watching and/or complaining about their monthly expenses, but are they really watching each and every expense item? Milk prices have been dropping like a rock since December 2014. While we have seen relief on feed prices, they were a nightmare as well until this year. The justifications for tracking your cash flows are numerous. Currently, however, the biggest justification for this process is survival. The dairy industry is under pressure from vendors, banks and regulators. Our entire economy is in an upside down state. Knowing where you stand in your cash flows can provide you with additional comfort because even if you are struggling, you will be more aware of your upcoming needs for cash and other financing, and also be able to answer questions that arise from your suppliers or banker. Where do you begin? How do you go about completing this process? My favorite starting point is to develop a budget for what you feel will occur during the next 12 months, preferably January to December. This can represent a different set of dates if you wish or if your operation is a corporation with a fiscal year end that is different. For a simple example, check out our “Home Page” or our “Success Tools” on our website at www.success-strategies.com. There you will be able to acquire what you need. Here is what we did with Matt and Diane’s dairy operation. We reviewed each and every expense item to see if the amounts they were paying made good financial sense. Often, particularly during periods of high milk prices, producers will add labor or other items that can be detrimental when prices go back down. Not surprisingly, we found several expense areas that had just simply gotten out of control and got them back in line with industry standards. We also set Diane up with QuickBooks Pro and allocated their various costs within categories that matched their Accountant’s Chart of Accounts. This will save them money down the road when their CPA is completing their annual tax return and developing CPA prepared financial statements, which will, in turn, help them to better manage their business going forward. After you have your budget format down, project what levels of production and corresponding expenses you will encounter during the upcoming 12-month time period. When you have finished this task, you are ready to complete a comparison each month throughout the year. Your Cash Flow Comparison will equip you to examine how you are doing in comparison to your month-by-month plan, just as Matt and Diane were able to do. In terms of tracking your actual results, why not do what most of my clients have been doing successfully for many years?

  1. QuickBooks Pro (QBP) is a good place to start. It allows you to input and print your checks as you pay you bills, categorize expenses into their correct categories and provides you with a Year-to-Date Profit and Loss Statement. You can print this out at the end of each month (e.g. 1/1 to 3/31) and use it for the comparisons process that we discussed above.
  2. As an alternative, you can also track items directly in Excel, but why not use QBP, especially when you have the capability to convert your QBP file into an Excel file if you want to.
  3. Others have their CPA track these items for them, although this can get expensive. Besides, he or she will probably also be using QBP.
  4. Financial Advisors, like myself, often include a comparison of what is being spent each month vs. what you budgeted. This allows us to really evaluate where you are financially each month. If you are already doing this, great. If not, start it immediately. Feel free to check out our Finance Matters™ software this fall at www.success-strategies.com or www.financematters.solutions. A comparison to your cash flow projection is so crucial to understand your financial progress.

Matt and Diane’s banker was thrilled with the progress that they made. Making your lender’s daily overdraft list is not something you want to strive for. Staying off of this daily list is far better for three reasons:

  1. It keeps you “out of the doghouse” with your loan officer.
  2. It saves her from having to advance funds unexpectedly to cover your excess checks written.
  3. It saves you money because whenever the bank covers an overdraft, they will charge you interest. Additionally, this “loan” is not usually priced the same as your other loans. Its pricing is normally at the prime rate plus 5% (or 8.25% today)!

Their banker was also pleased to see that they were executing business decisions with more confidence, simply because they were more aware of their current position, the potential issues they were facing (such as any future cash flow shortfalls), and what their potential options might be. As a result of these changes, she was able to lower the interest rate on their line of credit by ¼%, saving them several thousand dollars per year. Eventually, we were able to refinance their real estate loan with an insurance company, which provided them with further improvement in their long term cash flows, a lower fixed rate of interest, and an opportunity to fund an expansion when their son returned from college. This then became part of their long-term succession plan. What to do if you find negative variances?

  1. If you have expenses that are considerably over your projected levels, you have to take action. What are some possibilities?
  2. Are you using too much, e.g. supplies?
  3. Are any items disappearing? Do you track inventory closely?
  4. Are there products that have become too high priced to justify any longer? ________________________________________________________________
  1. Are there less expensive alternatives available?
  2. Finally, do you even need the item? I know this sounds silly, but I have seen occasions where a producer has been using a product because his Dad had used it. However, he continued to use it even after he had also adapted a superior alternative product. Sounds like what we used to call the “belt & suspenders routine” in banking. We’ll save that concept for another time.
  3. Who is controlling the acquisition and delivery schedule of this item, if in fact, it is a product. Is the delivery schedule matching the rate of usage? Is it in line with what we would expect? Accountability and a degree of control over the process are imperative in this area.

Action Steps:

  1. Where do you begin? Develop a Cash Flow Projection to provide you with a solid idea of what your cash flows are expected to look like during the next twelve months. This will allow you to plan for those months, if and when your bottom line may be negative. If you know those months are coming, you can plan for them by holding back some extra cash or plan to borrow more on your lines of credit.

What should you do next? Decide how you will track your cash flows. As I explained above, I suggest that you use QuickBooks Pro to pay your expenses, track your revenue and costs, and complete your taxes with your accountant. Its Year-to-Date Profit and Loss Statements can be used to complete your comparisons process. Knowing what your strengths and weaknesses are compared with your monthly budget will help to keep you on track and avoid the age old problem of getting to a point beyond repair on particular expenses, whether it is on feed, labor, repairs & maintenance, or some other item. Knowing where we stand on each expense area compared to our budget and to industry standards will keep your operation moving forward in a positive manner. The key is to know what is really occurring in your business.

WOW! ALL I NEED ARE MORE OPTIONS!

People love to be offered options in life, up to a certain point. Unfortunately, if they are faced with too many options or ones that they do not understand, the choices available to them become overwhelming. Actually, that may describe the current situation with Milk Options. There are so many options available that the choices can, indeed, be confusing. Several years ago, I wrote an article for the Western Dairy Business publication centered upon what I felt were the “Top 10” steps to take in preparation for the coming year. One of the most critical of these steps was the development of a Milk Marketing Plan.  This is an absolute must today, particularly with the increasing amount of volatility and fluctuation in milk prices. Understanding your break-even price level (check out: www.financematters.solutions today) and knowing how to position your business to achieve that price will continue to be essential to your financial future. Get involved in your own marketing plan by working with an options broker that you trust. He or she can be invaluable to your business. About the same time, I also had an opportunity to moderate a panel of Agricultural Lenders in a discussion on the availability of financing. One of the recurring themes that seemed to surface was the issue of whether or not a producer should be using milk options, also known as Puts and Calls, in the management of their dairy business. Their response was unanimous. About the same time, I was asked to describe a scenario when I felt it would be smart to make use of a Call Option. When would it be wise to make use of a Put Option? In a moment, I’ll share my response to those two questions as well. However, I feel it is important to consider what all “options” are about. Who, in fact, needs them? The key to successfully using milk options revolves around a task known as “Margin Management.” You may know this as “Risk Management.” Several of our lenders on the panel emphasized how important they felt that was for any borrower. Their explanation covered some of the aspects of how you should use milk options to almost ensure that your margin is more positive. Our lenders also discussed a term called your “Burn Rate.” This is the rate at which you will eliminate your entire Net Worth if you continue to lose money each month. For example, if you milk 2,000 cows that produce 70 pounds per cow per day, you will produce about 42,000 hundredweights in a thirty day month (2,000 X 70 X 30 / 100). If you have a Net Worth of $2,000,000 and are losing $2.00 per cwt, your Burn Rate is about 24 months ($2,000,000 / $84,000). In other words, you could potentially operate for about two years at that rate of loss until you ran out of Equity. Your lender would much prefer that you consider making reductions in your costs or somehow place a “floor” under your milk price prior to that occurring. That is what you can accomplish by using a “Put Option.” The Put places a floor under the price you receive. Puts are all priced using Class 3 Federal prices, which can create some issues in California, Idaho and possibly several other states due to the difference in basis. These states’ systems may be somewhat correlated with the Federal Pricing system. However, they do not match it. By purchasing Put Options through a broker affiliated with the Chicago Mercantile Exchange (CME), you essentially put a floor under your milk receipts/cwt on the portion of your milk you cover. If you purchase a Put Option for $15/cwt milk for June 2010 and the Federal Order Milk price at the end of June lands at $14/cwt, you will still receive the $14/cwt from your Cooperative. However, you will also receive the difference in a separate check from the CME ($1.00/cwt e.g.). If, on the other hand, the market price comes in higher than the level your Put Option is set at, it expires unused, and you only lose the cost of the premium you paid for that Put. This is an extremely simplified example of how Put Options work. You can only purchase these through licensed, qualified brokers, for good reason, but there are many great firms out there for you to access. Why would you use Puts? Let me give you four reasons: 1.) Your loan renewal is coming up, and your banker is worried about your projected profit/cwt. 2.) Your “Burn Rate” is looking rather small. 3.) You are a young producer just getting started and need to be certain that you protect your bottom line. The use of options may help. 4.) You are highly leveraged, either as a result of past losses incurred or due to a recent expansion you’ve undertaken. How about using “Call Options” in your dairy business? These allow you to “buy” milk at the CME (not literally) at a pre-set price. Primarily, I see these used when a milk buyer offers a “Fixed Price Contract” for your milk. If, for example, you agreed to a $15/cwt price with your milk buyer for the next 12 months and during that same time period the Federal Class 3 Milk Price climbed to $18/cwt, you would still only get $15 from the buyer of your milk. What can you do? If you simultaneously have Call Options in place for some level such as $15, they will allow you to buy milk at $15 when it is worth $18/cwt, allowing you to collect the difference from the CME. This information covers only the basics of what you need to know before using Milk Options. However, I think it is important to consider how they might benefit you by smoothing out the highs and lows of the dairy industry. The easy days of managing dairy prices and margins are over. It will be critical to your future that you master the art of margin management, which requires knowing your true cost of production, particularly on feed, with which you can also use options (Hint: See www.financematters.solutions). If you have developed a better system, I hope you succeed greatly with it. However, for most producers, options offer the best insurance against devastating losses. Talk to some brokers and other dairy producers who have actually used them and develop a plan. A number of my Clients used a combination of Options and Fixed Price Contracts with their milk buyers during 2009 & 2015. Several Clients averaged almost $16/cwt for their milk and netted out over $2.00/cwt before their personal draws from the business. This was excellent, but, more importantly, it happened because they’d set themselves up to have more “options!”

DECISIONS, DECISIONS!

We are all faced with numerous decisions every day. Simple as it sounds, your daily decisions begin with deciding what time you will be getting up in the morning, what you will wear and what you might have for breakfast. Then, I would suggest, the big decisions need to be made: What cows need treating today? Should I add another employee? Can I afford that new tractor? Sometimes you can defer these decisions. However, often they need to be addressed immediately. The problem with delaying decisions is best summarized by Adam Hanft in his article entitled “The Risk of Doing Nothing” in the December 2002 issue of Inc. He was discussing the absence of action on the part of Montgomery Ward (remember them) as Wal-Mart grew from 125 retail stores in 1975 to become one of the largest companies of any kind in the world. Mr. Hanft reviewed how Folgers and Maxwell House did little or nothing as Starbucks redefined coffee as an “experience,” rather than just as a beverage. He added that “there were numerous points along the way where any of these companies could have broken the continuum of paralysis – but at each point the consequences of change were judged greater than the risk of doing nothing.” He goes on to say: “That’s what’s so insidious about the absence of action: no single decision to delay or defer ever appears monumental at the time. Inaction also takes time for the contours of its dumbness to be revealed, so it rarely punishes current management; only the future gets mortgaged.” So how and where does this fit within the realm of your dairy operation? This is an excerpt from my 2005 book entitled A Roadmap for Success. See if, perhaps, you can find yourself in this story: “3:00 a.m. Your herdsman approached you earlier today about an offer he has received. He has been approached about taking his 200 cows and 140 heifers (about 20% of your total herd) and moving them to another dairy where the owner is getting up in years and would like to take on a partner in an effort to fill his new facility. While your herdsman is not anxious to leave, this represents a positive opportunity for him. He will make considerably more money and will immediately become a partner in both the herd and the land & facility at the new place. He has been a great herd manager for you. He has been a solid team player, loyal and conscientious. You wonder if you could even find an equal replacement. You are adamant in your statement to him that “this is just not the way things work around here.” You really hate to see him go, particularly since your cash flow seems quite tight. However, he has offered to stay, but only if you provide him with a $45,000 retention bonus so that he can purchase a new home not far from your operation. He feels that will help compensate him for the “proposed” ownership plan that you started talking about 15 years ago… You rationalize that you could simply borrow the $45,000 on your herd loan, but it’s the principle of the matter, you reason. Perhaps you can discuss this with your banker when he (or they) arrives later today. 3:10 a.m. To divert your mind from this, you start thinking about the value of your ranch or farm. It is a great place to operate, you reason, one where you hope to continue your business for a long time. After all, you do have two sons who are in Junior High now and whom have expressed an interest in continuing the operation. However, you are hearing rumors of many changes in the neighboring regions. There are new homes being built just nine miles east of you. While these developments are planned to go only eastward from where they currently are, the winds from your farm location could create a problem for these residents. You and one of your neighbors had resisted establishing an “agricultural zone” 10 years ago, thinking that might prevent your land from being bought for development in the future. Now, he is in financial trouble with his bank and has his place on the market for $500,000 less than you paid for yours four years ago. 3:30 a.m. The dairy again: You have had some inquiries or you haven’t had them… The most successful A.I. firm in your area has inquired about your availability. Either way, you worry that if you leave now, what will that mean for the future of your sons in this business? If you hold out, will you be leaving a lot of money on the table? Could this industry implode if you hold on? Will your sons really want to come home after five and six years of school, respectively, plus another four years of college? How could they possibly even know at this point? After all, they are only 14 and 13 years of age. You try to go back to sleep. 3:50 a.m. Your banker has been calling to follow up on a letter that was sent to all of his borrowers. The “directive” you received by mail two weeks ago sits like a rock in your stomach. They expect you to come with up with five-year goals for your dairy, along with a five-year plan for achieving them. You have been told that you will need to provide marketing plans for your milk, an outline of feed needs and potential contracts, an overview of labor laws and your compliance with them, and a Nutrient Management Plan and any plans for future business growth or an exit strategy. While this all may not seem like such an unbearable task, they have informed you that their new Division Director (since being acquired by another Super-Regional Bank) will be reviewing your quarterly results to determine if you are staying on plan. Unfortunately, you are already familiar with this Director. In fact, you have had a “run in” with her at your prior lender six years ago. You recall that she seems to have had an unrelenting memory for most of your earlier discussions.” Does this producer have some decisions to make? Yes, absolutely. Can he put these decisions off? Sure. However, he enters a whole new arena of risk if he does. How long can he keep his herdsman if he does nothing? What about the future of his dairy operation? Can it continue successfully? What if the bankers show up and he is not prepared to discuss his plans for the next five years? Sometimes, you just have to make a decision without delay. Are you going to get them all right? No, none of us does. However, the good news is that you don’t have to make the best choice every time – just most of the time. Even Warren Buffet makes some poor decisions, but I think you’ll agree that, on the whole, he has made a lot of great ones. When you are faced with an important decision, I suggest you use the following practice, which was introduced to me by CPA Albert Nunes from the accounting firm Genske Mulder and Company. Ask yourself these four questions:

  • What is the best thing that could happen if I do take this action?
  • What is the worst thing that could happen if I do take this action?
  • What is the best thing that could happen if I don’t take this action?
  • What is the worst thing that could happen if I don’t take this action?

If you go through this process and then, if at all possible, sleep on it, you will probably come up with the best decision for you. A lifelong friend of mine introduced me to the abbreviated version of this decision model in 1976. He said to ask myself: “What’s the worst thing that could happen if I take this action? Can I live with that outcome? If so, go for it. If not, then I better rethink my intended course of action.” Whether you opt for the longer version or choose the abbreviated one, put these steps into practice today. Even in difficult economic times, you need to make tough decisions. You cannot keep your finger on the “hold button.” If you do, at best you risk being left behind. At its worst, this can lead to an economic disaster. Just put your self in the situation of the Client described above in the banking scenario. What if he ignores the bank’s request for an action plan? He could potentially lose his financing or even worse. Ironically, I wrote my book in 2005, but this scenario is a good description of what some producers are facing today. Never allow yourself to be put into that type of situation.

You Won’t See How to Reach Your Goals

David Allen, in his book entitled Ready for Anything stated:

“You won’t see how to do it until you see yourself doing it. Our brain’s pattern-recognition mechanism is triggered by the images you identify with and the focus you hold. You see the outcome first, and then you are unconsciously made conscious of information. If you won’t see yourself having or doing something until you see how to do it, you’ll never recognize the methods, though they are all around you. Notice what you notice and how you make that happen.”

Allen says: “I am continually amazed at how often I forget about our astonishing ability to create what we want by what we envision. Outcome thinking and the willingness to visualize something’s being true before it’s physically present is a master skill that we all could probably develop to a much greater degree.”

I recently pulled out a long term life plan that I had developed about ten years ago. I was amazed at how many of my goals I had reached, some of them without even realizing it. Wow! What was happening here? My plan included finances, work, and family items.

Allen added: “Those images for years had sparked and supported my significant choices. Some of the pictures weren’t very exact, in terms of what I achieved. I never really got to a proficient level of playing jazz flute, as I had drawn. But much of the little mural was quite exact about what has come to pass. Some of my visions were pure fantasies when I had them. But I allowed myself to draw the blueprint.”

Why does this work? Two lines of thinking include:

  1. “Your automatic creative mechanism is teleological. That is, it operates in terms of goals and end results. Once you give it a definite goal to achieve, you can depend upon its automatic guidance system to take you to that goal much better than you ever could by conscious thought. You supply the goal by thinking in terms of end results. Your automatic mechanism then supplies the means whereby.” – Maxwell Maltz
  2. “If you limit your choices to what seems possible or reasonable, you disconnect yourself from what you truly want, and all that is left is a compromise.” – Robert Fritz

Getting the results you want requires that you start to visualize them. As Dan Sullivan, my Business Coach and president of The Strategic Coach™ stated:

“Getting results doesn’t take much time at all. It’s not getting the results that takes up all the time.”

Think about it, as you begin a New Year!