Posts

I recently had an excellent discussion with one of my Clients about how the last 12 months had turned out. As many of you know, early 2020 presented an incredibly challenging time with the onset of COVID-19 and its extremely low milk prices, particularly during the second quarter.

However, he had maintained his production levels, despite the fear in the markets, and it had paid off. He was solid on his Cash Flows and the details of his herd management, but then at end of his year, he seemed to “take his foot off the gas…” Maintenance of his facilities seemed to fall short of their normal levels, and milk quality started to suffer.

When I asked what had happened, he seemed a little defensive. However, helping people stay on their “A Game” is part of what Clients pay me for. Then, he informed me with the following: “John, I’m tired. My employees are exhausted. These last 12 months have been very taxing.”

Believe me when I say that I did, indeed, understand. I had overcome several serious Client challenges on the banking front, facing off against some of the most ridiculous financing challenges I have seen in 23 years of consulting. However, I worked with my Team and my Clients to overcome those hurdles.

You know what made the difference? We “played all four quarters!” Every game is won or lost in the fourth quarter. You can plan an excellent game for three quarters and then lose it in the fourth quarter. Guess what? It is no different in the dairy business. You must play all four quarters each & every year. Defeat and its willingness to take you down is on call all the time, just waiting for you to let up the slightest little bit!

I want to encourage you to “fight the good fight,” and I mean all year long. Here are some suggestions for “winning the game” by playing all four quarters:

  1. Complete regular monthly Cash Flow Analysis, not just occasionally, but each & every month. My Clients see this information from me every month. There is no better way to stay ahead of the game. While I am an advocate of regular quarterly CPA prepared Financial Statements, a lot can happen in 91 days. I want to catch any expense items that are getting out of control before they get “beyond repair.”
  2. Regular Management Team Meetings – These should be held with your Financial Advisor, Nutritionist and Key Employees on a regularly scheduled basis. As I said earlier, you have to play all four quarters to “win the game.” However, you also have to have a winning team, all of whom are pulling in the same direction. If they are out of sync with you or each other, this can create real challenges to your overall success.
  3. Regular Finance Team Meetings – These can be crucial to making sure that your Team stays on track. Measuring your Cash Flow monthly is one thing, but making sure that your Team is aware of challenges that arise is crucial. How can we expect them to keep costs in alignment if we never share our concerns with them?
  4. DMC & DRP – These programs are, simply stated, a “form of insurance.” Like any insurance program, they provide you with a safety net against any severe downturn, in this case a falling milk price, which, of course, can wreck your Cash Flow. Think of these safety nets as an investment, not a cost. Just as you would not call your insurance agent at the end of a year & and complain about the premiums you had paid, although your house didn’t burn down, you likewise shouldn’t complain about these premiums. Both DMC & DRP are a form of financial insurance.

I hope you’ll consider playing all four quarters this year, even the frustrating ones, because that is the only way for you to WIN!

If you would like to learn more about these concepts, just shoot me an email (john@success-strategies.com) stating “NLT Workshops,” and I will be sure to include you in future invitations.

As the cost of buildings on your operation continue to rise each year, you certainly wouldn’t think of not covering their replacement with adequate insurance. Yet, have you done the same thing with the primary source of revenue in your business?

For most dairymen, Milk Sales represent 85-90% of their total revenue streams. This would seem completely prudent, given the increased levels of volatility in the dairy markets… It’s been almost two years since the introduction of the Dairy Revenue Protection (DRP) Program, but are you using it?

If you study the program, it is a fairly straightforward method for placing a floor under the milk price you receive at your dairy. You can choose to protect your Class 3 price, your Class 4 price or you can use your components as the basis for protecting your milk price, assuming that fits your operation better. The key question here is – Have you looked into DRP yet? If not, please do so soon.

I believe you can go ahead up to five calendar quarters. Of course, since the price protection is based upon the use of “Put Options,” which place a floor under your prices received, the longer into the future you contract, the greater the cost of those Put Options will likely be. Their cost can also increase when markets are more volatile (such as this year…) and if you select higher price coverage levels (e.g. $18/cwt vs. $16/cwt.)

However, there is some good news on the cost front. Currently, the federal government is subsidizing the cost of the DRP options by about 40-45%, so if an option costs $0.60/cwt in the open market, your net cost through DRP will likely be about $0.36/cwt. So, how do they pay out?

At the end of each quarter, if the market prices have been higher than those you had set as a floor in the DRP program, these Put Options will expire unused, and, unfortunately, you will receive a bill for the cost of that quarter’s Puts. That’s the bad news. The good news is that since the market was stronger than the level you had set for coverage, you should have been receiving higher milk prices & thus be able to pay this premium. And, please remember that you can do less than all of your milk; I believe you can also set this up with multiple tiers of coverage, e.g. 25% of your milk one week and then another 25% the following week. The costs of the two 25% coverages may be different, but as long as you contract before the required deadline (around the 15th of the month before the next quarter begins), you’ll be covered for the level you select. You can also go into your DRP account every day, if you wish, to monitor your progress/potential payout levels.

Is this DRP program perfect? Probably not. I’m certain that if we study it long enough, we can likely find some characteristic we don’t like… However, it can put a “floor” under your overall milk price received, the premiums are government subsidized, you have numerous different input factors that you can use (e.g. Class 3, Class 4 or Components), and you don’t even pay the premiums until the month following the quarter for which you were covered. As a result, you can pay the “premiums” out of the DRP coverage you received or out of the higher milk prices you collected if your DRP coverage didn’t kick in.

Yes, you will be out the cost of the Put Options, but do you call your insurance agent at the end of the year if your house doesn’t burn down, despite having it insured? I didn’t think so…

Given the higher levels of volatility due to market conditions, unforeseen events such as COVID-19, or disdain for some variables in our trade agreements, don’t you owe it to yourself to be covered? Take action now! I wish you the best of success!

If I can assist you in any way, please let me know at john@success-strategies.com or 209-988-8960.