1. Working with Dairy Businesses in Challenging Times Kimberly, WI September 11, 2009 Kevin Bernhardt UW-Platteville/Extension

3. Participant Case Study Comments: What is the son thinking! What is the daughter-in-law’s education Operation performance, yield, production Why does the profitability look the way it does? Family living expense / lifestyle Condition of facilities How much does the son want Relationship with suppliers Capital assets Why is milk production dropping

4. Context

9. Annual Class III Prices

10. Annual Class III

11. Monthly Class III Prices 1418 2319-24

12. Per cwt costs, prices, & income after charge for Labor/Mgt CFFM: 101-200 cow dairies, Free stall, no organic or pasture

13. CDP: 100-250 Cow Dairies in WI (freestall, no pasture, not organic, cost basis of assets) 5 of last 6 years ROE>ROA

14. CFFM Data (cost)

15. Net Farm Income From Operations (cost) CFFM: 101-200 cow dairies, free stall, no organic, no rotational grazing CDP: 100-250 cows, all else the same

16. WE ARE NOT ALL THE SAME and NOBODY IS THE AVERAGE!

17. ROROE (cost basis w tax depreciation) CDP: 100-250 Cow Dairies in WI (freestall, no pasture, no organic)

18. ROROE (mrkt basis w economic depreciation) CDP: 100-250 Cow Dairies in WI (freestall, no pasture, not organic, cost basis of assets)

19. 2008 ROROE & ROROA (cost w tax depr.) CDP: 100-250 Cow Dairies in WI (freestall, no pasture, not organic, cost basis of assets)

20. 2006 ROROE & ROROA (cost w tax depr.) CDP: 100-250 Cow Dairies in WI (freestall, no pasture, not organic, cost basis of assets)

21. Net Farm Income (Mrkt w. Econ Depr) CDP (same farms): 100-250 cows, freestalls, no organic, no pasture

22. Net Farm Income From Operations (cost w. Tax Depr) CDP (same farms): 100-250 cows, freestalls, no organic, no pasture

23. 2006 (CDP, 100-250 cows) Mrkt Value of Assets and Economic Depreciation Performance MeasureLow 25%Middle 25%Top 25% Current Ratio2.0612.713.81 Working Capital:Total Expenses13.3%39.8421.8 Working Capital:Gross Revenue12.5%34.317.4 Debt:Asset44.2%26.936.9 Assets:Equity1.791.371.59 ROROE-5.1%3.011.6 ROROA-.55%3.89.41 OPM-1.48%12.119.8 ATO37.0%31.547.6 Interest$35,947$29,799$31,205 Interest:Assets2.31.52.2 Total Assets (Mrkt)$1,561,716$1,918,484$1,403,604 Number of Cows168150160

24. 2007 (CDP, 100-250 cows) Mrkt Value of Assets and Economic Depreciation Performance MeasureLow 25%Middle 25%Top 25% Current Ratio2.119.505.15 Working Capital:Total Expenses13.950.723.2 Working Capital:Gross Revenue12.539.417.0 Debt:Asset37.624.932.5 Assets:Equity1.601.331.48 ROROE.727.1120.43 ROROA2.727.0815.46 OPM8.3420.7825.34 ATO32.634.061.0 Interest44,66735,18229,334 Interest:Assets2.251.701.48 Total Assets (Mrkt, ending)1,979,9792,067,7141,517,532 Number of Cows151147178

25. 2008 (CDP, 100-250 cows) Mrkt Value of Assets and Economic Depreciation Performance MeasureLow 28%Middle 28%Top 28% Current Ratio2.578.5212.32 Working Capital:Total Expenses16.6%30.654.1 Working Capital:Gross Revenue15.8%24.938.6 Debt:Asset47.5%23.233.4 Assets:Equity1.901.301.50 ROROE-3.17%7.0617.6 ROROA.92%6.7913.6 OPM2.28%17.0227.6 ATO40.4%39.949.1 Interest$44,062$29,836$34,540 Interest:Assets2.55%1.351.8 Total Assets (Mrkt)$1,726,032$2,202,736$1,888,622 Number of Cows155172177

26. 2008 (CDP, 100-250 cows) Mrkt Value of Assets and Economic Depreciation Performance MeasureLowMiddleTop Basic Cost:GR69.759.052.0 Wages Paid:GR8.310.410.3 Interest:GR6.63.53.9 Depreciation:GR7.88.44.7 NFIFO:GR7.618.829.1 Milk sold per cow18,98021,09021,912 SCC234,611208,500213,917 Crop Acres per cow3.0 2.4 Forage Acres per cow1.61.71.4 Debt per cow5,0482,9423,438 Net Milk Price19.2619.4818.92 Cows153172177 Total Assets (Mrkt ending)1,824,6002,202,7361,888,622

27. Our Economic World Today Interdependent –As trading nations VOLATILITY Dairy Industry structure Energy Technology Interdependent –As businesses

28. I’m Procrastinating What’s your mission –Profits for bank –Satisfied and profitable customer –Reasonable risk-return Farm Customer Choices 1.Path back to profitability (SR & LR) Underlying structure (finance) - Dupont Mgt capacity (adaptability, business sense) Personal condition (age, family help, equity, off- farm income) 2.Financially “happy” exit (Phil)

29. Path back to profitability may take some bridge building –Short Run Debt restructuring Increase working capital Innovative payment arrangements –Long Run Financial Analysis Partial Budgeting Operational/Strategic alignments Strategic and Business Planning

30. Is there current cash flow? (through harvest, through Spring planting) Is there sustainable profitability? YES Liquidation Situation NO Generate Cash Flow NO

31. They Cash Flow, Now is there sustainable profitability? YES Liquidation Situation NO Financial & Management Diagnostics -Efficiency-Efficiency -Scale-Turnings -Debt structure-Leverage -5 C’s -Character GO Re-Engineer Operation Accept & Finance Plan? YES NO

32. Are cash receipts expected to cover cash costs? Is there some contribution to overhead? Is current ratio 1.5 and working capital at least enough to cover family living and debt payments –WC:GR > 20-25% Is Ending cash flow:All cash expenses >10% –If Yes: Move onto next question (profitability) Cut cash costs where possible –Don’t throw the baby out with the bathwater. Is there current cash flow? (through harvest, through Spring planting)

33. NO: –Cut cash costs where possible –Don’t throw the baby out with the bathwater –Outsource low return activities and sell assets –Interest only payments –Restructure and lengthen amortization –New or increased operating lines –Sale of non productive capital assets –Sale of inventory (sale and re-own) –Elimination/Sale of non profitable enterprises Generate Cash Flow

34. NO: –Investment partner –Delay new capital asset purchases –Lower family living –Off-farm employment Generate Cash Flow

35. Is ROROE at a sufficient level to meet business and family objectives? Is ROROE competitive with other opportunities? Is ROROA > interest rate –And thus ROROE > ROROA Is the value of unpaid labor and management covered? Is depreciation covered? Is a payment to equity capital covered Is There Sustainable Profitability?

36. –Multiple years (trends) –Cost and market basis –Accrual –Benchmark –Search for Where should management time and creativity be targeted? Financial & Management Diagnostics And

37. Introducing the DuPont System for Financial Analysis

38. DuPont System “DuPont Financial Analysis Model is a rather straightforward method for assessing the factors that influence a firm’s financial performance.” (Gunderson, Detre, and Boehlje, AgriMarketing 2005)

39. DuPont System – What is It? The system identifies profitability as being impacted by three different levers: 1.Earnings & efficiency in earnings 2.Ability of your assets to be turned into profits 3.Financial leverage Earnings Turnings Leverage

40. Operating Profit Margin Asset Turnover Return On Assets (less interest adj.) Financial Structure Return On Equity X = X = Income Stream Investment Stream Earnings Turnings Leverage DuPont System

41. NFIFO – unpaid labor/mgt + interest Total Revenue Total Revenue Total Assets Return On Assets Total Assets Total Equity Return On Equity X = X = Earnings Turnings Leverage cash income +(-) inventory changes cash expenses +(-) accrual exp changes + purch lstk Depr labor + depreciation + interest expenses OK Too Low OPMR ATO OK Too Low Total Revenue = Basic Costs = Non Basic Costs = OK Too Low

42. NFIFO – unpaid labor/mgt + interest Total Revenue Total Revenue Total Assets Return On Assets Total Assets Total Equity Return On Equity X = X = Earnings Turnings Leverage OPMR ATO Too Low OK Too Low OK Too Low - Unproductive machinery? - Buildings not being used? - Breeding livestock not producing? - Unproductive land?

43. NO: Strategic Planning Partial Budgeting Plan the work - work the plan Strategic alignments Efficiency, Scale, Structure Labor utilization YES Is There Sustainable Profitability? GO Re-Engineer Operation

44. Accept & Finance Plan? NOYES PlanDoCheckAct Re-Engineer Operation Liquidation Situation

45. What Else? Reduce Risk –Loan Guarantee Programs –Marketing –Production –Fixed interest rates (secondary market) –Insurance checkup –Labor –Health Sensitivity Analysis

46. 5 C’s Collateral –yes, but! Conditions –What is the loan for? Capacity Capital Character –Not a computational task!

47. Be Creative Is it better to stick to your rules and policies, or find a way to get some money back? Good managers in bad situations could be good future & profitable customers How can you minimize losses

48. Banker on Management Team?

49. There is a reason they put a human behind the lenders desk and it’s not for when times are good Finally