Managing COVID-19 Instigated Risk on the Dairy Farm – Be Optimistic, But Plan

(An adapted reprinting from Progressive Dairy – https://www.progressivedairy.com/topics/management/covid-19-a-hard-conversation-about-the-risk.)

Contact: Kevin Bernhardt, Extension Farm Management Specialist, kjbernhardt@wisc.edu

Many in the dairy industry may face tough conversations in the year ahead. COVID-19 is an enemy that struck with little warning and no one really knows where this is all headed for the world, the nation or the dairy industry, but an almost certain outcome is that the hoped-for recovery of prices and profitability may have to wait another year.

Figure 1 shows Class III Announced prices from January 2005 through December 2020 (April-December 2020 are futures prices as of April 2, 2020). In July 2019, the Class III price finally broke out of a cyclical low for the first time in 4½ years and continued to rise to a much needed $20.45 in November 2019. Dairy farmers were finally beginning to breathe a sigh of relief, pay off some debt, replace capital assets and build back working capital. Then, news of a new virus started coming out of China.

The much-needed recovery has stalled. Has there been an overreaction by markets, probably so, but what is not in doubt is that the pandemic has disrupted worldwide commerce and it will take time to rebuild business, put people back to work and normalize trade and consumption patterns. Depending on how long recovery takes, it could mean some tough conversations.

Dr. Anthony Fauci, the White House advisor on infectious diseases made a comment that he hoped the critique of him would be that he was too cautious. That is my hope as well. I hope that this pandemic all blows over quickly, we get back to normal and have a quick recovery back to profitability. I will happily be the first to criticize myself for being overly cautious. Until then I’m reminded of the need to remain optimistic, but plan for potential risks ahead.

Potential scenarios are many and a bit daunting. Let’s break the challenge down by what risks we may face today versus next week or the months ahead. There are many resources and more coming. One resources that addresses multiple risks is fyi.extension.wisc.edu/covid19/category/topics/farming/.Today’s Challenges

  • Bills are due. From January until the close on April 2, Class III futures prices for the May contract have fallen from $17.25 to $12.88 ($4.37 fall). For a 100-cow dairy that is approximately $8,750 less revenues for one month (approximately $175,000 for a 2,000-cow dairy) with which to pay bills. Potential strategies/resources:
    • Be fully transparent with lenders and creditors.
    • Consider a draw from your line of credit, new bridge borrowing and/or partial payment plans.
    • Take advantage of government programs and stay informed of new ones such as the “Paycheck Protection Program” that provides forgivable loans for employee and other eligible expenses (https://farms.extension.wisc.edu/ppp-and-farmers/).
  • Dumping milk. With supply chains disrupted, a last recourse is dumping milk. Hopefully it will remain a few isolated instances (be optimistic, but plan for the risk). Losses are likely to be shared across the pool of producers, meaning even if you were not asked to dump your milk, you may still share the cost.
    • Document losses, dumped milk or otherwise, that are a result of the pandemic (written records, photos, dates, etc.). Government relief programs may require documentation for eligibility.
    • Resource: “Emergency Disposal of Milk for Dairy Farms During the COVID-19 Public Health Emergency,” DATCP/DNR Fact Sheet, DATCP_DNR Milk Disposal Final 3 28 2020 (003).pdf.
  • Stop the spread. Sick employees, family members and you can’t milk cows, feed calves or make clear-headed decisions. As farm business owners, bosses and rural community leaders, you are the leaders of your community and on the front lines to lead the charge to keep the virus out! People will follow your example.
  • The scariness of the virus itself, social isolation and financial worries are taking a toll. Chronic stress can impact mental and physical well-being, relationships and decision-making.
    • Take care of yourself so that you can take care of others.
    • Lead regular conversations with your spouse, employees and others that creates an environment of openness for expressing needs and fears. Plan for farm work continuation.
    • Information source: “Resilient Farms, Families, Businesses & Communities: Responding to Stress,” extension.wisc.edu/farmstress/.

Next Few Weeks Challenges

  • Sick employees, family members, milk haulers and processing plant employees. Sickness could impact the normal operations of the dairy. With spring work around the corner this is even more of a concern.
    • Prevention (see “Stop the spread” in the previous section)
    • Develop contingency plans for how work will get done including cross-training, written standard operating procedures and neighborhood labor pools.
    • Contact your haulers, vets and others that are a routine part of operations and ask them what their contingency plans are or what you need to do to prepare for an outbreak among them.
    • Prepare plans for how to dispose of milk for short disruptions that might be caused by the dairy plant having to quarantine due to a virus outbreak.
  • Liquidity/Cash flow/paying bills. If prices stay low, then greater actions will be needed to increase cash flow. Changes in practices that increase short-term cashflow including:
    • Cheaper ration ingredients
    • Negotiate lower prices
    • Interest only payments on loans
    • Sell unused or underutilized capital assets (cows, machinery, etc.)
    • New operating loans and/or restructure existing loans
    • Change in milking, feeding and other procedures that reduce labor and other inputs
    • Cull or dry off low producing cows early

Months Ahead Challenges

Solvency and/or Loss of Equity. The last 4½ years of poor profitability has taken a toll on owner’s equity.  While not unusual in the farming business, the length of this downturn reduced the resiliency of businesses to take another hit. Continuing erosion of equity due to financial impacts from COVID-19, may necessitate a tough conversation on what is best for the future of the operation.

  • Ask and answer some tough questions
    • What is the trend of profitability, debt and equity?
    • How will these change under different price scenarios (Class III $18 and higher, $15-$18 or lower than $15)?
    • How much more equity are you prepared to spend to wait it out?
    • Are there alternatives for partial liquidation?
  • Based on your early answers, you may fit one of three profiles
    • Long-Haulers: I’m in the business for the long run. To use a phrase from “Game of Thrones,” I know “winter is coming,” so I’ll hunker down and cash flow until profitability returns.
      • Big Question: How do I cash flow in the short run?
    • Guardian Transitioners: I have equity in this business, and I am going to guard against any further erosion by proactively managing transition, exit or partial exit and preserve the equity I have.
      • Big Question: How do I exit successfully with the most equity possible?
    • On-the-Fencers: I’m unsure. I’m too young to retire and I’m too old to start over. I want to farm, but I don’t want to go poor doing it.
      • Big Question: How do I analyze this situation and make decisions?

Focus creativity to solve the problems that are in your control. There are things that can be done to mitigate the risk of the coronavirus. As hard as it is, focus your energies and management creativity on what you can control even if it means a tough conversation.

A video series that complements this article is available on the UW Extension Agriculture COVID19 Response YouTube channel, Farm Finances playlist: https://www.youtube.com/playlist?list=PL_4exar2g7mcMNDRA8XhyaiIPVsDJR2cL

The series highlights perspectives on the COVID-19 pandemic; impacts on the farm; and thoughts on finding ways to regain some sense of control to put these stressful times into perspective. The presenters in the videos are Mark Stephenson, Director of Dairy Policy Analysis and the Director of the Center for Dairy Profitability, UW-Madison; John Shutske, Extension Agricultural Safety and Health Specialist and Director of UW Center for Agricultural Safety and Health, UW-Madison; and Kevin Bernhardt, Extension Farm Management Specialist, UW-Platteville.

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