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Welcome to January. We made it through 2021. What a year, and what a host of challenges for dairy operations. If it wasn’t the weather, too wet or too dry, it was extraordinarily high feed cost with historically moderate to low milk prices. We saw razor thin margins with this level of feed cost and increased machinery and/or repair cost. 
As I begin to complete the 2021 dairy farm analysis, I am seeing a huge range of milk prices, hauling costs, components and profitability. In fact, the numbers scare me just a bit. Yes, we are seeing higher prices going forward throughout 2022, but will the dairy producer receive these prices in the mailbox, and can they stay long enough to recapture some of the rising cost from 2021? Have you considered protecting some of the milk price using the variety of tools available, such as Dairy Revenue Protection, Livestock Gross Margin Insurance Plan for Dairy Cattle or forwarding contracts with your processor? My recommendation is to protect a percentage of your expected production that is over your Dairy Margin Coverage-approved pounds.
A few of things to think about as we begin 2022:
– If you have employees and had a reduction in revenue in quarters 1-3 of 2021, compared to the same quarters of 2019, make sure you talk to your accountant about applying for the Employee Retention credit. This can be financially lucrative.
– Make sure all W-2 and 1099 forms are completed prior to the end of January. Veterinarians and lawyer firms get a 1099 if they paid out $600 or more. Of course, land rent and custom-hire individuals also get a 1099 if they paid out $600 or more.
– Make sure you’re enrolled in the DMC program by Feb. 15. Are you eligible to increase your base APH? Contact the Farm Service Agency office.
– Learn about, and enroll in, the Agriculture Risk Coverage and Price Loss Coverage programs for 2022.
– Finalize your 2022 books and file income tax. Make sure you review the best tax planning strategies. It is not the best scenario to always avoid paying tax. The tax man (IRS) will get you sometime, so maybe pay some today to avoid larger amounts later. I doubt the tax rates will be lower in the future. Use the 179 deduction cautiously. My rule of thumb is to use the amount that is paid for, and not under loan. Depreciation should come close to offsetting your principle payments in years ahead; otherwise, you have no offset to the taxable principle payments.
Hopefully you have taken Jan. 1 inventories of crops, livestock and equipment. Creating your balance sheet reflecting asset values, payables and loan balances is the best tool to reflect business growth for the past year and a trendline over numerous years. My recommendation is to not get carried away with the per unit values, despite the market price. For example, if your corn isn’t contracted for sale, use a value something close to your cost of production and claim the real profit when it is sold. This may be best to reflect continual growth on the balance sheet. Using a $6 per bushel price and then eventually selling for $4.50 or $5 per bushel will only give you a false impression of equity and create a yo-yo effect on the balance sheet. In my opinion, crops to be fed need to be evaluated at the price you’re comfortable with as a feed cost for cows or other livestock. Market livestock facilities can be shut down and the crop sold if you determine it is more profitable to leave the industry for a period of time. Dairy, however, is not as flexible, as it takes many years to obtain the quality genetics required for a top-producing herd. The goal for the balance sheet is to continually see financial growth over many years, as opposed to many ups and downs based on a projected market price. In addition, using unrealistic high forage and grain prices (above your crop cost of production) will give you a false impression of the dairy profitability.
Work with either your farm management person or your banker to finalize those balance sheet values and view a multi-year trendline for equity growth and ratios. Have discussions about strong areas and those needing improvement. Inquire with your lender about your bank credit score number and have discussions on what it means and how to improve your score. A better score means better interest rates.
Lastly, ask yourself and your farm team, “How do we become better?” Be a bit self-critical and inquire about your financial, production and benchmark figures. Don’t be offended about areas you may need to improve upon, but instead seek ways to become better.
Tom Anderson is a Farm Business Management faculty member at Riverland Community College.

 

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