Great Lakes Dairy Sheep Symposium - the Department of Animal ...

Several items were particularly striking. Accounts receivable ranged as high as $45,756.
One farm, the yogurt producer, did not have any milk at the end of the year and thus did not have
any inventory or accounts receivable. Processing supplies ranged from $0 to $77,000.
Processing land and buildings averaged only $25,000 as compared to farm assets of $162,000,
indicating the lower investment in fixed structures needed for processing. Processing equipment
ran from $3500 to $38,000.
Debt was more variable than assets for this study. Three farms did not have any debt,
making financial decisions a bit less risky than for the farm with debt. Farms averaged a total of
$108,000 debt that was split closely in relation to the investment in processing and farm assets.
More striking was the range of debt, with 2 farms with more than $300,000 in debt.
The debt/asset ratio provided a size neutral assessment of debt for the farms in the study.
Generally lenders consider a D/A ratio greater than 0.5 as high and 0.7 as dangerous. The farms
averaged a 30% D/A ratio, ranging from 0 to 0.67. What is more striking is the D/A ratio of the
processing sector. This ranged from 0 to 3.43, meaning a debt at 3.43 times the value of the
assets. How does this happen? You have to consider the type of asset. For the farm assets, land
does not depreciate and usually escalates in value, providing equity and collateral for the owner.
Also, farm equipment and animals usually maintain reasonable market value.
Processing assets, however, are expensive, new, and drop in value quickly. Depreciation
is especially high for installation costs, which cannot be sold. Thus, for some farms, the value of
equipment and accessories can be discounted significantly while any debt related to the items
only goes down as fast as the payment schedule. On the other extreme, some farmers who are
small operators have done an excellent job finding low value and used equipment that limits their
depreciation and also their debt levels.
Income Statement
The accrual adjusted income from the 10 farms would not induce one to head out right
away and jump into the processing business. Four of the 10 farms ended with negative net
business income (Table 5). How does this happen? A lot of farms do not calculate income
according to accounting standards. For this study, we first examined farm and processing
income separately, then together, and then charging for depreciation. In addition, milk was sold
at a going wholesale price from the farm to the processing sector.
On average, farming operations broke even, with expenses equaling costs. On the
processing side, the average farm made just under $20,000 after paying for expenses. It shows
that the demands of the processing sector required much more time and emphasis that generally
did not permit operating the farm to maximum production. In most cases, farming was done as a
method to supply their own milk. What may be interesting is that a number of the farms would
be better off buying their milk from a farm that concentrated on producing milk and did not
concentrate on processing. But then, a sales point for most farms is that they produce and
process their own milk.
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