I am 63 years old. My 30-year-old son farms in partnership with me on our 270-acre farm in northwestern Wisconsin. We milk 100 cows and raise all of our young stock, including Holstein steers. While we are not struggling because our debt is low, we are also not making much money. I was talking to my son last week, and we agree that when the dairy economy turns around, we will sell the cows. I plan to retire and my son plans to find a job in town. We’ll either grow crops on our land or rent it to a neighbor. Our question is, when do you think milk prices will increase so we can afford to sell our cows instead of give them away? I understand 2019 is likely to be more like 2018 and 2017. Do you think things will turn around in 2020?

Doug Hodorff: I can’t predict milk prices. What I do know is you can control costs. Seems you have done a great job of price control on your farm. Prices will turn around. You are in a good situation and are holding steady on costs. I feel you should wait out this downturn and plan on selling in a more positive market. Put together a longer-range plan that will satisfy your goals. 

Sam Miller: The crystal ball is pretty cloudy as to what milk prices and the dairy economy are likely to look like over the next couple of years. On the positive side, dairy demand — both domestically and on a worldwide basis — is increasing. While fluid milk sales are down, cheese, butter and protein are all up, both domestically and globally. Further complicating price improvement are trade-distorting impacts such as tariffs against dairy products and even the relative strength of the U.S. dollar compared to currencies in primary U.S. export markets.

The current low dairy farming margins have many producers facing the same question you are. If the milk supply contracts while demand keeps modestly rising, milk prices, and subsequently cattle prices, will rise at a similar rate. Put some time into budgeting income, expenses and returns for operating the dairy until you plan to sell vs. what the business will look like after the cows leave. This can help guide you to how much you would need to sell the herd for in the future vs. selling this year. Good luck with your deliberations.

Katie Wantoch: Dairy pricing is entirely cyclical in nature. This downturn has lasted for an unusually longer time than was expected. Dairy economists estimate that prices should strengthen somewhat in 2019. However, they had predicted an upswing to occur in 2018, which did not come to fruition. I would suggest that you review your current financial situation with your accountant or tax preparer to determine future plans for your dairy, dairy beef and crop enterprises.

Creating a budget will assist you in determining whether the crop enterprise is profitable after the sale of the dairy cattle. Your accountant or tax preparer can also assist you in the timing of the sale of livestock to reduce your income tax liability. My last suggestion would be to start thinking about what your retirement plans are, and meet with a financial adviser on funding your plans.   

Selling land is short-term solution
My brother and I are 40 and 42 years old. We took over our parents farm 10 years ago when they retired. We milk 140 cows and farm 300 tillable acres in central Wisconsin. We have $500,000 in mortgages on our farm, cows and machinery combined. The banker suggested we might want to sell our cows in 2019 since we haven’t made any money on them during the past three years. Cow prices are in the tank, and I think it would be smarter to sell 100 acres of land to a neighbor for $4,500 an acre and almost wipe out our debt. I did some cash-flow projections, and with little or no debt, we would actually be making money even with low milk prices. We both like dairy farming, and we’re too young to retire. Please advise.

Doug Hodorff: Way too many unknowns to make an informed suggestion. Some concerns are your assumption of selling land. The proceeds from the sale would not reduce your debt totally. You would owe taxes on the sale according to your tax basis in the land. Secondly, your banker knows your business and your potential for profitability. I am questioning the profitability of your farm. If you free up some cash, what will you do with the cash? Reinvest in the business or spend it? Selling land is a short-term solution to a longer term problem. 

Sam Miller: The core part of your question is how to right-size your business so you can meet cash-flow and living objectives. Fortunately, you have options. You can change the business by selling the dairy herd, or you can shrink the size of the operation by selling land as a fixed asset and significantly lowering your debt level. Selling the land does not impact how much income you would receive from milking your current herd of cows, but will likely increase feed costs unless you intend to rent land to replace what you would sell. 

While selling the land would almost eliminate your debt, don’t forget you may have capital gains taxes on the sale of the land. Visit with your accountant to calculate the potential tax if you were to sell the land.  Bottom line: Run alternative scenarios and ask how to solve the question of being able to meet cash flow while considering continuing to operate a business you want to operate. An Extension ag agent, farm technical college trainer or your banker can assist you in evaluating your options. Good luck examining the best way to operate your business going forward.

Katie Wantoch: While this sounds like a viable option for consideration, it would be advisable to take a close look at how the land sale would impact your feed inventories and crop acres necessary for nutrient management. Will you be producing enough feed on the remaining acres after the sale to feed your cows and young stock throughout the year? Do you have a neighbor that you could partner with to purchase supplemental feed should you run short? Will you have adequate tillable acres for manure spreading? Will be able to utilize neighboring fields for nutrient application? Would you be able to lower your feed costs by utilizing neighbors’ excess forage and grain inventories? These questions are a few of the “what ifs” that you may want to consider as you evaluate this challenging business decision.

Agrivision panel: Doug Hodorff, Fond du Lac County dairy farmer; Sam Miller, managing director, group head of agricultural banking at BMO Harris Bank; and Katie Wantoch, Dunn County Extension agriculture  agent specializing in economic development. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].