A better return - Stocks and bonds or dairy cows?

by Gary Sipiorski
The author is the dairy development manager for Vita Plus of Madison, Wis. He is a member of the board of directors with Citizens State Bank of Loyal, Wis.

This volatile business of milking cows has rewarded many of its caretakers with handsome returns. We always must remember this is a business that demands a great deal of capital, planning, time and good old-fashioned hard work. I believe successful dairy producers could be successful in almost any business or investment that they choose.

They have chosen the independent occupation of dairy cows for a variety of reasons. Some reasons might be a family's past history and opportunity. Many like dealing with living creatures and crops. I always have thought of dairy producers as hands-on scientists with an earned business degree, as well. From a scientific standpoint, they are dealing with living organisms every day. That takes some "real" talent.

There are times when this business is quite profitable. Use good times to get balance sheets in order, have a comfortable income statement and make further decisions of where else to invest their money.

I must make a disclosure here and remind you that I am not a certified investment adviser nor do I have a "Series 7 license." These are simply some financial observations that I have noticed in "successful dairy producers."

Attributes of leading producers
1. These dairy producers, regardless of age, have thought about the business side of their operation first. They make sure money borrowed and invested generates a positive cash flow and ends up on the net worth side of the balance sheet.

2. Many dairy producers have invested the earnings back into their farms and use the growing balance sheet to leverage the dairy for further expansion; some buy multiple farms. Most pour their profits and borrowed money back into their farms because they feel they can get a better return and watch their cash rather than have it invested on Wall Street.

3. Need I mention farmers investing in additional land purchases which becomes very important in many dairy areas for nutrient management along with forage and grain production for feed?

In the last few years, there has not been a better investment anywhere than in the form of "appreciation" gains. Remember, that is different than "earned income." Only the future will hold the answer to the return, leverage and wisdom of the high recent prices paid.

4. Some producers have diversified the profits off of the farm in other business investments like rental housing and in-town businesses. Many of these have shown satisfying returns that may or may not demand the same management intensity.

5. There are dairy producers with profitable farms who used their personal incomes from the farm to make 401K contributions and other stock or bond investments for a future time when they may not be physically or mentally able to manage a dairy. This investment strategy would hopefully include a well-thought-out succession plan to move the management and financial responsibilities to the next generations. I have seen some hefty investment portfolios built over the years with sound advice from trustworthy investment advisers. Farm transfers with a generation being able to support themselves with off-farm income makes passing the baton much easier.

6. Oh sure, stocks, bonds, mutual funds, municipal bonds, to mention just a few paper investments, can be as volatile as the Class III milk price. These investments do diversify the personal balance sheet.

No sure thing
Over the past and future years there will be ups and downs in all businesses and investments. Those dairy producers who understand the business side of milking cows in terms of balance sheets, income statements and using the advice of sound advisers will find profits in milking cows.

In many cases, and mostly due to the day-to-day dedication 365 days a year, the dairy farm will outdo stocks and bonds at times. At this time in history, bonds are yielding less than 0.09 percent to 3.5 percent depending on the duration; some tax-free municipals will yield higher. Wall Street is trying to capture stocks that will throw off dividends of 3 percent, although the general value appreciation is up. Well-run dairy farms will have a return on assets of 8 percent or more. It looks like those long hours do have benefits. The job satisfaction will come in many ways. Then using those profits to grow or diversify will make a successful total family life and personal career.

This article appears on page 543 of the August 25, 2014 issue of Hoard's Dairyman.