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.
In general, the U.S. and world economies are pretty stagnant. Part of the issue is after the 2008 financial crisis consumers and businesses were just happy to still be around.
Time does heal even though there are still many homes underwater. Jobs have come back even if the wages are not what they were before the crash. The public is starting to loosen the spending purse strings yet consumers are more aware of their debt and wanting to pay down those obligations.
Auto and light truck sales are at record levels with drivers seeing rust spots on aging cars and high odometer numbers. Restaurant traffic has picked up as families feel a little better about getting out and enjoying themselves. Businesses are becoming cautiously optimistic as some profit returns to the cash register.
Based on the Federal Reserve's moves and statements an observer will see they have been holding back on any interest rate changes while waiting for stronger economic signals. This can be interpreted in a lot of ways. Maybe the best answer is we are not back to "normal" yet.
The best investments
So where does one go for a return on their money? Where is there a profitable business with either appreciated growth or a business that is getting a reasonable return on the investment?
Land has been a windfall for many, in appreciated value, if bought at the right time. The real value of land comes when a crop can be raised for a profit. However, farmers buy land to keep. Land values have and can move both ways.
Money can sit in a certificate of deposit (CD) in a bank where it is safe, providing the amount is at or under the Federal Insurance level. A five-year CD will earn around 1 percent on average. In the last few years, stocks have been earning around 3 percent in many cases. Some have appreciated in value. Always remember these kinds of investments come with risks.
If those returns look dismal, try out some European CDs or Treasury bonds. Some have a negative interest rate meaning the depositor pays to get their money back!
Understand that 2014 was a banner year for milk prices and high returns were common. "Returns on Equity" and "Returns on Assets" ranged anywhere from 5 percent to 20 percent and, in many cases, higher. These returns are based on the fair market value of the farm. Even in "normal or average" years returns can range between 5 percent to 7 percent.
There certainly is a large investment in a dairy farm and attention is needed daily, better yet hourly, throughout the year. Here are a few simplified definitions to help better understand what kind of a return your dairy is getting. Accountants will have a much more specific formula, but this is a start.
Fair Market Value (FMV): These figures represent appraised values. The numbers are based on what farms, land, buildings, cattle and machinery are selling for in your area. These would be values on a year-end FMV balance sheet. The other value terminology is Book Value (BV). These would be depreciated values based on an accounting procedure. From a layman's point of view, FMV is commonly used.
Return on Assets (ROA): This is the net income after expenses (not including interest), depreciation, family living and income taxes divided by the total FMV assets on the balance sheet. Interest is not used in the calculation in order to measure all businesses on the same plane without the cost of borrowed money, in accordance with Generally Accepted Accounting Principles (GAAP).
Return on Equity (ROE) or sometimes called Return on Investment (ROI): This is the net income after operating expenses. Interest is included in this calculation along with depreciation, family living and income taxes. This group of items is divided by the net worth or equity on the balance sheet.
The best place to invest
Many dairy producers will find a return that will be better than other places to invest money. Yes, it comes with hard work and a lot of day-to-day decisions. This is really called a small business.
Small businesses make up the largest percent of businesses even though the big businesses get all of the press. Certainly, at this time in history, many dairy farms will as they say "beat Wall Street." Having a profitable business is the best show out there now; if you have one, hang on to it and work on making it even better.