No matter if you currently milk 70 cows or 5,000, expanding your dairy operation will have a major impact on your farm’s future. There are many motivating factors for you to consider. Whether it’s the recent labor market forcing you to re-evaluate how the cows are milked or the next generation is interested in joining the operation, you’re likely going to lose some sleep when thinking of expanding.
There are plenty of questions that will arise. Do you have enough acreage to feed additional cows? How do you plan to grow the herd? If you do grow, are you going to need to hire additional employees? What are your manure management plans?
Even after you answer all those questions and you’re comfortable with your decision, there is still more areas to work on. The additional milk needs to go somewhere, so you’ll need to check with your milk processor to ensure they’ll take it. You’ll also need to look into your local government regulations regarding the expansion and discuss with your lender to determine the financing options to lock in your decision.
When working with regulations, the big hurdle we normally see involves operations that are moving from non-CAFO (concentrated animal feeding operations) to CAFO. The number of animal units that this occurs at varies by state, so we advise checking with local regulators.
While you’re checking into regulations, you’re likely going to want to get in touch with a reputable contractor to give you an estimate for the cost and timeframe of when they can begin the process. Two things we would recommend would be to expect a 10 to 20 percent higher cost than what is estimated, and plan on building the facility in a way that allows for additional expansions in the future.
We do want to emphasis that no dirt should be moved, or building started until the loan documentation is signed. The contractor might have an open now but doing so without the proper inspections could risk the loan and regulatory approvals.
No matter what size operation you have, an early conversation with your loan officer would be recommended to determine what type of financing best fits your operation. This conversation could also include your tax accountant to determine if you should explore leasing options versus traditional lending, or potentially a combination of the two.
If you choose traditional lending, a construction loan will likely be utilized. This process typically entails an ‘as-will-be’ appraisal being completed, meaning the farm will be appraised as if the construction is completed. There are additional safeguards that we utilize to help protect the co-op as well as the farmer. These can range from a construction agreement, environmental inspections, lien waivers, among others.
Cash flow is one of the biggest concerns on a dairy farm, and after your financing is secure there can be a 6-to-12-month period from the time construction begins and when you receive that first milk check reflecting expansion. Due to this, a construction loan will require interest only payments during construction, with principal payments beginning up to 12 months after construction begins.
Looking beyond the scope of cash flow, your farm’s balance sheet will also be impacted. Post appraisal, you’re likely going to see a negative effect on your equity position as the valued added from the expansion usually doesn’t match dollar-for-dollar to the cost. This is something to be aware of when considering expansion.
If you have considered an expansion on your farm and would like more information, please contact your local AgCountry office to speak with a loan officer. Not only can we assist you in the process, but we can also give you financing options to fit your farm.