Liquidity management in dairy farms in Lower Saxony

Background and Objective

Increasingly fluctuating payment flows for dairy farms have various causes. On the cash in-flow side, volatile milk producer prices have been a clear result of the liberalisation of the milk market since 2006. On the disbursements side, prices for animal feed in particular fluctuate. Here a targeted control of payment flows is required in order to secure the solvency and the liquidity of the farm at all times. Especially in longer periods of low milk producer prices, when expenses for milk production are not covered, liquidity management becomes a focus of farm management.

Target Group

Science, Policy, Agricultural consulting, farming practice

Approach

This paper uses a mixed methods research design to analyse the status quo of liquidity management and its influencing factors in agricultural enterprises using the example of dairy farms in Lower Saxony.

Firstly, based on the current state of research, the literature was used to analyse what "optimal" liquidity management on dairy farms should look like and which farm-specific factors as well as characteristics and attitudes at farm manager level influence the liquidity management of farms from a theoretical perspective.

This was followed by an empirical analysis of liquidity management on dairy farms and its influencing factors at farm level and at farm manager level. For this purpose, a written survey of around 1,100 dairy farms in Lower Saxony was carried out. Qualitative expert interviews were conducted in preparation for the survey and a final validation workshop was held with experts to discuss the results of the analysis and derive recommendations for action

Data and Methods

Data collection takes place in two steps. First, the influencing factors on the farm are queried in a written questionnaire addressed to all dairy farms in Lower Saxony. In a second step, interviews are conducted with farm managers in order to determine influencing factors in the area of personal attitudes and competences. Following the data evaluation, the results will be presented, discussed and further developed in an expert workshop with representatives from science, agriculture, the dairy industry, dairies, agricultural cooperatives and associations, and banks.

The comparison of the theoretical and empirical results should ultimately lead to the derivation of recommendations for action.

Our Research Questions

What are the main operational factors influencing the liquidity management of dairy farms?

Which entrepreneurial skills and attitudes do current farm managers possess, and are impacts or contexts discernible? How can the current situation be improved?

Results

The survey data from a total of around 1,100 farm managers were analysed using multivariate analysis (ordinal-logistic regression) with regard to the following aspects:

a) at farm level: capitalisation, legal form, profitability and stability, and

b) with regard to the personal characteristics of the management: professional qualifications, strategic thinking, motivation, ambition/goal-orientation and risk appetite.

The analysis showed that a higher proportion of borrowed capital in the business leads to more intensive liquidity management. The same applies to the qualifications of the management: the higher the level, the more intensive the liquidity management. In contrast, the attitude to risk cannot be clearly linked to liquidity management; however, risk-averse farm managers tend to accumulate larger liquidity reserves on the farm.

The following recommendations were derived from the results:

•  The "liquidity management score" should be further specified with regard to the quality of liquidity management in order to enable the delineation of more homogeneous groups in the empirical analysis on liquidity management.
• Both the risk attitude and the risk experience of farm managers and their causes should be further researched in order to be able to analyse liquidity management more comprehensively. 
• It should be investigated what obstacles exist on the part of the farm managers to systematically addressing liquidity management.