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Veteran Advisor

Dairy business

THought this fit better over here than in the Parlor pit post.  Been to two meetings this past month that just scarred the bejeebers outa me.  I also got two phone calls from dairyman I know that are being forclosed on.  This article shows some really disturbing trends.

Farm Lenders Sour on Dairy Loans

AgFax.Com - Your Online Ag News Source

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By Marcia Zarley Taylor, DTN

 

Farm lenders "kept the walking dead alive" in the dairy industry the past two years, but that reprieve will end for many stressed operations as loans are renewed this spring, predicted **bleep** Gilmore, a financial consultant with 30 years experience in farm lending. The Charlton, Mass., consultant now works with some of the nation's largest ag lenders to appraise property and manage troubled farm accounts, including dairies.

 

"Lenders hesitated to shut down stressed livestock operations in 2009 and 2010 because the assets were worth only pennies on the dollar and were too far under water," Gilmore told a recent meeting of the Association of Agricultural Production Executives (AAPEX) here. Breathing room benefited pork and cattle producers as their margins rebounded last year, but during that same period, many dairies just narrowed their losses. Many drained their equity when the price of cows slipped from $2,500 at the peak of dairy profits to a mere $1,000 today.

 

When industry-wide calamity struck, a lot of the collateral securing loans just went "poof," Gilmore added.

 

One 3,000-cow Idaho dairyman in the audience said he averaged costs of $15 per hundredweight (cwt) in 2010, but Tier III prices have remained above that level for only a few months since mid-2008. "We've dug a very big hole the last few years," he said.

 

CUMULATIVE LOSSES

 

Dairy loans are the most problematic farm accounts because of the length and depth of their losses. Overall, nonperforming farm loans ran between 2.3 percent and 2.8 percent of the ag bankers' total portfolio at year-end 2010, according to Kansas City Federal Reserve economist Jason Henderson. Those are loans at risk of default, including accounts that are current on payments but may be under collateralized.

 

Overall nonperforming debt levels at banks are not especially worrisome yet, Henderson said, but the concern is that profits among crop producers are masking the long-term challenges for livestock, particularly dairy.

 

Plunging net incomes during the 2008 spike in grain prices pushed half of all livestock producers into serious financial stress, according to a recent report by Brian Briggeman, another economist for the Kansas City Federal Reserve. By his estimates, debt levels for nearly one-third of the nation's livestock producers ballooned to twice as much debt as their incomes could prudently service in 2008. Dairies topped the list of these high-risk borrowers, Federal Reserve economists said.

 

Large-scale dairies outside the upper Midwest exhibited the heaviest losses, since they shouldered expensive transport costs for feed. But even those in the traditional dairy states of the upper Midwest suffered: Minnesota dairies with more than 500 cows averaged losses of $314,000 after labor and management charges in 2009, a huge reversal of fortune from average profits of $363,000 in 2008, according to the state's Farm Business Management Program database. More troublesome is that their working capital -- liquid assets -- slipped to about 7 percent, below the 20 percent or 30 percent of gross sales recommended by farm financial consultants.

 

"A lot of dairies had a line of credit for cows, a line for feed, a line for machinery and equipment and a long-term loan. When you analyze their loans, guess who's making the payments to the long-term lender? The short-term lender," Gilmore said. "We just lent dairy way too much money."

 

TOO LITTLE, TOO LATE

 

Given those strains, bankers and Farm Credit System lenders are expected to call more dairy accounts this spring, even though milk prices are improving.

 

"It's not just that dairy prices are increasing. Lenders look to see what margins producers can make at these milk prices and feed costs," the Federal Reserve's Henderson said. "If you can't show a profit going forward, you're going to find it very difficult to get financing."

 

While lenders will make decisions on a case-by-case basis, the key will be "how long do they have to recover before interest rates rise and higher feed costs erode margins again?" Gilmore said. "Seven-dollar corn and $14 soybeans could make things ugly."

 

Class III milk futures have seen a strong upward movement since December and are running $18/cwt through May, $17 to $18 from June to September and ending up the year at about $16.50 for December. Those are the highest futures prices in more than two years, said DTN Analyst Rick Kment, but perhaps not enough to cover feed costs if corn and soybean meal prices remain super charged. Some dairy producers are weathering price spikes now because they purchased feed needs last summer, but Kment said the question is dairy's long-term feasibility.

 

Gilmore said there are lessons for crop producers in dairy's experience. During high-profit years when milk was $20, too many dairies reinvested in expansion rather than building liquidity for a rainy day fund.

 

"What we learned is that cash is the real thing, not equity," he said. Wealth built on land, grain inventories and livestock valuations looks good on paper during boom times but vanishes when commodity prices and margins crash.

 

Marcia Taylor can be reached at marcia.taylor@telventdtn.com

6 Replies
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Senior Advisor

Re: Dairy business

Would one say "to much greed to succeed "---reality being one can run numbers and averages and percentages untill the "cows come home" with the variables of -weather- markets-livestock performance into the mix does not equal profiet ! On top of that huge debt to service guess the ending ? 

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Highlighted
Senior Advisor

Re: Dairy business

""What we learned is that cash is the real thing, not equity," he said. Wealth built on land, grain inventories and livestock valuations looks good on paper during boom times but vanishes when commodity prices and margins crash."

 

This is easy to say looking in the rear view mirror, but when times are good and expansion is a possiblity, it looks like the logical thing to do.  Who knows how much money to sock away?  And, when the farm next to you comes up for sale and you need to build your business, do you bid it up or let a competitor have it cheap?

 

It sounds to me like the article was saying cash flow was the real thing and bankers got tired of providing it with borrowed money, which they never should have in the first place.

 

I agree 100% that paper can go 'poof" real quickly when things get down to whether there is any real money.

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Veteran Advisor

Re: Dairy business

Jim one of my pet peeves thru this thing has been the willingness of banks to keep folks going just so they could sell them oput when times were better.  I personally know one farm with 4000 cows who were given a year of interest only on their new parlor wich cost about 1 millionm dollars two years ago. THey were also told that they must maintain cow numbers and if they didn't have money for replacements the bank would loan them the money for more cattle with out repayment until milk got back above a cetain price!  THis is in the midwest.

 

Another farm in Cali told me that every month they go in and get theri feed money from the bank.  I asked how much equity they are pledging to get that done.  They said NONE they have no equity left This is about 130,000 a month!  I think you can see that those kinda deals make it worse for everybody!

 

The common theme was that the banks were not writng down the equity in these operations so as to get the right look for the regulators! 

Highlighted
Senior Advisor

Re: Dairy business

Maybe now we know why there is an attempt to put in place base line regulation on the lending business--although to many people in finance business haven't any "skin in the game" except next weeks pay check---kinda looks like the housing business ? 

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Highlighted
Advisor

Re: Dairy business

Sounds a lot like the ledger contracts that packers held with hog producers in 1998-9, which was how they Smithfield ended up owning Wendell Murphy's production outfit, from what I've been told.  They kept getting paid a cashflow price for pigs, but ran up a heavy negative balance on the ledger with the packer. 

We had been offered one of these "window contracts' with Purina, but did not get to build that operation.due to a bad zoning decision by the county.  Best example of an unanswereed prayer in my lifetime.  Still why I say: sometimes, the best answer you can hear for you own good is "No!"

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Advisor

Re: Dairy business

Reminds me of a remark made by the most crooked man I've ever met in business, when I mentioned  once being worried about borrowing a lot of money to buy and build this place. 

He said, "Don't worry, they will work with you...there ain't a banker alive who wants to raise hogs." 

I sincerely doubt there are many who would want to milk cows, either....

 

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