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Despite Drought, Some Reason for Hope for Dairy Farmers

August 8, 2012
By: Jim Dickrell, Dairy Today Editor

At the moment, however, New Mexico dairy producers are struggling with margins $2/cwt. below breakeven. Feed prices and a shrinking Class III basis are to blame.

The drought of 2012 is shaping up to be another nasty year, similar to but not quite a brutal as 2009, say lending experts with the Farm Credit system.

New Mexico dairy producers have seen equity levels erode about $200 per cow between January and June, and the July/August erosion appears to be on a similar downward slope, says Greg Carrasco, VP of lending for the Farm Credit of New Mexico, based in Las Cruces. There is some hope for recovery in September and October, as schools re-open, Class I sales increase and blend prices rebound.

At the moment, however, producers are struggling with margins $2/cwt. below breakeven. Feed prices and a shrinking Class III basis are to blame. Carrasco notes that dairy quality hay is now commanding $280/ton and corn silage $75/ton (delivered, inoculated and packed into the bunker). Cotton “hay”—essentially cotton stalks fortified with non-protein nitrogen—is $120/ton delivered.

The other problem is the Class III basis. Last year, the basis—the difference between Class III and mailbox prices—was about $1.20/cwt. This year, it’s much more volatile and currently only about 15¢/cwt. “As a result, we don’t have a lot of producers locked in,” he says. “They’re trying to get a handle on the basis, and most have opted to self-fund the risk.

Carrasco won’t speculate on how many of his Farm Credit dairy customers are at risk, but he believes the number to be quite low. “2009 was brutal, but we’ve had a decent recovery in balance sheets in 2010 and 2011,” he says.

“Farm Credit has been here in New Mexico for 30 years, and most of our long-term operations have good levels of equity,” he says.

Nationally, dairy customers are the most stressed of all of Farm Credit’s agricultural customers, says Bill York, CEO of AgriBank, St. Paul, Minn. Corn and soybean farmers will have crop insurance to fall back on if crops fail. But dairy producers will struggle to find enough feed to get through the next year, and will pay dearly for it if they find it. “We’re looking at 12 months of uncertainty,” he says.

“There will be a lot of creativity in putting together rations in the coming months,” he says. “And there will be need for increased operating loans to cover those costs.”

The one saving grace is that cost of capital is at historical lows. “It’s difficult for me to see an upward adjustment in rates in the foreseeable future,” he says. So operating money, for those who qualify for additional loans, will likely be less than 6% for most operations.

The second bit of good news: Most long-term Farm Credit dairy borrowers have room left on their balance sheets for additional leverage. “I’m fairly confident that there will be support for most of those operations which need additional working capital,” he says.

The third reason for optimism: Land values might level off over the next year, but it’s unlikely farmers will see values go down. That stability will underpin balance sheets and support existing levels of equity against which farmers can leverage operating loans, says York.

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