One of the nation’s largest dairy lenders answers our questions about this year’s dairy struggles and its lending philosophy.
Editor’s note: For “Nowhere to Turn,” the lead story in Dairy Today’s September 2012 issue, Dairy Today Western editor Catherine Merlo asked Wells Fargo to weigh in on this year’s financial distress among U.S. dairies. Wells Fargo is considered one of the nation’s largest dairy lenders. Here are the bank’s answers from Wells Fargo spokesman Gabriel Boehmer. (Our September issue will reach mailboxes beginning Sept. 13.)
What’s Wells Fargo’s perspective on the financial turmoil that dairies are undergoing right now?
Wells Fargo: Wells Fargo believes that much of California’s dairy industry was built on low-cost grain from the Midwest, inexpensive transportation cost, low cost local by-products (i.e. cotton seed), and favorable weather enabling dairymen to build large dairies with low operating cost. The relatively stable nature of milk prices through 1995 and the low, stable grain prices through 2002 provided the state’s dairymen with a stable, profitable business. Beginning in about 1995, the stability of milk prices changed, and grain price volatility rose in about 2002-2003, which was amplified in 2007-2008 (in part due to ethanol production) and once again with the current drought. Furthermore, grain prices and energy costs increased, shifting the comparative advantages increasingly in favor of the Midwest dairies, many of which grew their own feed and all of which were closer to the feed source. These changes increased the operating risk profile of the dairy business in all states, including California.
Which state accounts for most of Wells Fargo’s dairy loans?
Wells Fargo: Wells Fargo finances dairies in all the major Western and Midwestern dairy production regions: California, Idaho, New Mexico, Texas and the Midwest.
Are there any particular parts of the country where Wells Fargo customers are in worse shape than others? If so, which areas?
Wells Fargo: Dairy margins in California, where average milk prices are somewhat lower than other states and where purchased feed costs are somewhat higher due to additional transportation costs, are facing above-average industry stress.
There are claims that Wells Fargo has done an about-face of sorts and is withdrawing from dairy lending, especially in California’s Central Valley. Is this true?
Wells Fargo: No. That’s inaccurate. Wells Fargo has banking relationships with individual people and businesses, not industry groups. Wells Fargo remains committed to dairy producers throughout the United States, including California, whose businesses and strategies appear to be viable over the long term. Wells Fargo believes that successful dairy producers will recognize that the risk profile of this industry has changed and will make appropriate adjustments to succeed.
Has Wells Fargo changed the terms among its dairy customers on who is a qualified borrower?
Wells Fargo: We have made no recent changes to our dairy lending standards. When appropriate, we adjust and refine lending practices to reflect changing risk profiles of any industry we finance.