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.
How does Wells Fargo respond to claims that it has reneged on its earlier promises of big financial support for dairies and is too hastily pulling loans from dairies?
Wells Fargo: The question’s premise is inaccurate. Wells Fargo’s continues to support our customers with viable positions within the dairy industry. These customers are demonstrating their commitment to making the adjustments necessary in terms of risk management and capital structure to prosper in this changed industry environment.
What percentage of Wells Fargo’s dairy loans is in special-asset status nationwide? In California? In Idaho?
Wells Fargo: This is proprietary information.
What common ground do troubled dairies share, in Wells Fargo’s opinion?
Wells Fargo: Dairies currently have to adjust and adapt to changing operating conditions. During this adjustment phase, some dairy producers are experiencing negative margins as their feed cost has risen faster than their milk price. To address this problem, some dairy producers are adopting risk management strategies giving up some potential upside in price to insure against lower prices. Others have reduced their debt levels, recognizing that their traditional capital structure is no longer adequate to handle the higher risk level.
Dairies that are experiencing financial stress cannot be lumped into a group. They are all unique in their operations and financing. Their uniqueness makes it difficult to generalize why they are stressed.
Is there any way out for dairies that are in financial stress? If so, what?
Wells Fargo: The dairy producers should continue to work to improve competitiveness relative to the industry.
Does Wells Fargo see a silver lining ahead for dairies? If so, what?
Wells Fargo: As a long-term provider of financial services to the food industry, Wells Fargo has been involved in many industry sectors that have gone through painful but necessary adjustments. Such is the nature of the food business. These industry sectors, while temporarily in turmoil, generally emerged stronger and more competitive than before. Dairymen and dairy processors produce and market a wide variety of healthy food products consistent with today’s population demographics and consumer lifestyles. Product innovation and introductions seem to increase each year. Worldwide dairy consumption continues to rise from an already huge base. That demand should continue to grow. Many dairy producers have recognized the new dynamics of their industry and have already made the required adjustments necessary to succeed. Wells Fargo will continue to play its role in financing and supporting those dairy producers embracing appropriate changes that better position them for continued success.