In his 30 years of lending experience with farms and dairies, Bob Matlick has never seen such dire financial conditions. "We're seeing a negative cash flow of $6/cwt. to $7/cwt. among dairies in the West,” he says.
Like the rest of the industry, Matlick has watched milk prices plunge 50% from last year's levels. California prices dropped to the $11/cwt. range by late January, well below the state's break-even point of $17/cwt. Midwest milk prices were also headed to the $11/cwt. level, significantly below the region's $15/cwt. to $16/cwt. production cost.
"We just don't see any glimmer for spring,” says California-based Matlick, a business consultant with Moore, Stephens, Wurth, Frazer and Torbet. The accounting firm counts dairy clients in several Western states.
Led by sky-high feed and energy costs and a slowdown in global demand, the 2009 downturn means many producers will lose money, erode equity or both, say financial insiders. Some may even be forced to exit the industry. "Everyone's going to suffer the pain of this price
decline,” says Greg Steele, vice president with AgStar Financial Services, which serves the Upper Midwest.
A few dairy producers, particularly those with little or no debt, may be positioned to ride out the storm. A savvy few may have hedged their milk price during better days. An estimated 10% of dairy producers have forward-contracted their milk through October 2009, Matlick says. A handful clinched contracts last year at $19/cwt.
But for the rest, tough times lie ahead. "I've never seen the lending community locked down as tight as it is,” Matlick says. "Credit is very difficult to obtain.”
|Dairy business consultant Bob Matlick (right) analyzes milk production costs with Rice Dairy broker Jon Spainhour at World Ag Expo in Tulare, Calif., last month.
Fewer Midwest dairy producers have hedged their price risk this year compared to last. While price contracting is much more common in the Midwest than the West, Steele says, "there are plenty today looking in the rearview mirror who wish they'd hedged more.”
That also includes Western producers. "Any dairy in California that hasn't contracted prices at higher levels is in trouble,” says Bob Dingler, senior vice president for Rabobank in Fresno, Calif. "You can be the best producer and still be losing money.”
"Times are tough for a lot of dairies,” says Neal Crapo, Wells Fargo's senior vice president in Visalia, Calif. The bank is reportedly one of the largest dairy lenders in California.
"But every situation is different,” Crapo adds. "It's important for dairy producers to look at their cost of production, carry lower leverage and do what they can to sustain higher levels of capital.”
- March 2009