Drought, soaring feed costs, shrinking credit lines and red ink box in dairies.
**Extended story highlighted in blue.
Every day of the past year, Texas dairy producer John Traweek has asked himself the same question: "Will my family and our Jam-Dot Dairy be the next to go under?"
Like many U.S. dairy families, the Traweeks and their 500-cow operation near Stephenville have been battered by an army of obstacles: volatile milk prices, soaring feed and fuel costs, shrinking credit lines, increasing animal health costs, stringent environmental regulations and farm labor concerns.
Add to those the Lone Star State’s 2011 punishing drought, which forced Texas dairies to reach as far as North Dakota for their feed, eating up the profits that last year’s strong milk prices might otherwise have delivered.
The latest of Traweek’s troubles has been 2012’s record drought, which has gripped much of the nation, shrinking crops and sending corn prices through the roof at $8 per bushel. The outlook is dire for Traweek’s declining dairy, which only last year was home to 1,500 cows.
Traweek has plenty of company in worrying about his family dairy’s survival. In many parts of dairy country, stories of record feed costs, drought-damaged crops, red ink, special-asset lending status, bankruptcies and dairy liquidations underscore 2012’s financial stress. While declining milk production recently helped lift dairy prices, many industry observers still expect this year’s dairy farm troubles to approach the severity of 2009’s crash-and-burn ordeal.
With livestock producers, ethanol plants, food manufacturers and exporters all vying to get their share of the smallest corn crop since 1996, prices have soared. Other commodities have followed suit. That’s put U.S. dairies in a bind, since nearly all rely on purchased feed to some extent.
"I don’t know of anyone who can grow all his own feed," says Florida dairy producer Joe Wright, who switched his operation to modified grazing to reduce feed costs after 2009’s dairy recession.
"Getting feed is one thing, affording it is another," says Jay Gordon, executive director of the Washington State Dairy Federation.
California dairies, for example, are paying $350 per ton for rolled corn, $310 per ton for premium alfalfa hay and $418 per ton for cottonseed. Texas producers are paying $335 per ton for delivered ground corn and $300 per ton for alfalfa hay. In the Midwest, dairies are dealing with $600 per-ton soybean meal. All prices are well above average—some have doubled.
Across the nation, those expenses are taking a big chunk out of dairy margins. Midwest dairies are in serious financial trouble, says Robert Tigner, a University of Nebraska Extension dairy specialist.
John (left) and Ricky Traweek stand in front of the original milking barn with their father, James, (seated), who founded the Texas dairy in 1964. (Photo: Richard Rodriguez)
"July’s lowest break-even price was $23.41 per cwt.," Tigner says. July’s mailbox milk price was $16.48.
"Many Minnesota dairies are barely making cash flow," says Bob Lefebvre, executive director of the Minnesota Milk Producers Association.
Texas dairy losses total $2 to $3 per cow per day, almost as severe as in the 2009 downturn, says Mitchell Harris, CEO of AgTexas Farm Credit Services.
In New Mexico, where margins have dropped $2 per cwt. below break-even, dairy producers saw equity levels erode about $200 per cow between January and June, according to Greg Carrasco, a vice president of lending with Farm Credit of New Mexico.
For those fortunate dairies that have received adequate rain and are producing good feed crops, conditions are bright. Dan Siemers is one of the lucky ones. His Newton, Wis., dairy farm received good rains this summer and his cows are milking well.
"This year, it’s all about the crops," Siemers says. "If you have a good crop or good crop insurance to get over the hump, you will be looking golden once everything straightens out."
But for many other producers, the situation remains grim despite $20-plus milk prices. Many California dairy producers can’t acquire feed unless they pay in advance or on delivery or agree to sign over a second deed of trust on their property to the feed supplier, according to Western United Dairymen, a California-based trade organization.
In the state’s Central Valley—the nation’s No. 1 milk shed—at least a third of dairies reportedly have been moved to lenders’ "special assets" departments, are in bankruptcy, close to liquidation or have shut down.
"No one is lending to California’s dairies right now, based on our experience with clients," says Doug Tucker, a partner in the law firm of Moss Tucker in Fresno, Calif.
John’s father, James Traweek, remains alone with his thoughts in the family’s milking barn, which once bustled with activity. (Photo: Richard Rodriguez)
He and Amanda Hebesha, another partner in the firm, are working with at least 10 Central California dairies, some with multiple sites. The dairies all have in common a special-asset status with the same lender. (That status is where a bank transfers a loan to its "workout" department for closer scrutiny, which sometimes leads to pulling the loan or liquidating collateral.) The precariously positioned dairies have sought legal counsel to work with lenders and buy more time to stay in business.
"The rules of the game have changed," Hebesha says. "Instead of a banking relationship where people work together and loans will be renewed, it now appears the bank is interested in maximizing its collection."
To help their clients, Hebesha and Tucker have been negotiating with the bank on loan principal payments. The attorneys are seeking to extend the bank’s demands for a 45-day loan repayment period. They’re asking for two months or more to buy time for their dairy clients to catch up and seek new financing. The legal team says it had some success until about mid-July, when the drought’s repercussions hit the market and lenders abruptly shut their doors to dairies.
In Idaho, dairies representing more than 50% of the state’s milk production are in special-asset status with lenders, says Rick Naerebout of the Idaho Dairymen’s Association.
Is there a way out? One solution is more financing options for dairies, says Darren Turley, executive director of the Texas Association of Dairymen.
"Too many don’t have access to capital," he says. "There are hard feelings toward lenders."
In particular, he adds, medium-sized dairies don’t have financing options. "Only when you cross over the 1,000- to 1,200-cow size do you get the bank’s attention," he says.
Some say ending or modifying government support for corn-based ethanol would be a big step in aiding livestock producers. "We need to quit feeding corn into ethanol plants," says Washington’s Gordon. "That’s stupidity."
Others believe that getting Congress to approve a new farm bill would also help dairies, bringing stability and disaster relief.
Florida’s Wright says skyrocketing corn prices might ultimately help milk prices. "It’s selfish to think so, but maybe $8 corn prices will suppress milk production enough to get some price recovery in the dairy industry," he says.
Still others stress that producers must play a greater role in their own price protection. Financial experts have been urging dairies to use futures contracts to hedge milk and feed prices. But, according to global lender Rabobank, that’s still fairly limited among U.S. dairy producers, with liquidity limiting even those who do participate to just three to six months’ coverage. "As such, most producers will be exposed to market pricing in coming months," Rabobank says.
As another step, dairy producers must improve their financial savvy, says Bob Matlick, a partner with the accounting firm of Frazer LLP, which has dairy clients nationwide. "Many of them need to upgrade their internal accounting departments to plan and forecast," he says.
For some dairies, though, any help will come too late. In Texas, Traweek and his family reached the end of the line in August, selling off their entire top-rated herd after more than 50 years of dairying.
"We had to stop the losses somewhere," Traweek says. "We’d been losing money every day since 2009."
Some of his cows went to slaughter, some to Iowa dairies. None went to other Texas operations.
As he closes up shop at Jam-Dot Dairy, Traweek, 48, says his mood is bittersweet. His festering anxiety of the past three years is finally over, but he’s saddened and angry at the turn of events in the dairy industry. He knows of a dozen other Texas dairies that have also reached the end of the line. Lenders, he says, have not been supportive enough. "The land banks have failed agriculture miserably," he says.
"The dairy industry is broken," Traweek adds. "We’re continuing to lose dairy producers and generations of knowledge. We can’t compete with the corn market, the government, ethanol policies, slow-reacting cheese markets and a banking industry that won’t help us out. Someone should understand this is not working."
LAST STRAW WITH LENDERS?
Nationally, dairy customers are the most stressed of all the Farm Credit System’s agricultural customers, says Bill York, CEO of AgriBank, based in St. Paul, Minn.
Corn and soybean farmers 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," York says. "And there will be need for increased operating loans to cover those costs."
In California, Texas and Idaho dairy country, anti-lender sentiment is high amid shrinking credit lines. Some producers claim that lenders have withdrawn support for the dairy business and are too quick to move troubled dairies into special-asset status.
"Lone Star Land Bank courted a lot of dairy loans in 2006, but they’ve decided to exit the dairy industry," says Darren Turley of the Texas Association of Dairymen.
Wells Fargo, one of the nation’s largest dairy lenders, disputes claims that it has withdrawn its support from the dairy industry.
"Wells Fargo has banking relationships with individual people and businesses, not industry groups," says bank spokesman Gabriel Boehmer. "Wells Fargo remains committed to dairy producers throughout the U.S., 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 profi le of this industry has changed and will make appropriate adjustments to succeed."
Herd liquidations and dairy closures aren’t always because the lender didn’t do its job, says Mitchell Harris, CEO of AgTexas Farm Credit Services. "A lot of lending and dairy business models were not designed to handle the level of challenge we’re seeing in the dairy industry," he says.
But Harris also urges producers not to paint all financial institutions with the same broad brush. "We haven’t foreclosed on a dairy since AgTexas was formed in 1999," he says.
AgTexas operates on a much smaller scale than Wells Fargo, Bank of America and other large banks. The $600 million Texas bank has about $25 million in dairy loans, with less than 25 dairy borrowers. That’s down from 125 dairies several years ago.
While AgTexas is still making loans to dairies, it’s busy counseling worried dairy producers, Harris says. The lender has used USDA loan guarantees to help some of its dairy borrowers work through the tough times.
"If you’re working with a borrower who has a challenged situation, the worst thing you can do is pull the operating line," Harris says. "There are a lot of reasons why you want to keep that line of credit in place. It’s not just about compassion. As a lender, you need to consider the impact of caring for and preserving the cattle while helping the borrower to preserve as much equity as possible. If the herd husbandry is not adequate, the value of the dairy herd can deteriorate by 50% in a matter of hours or days."