Liquidity Is the Elixir for Stomach-Churning Dairy Markets
Aug 01, 2011
The increased volatility of today’s dairy markets, driven now in part by global events, means you need to increase both liquidity and solvency on your balance sheet.
$500 per cow in liquidity? Even $750. Yeah, you betcha, says Ross Anderson, chief credit officer with AgriBank.
The increased volatility of today’s dairy markets, driven now in part by global events, means you need to increase both liquidity and solvency on your balance sheet. “It used to be that you needed $200 per cow in liquidity,” says Anderson. “In today’s environment, $500 to $750 per cow is not unwise.”
That doesn’t have to be all in cash, of course. Risk management strategies that lock in actual margins, inventoried feed and solid lines of credit all can play a role in reaching adequate levels of liquidity and solvency. The key is to get there, stay there and remain vigilant. Here’s why:
“Adverse paper in dairy loans jumped from less than 2.5% in 2007 and 2008 to the low teens in 2009,” says Anderson. Even with extremely good milk prices, that level of adverse paper—dairy loans in trouble because of problems with repayment, equity or collateral—has not substantially improved since. “We haven’t healed the wounds of 2009,” he says.
Both he and Terry Barr, a well-respected Farm Credit System economist and now senior director for CoBank’s Knowledge Exchange, are concerned that today’s high prices are the result of strong export demand. That’s all good, they say, as long as it lasts.
But it also puts U.S. dairy producers in a vulnerable position should another demand shock or economic crisis scuttle those exports. Recent news out of Washington and Europe are cause for worry. “You need a deeper balance sheet that you have to be hedged against,” says Barr.
While dairy exports now sop up 13% of milk solids produced in this country, the U.S. is still seen as a residual supplier in the minds of most international buyers. That’s not a good place to be because residual suppliers are usually last in when demand grows and first out when it shrinks.
“Our U.S. industry still has to be much more proactive in global markets,” says Barr. “We need to establish brands and markets that fit these international demands. If you don’t have an established export market, you have to downsize when the residual demand disappears.”
Plus, no surprise to anyone, high feed costs here at home are eating away at much of those higher 2011 milk prices. “We’ll be in this situation for at least another year, maybe two,” says Barr. “Hope is not a strategy when it comes to high feed costs.”
Yes, there are rumblings that the ethanol credit will go away, maybe even sooner than later, as Congress struggles to find budget savings. But even if the credits disappear, ethanol mandates—which require refiners to blend ethanol into gasoline products—remain. Those 5 billion gallons of ethanol mandates eat up 30 million corn acres. That part of the market is locked up, says Barr, which will continue to put pressure on feed prices.
Plus, the U.S. budget deficit and our inability to solve it don’t bode well for currency values. A weak dollar means our dairy exports may be more attractive overseas, but it also means $6 corn isn’t really $6 in China. That, too, will put pressure on feed exports--especially if there’s a weather scare anywhere in the world.
Risk management, liquidity and solvency are the holy trinity of surviving and thriving these next few years. Knowing what to shoot for is the first step.