The Hurt of Holding On Surviving 2009''s dairy crisis has taken its toll

December 2, 2009 06:00 PM
 

Larry Kamper, here at one of his two New Mexico dairies, culled cows and heifers more heavily this year.
Iowa producer Terry Van Maanen is angry that retail dairy prices remain at 2008 levels. "Dairymen are getting the short end of the deal,” he says.
Pennsylvania's Stan and Janice Burkholder, with son Clint (left), maintained high pro-duction levels, 80 lb./cow, through 2009. "We want to be ready for when the market comes back,” they say.
"2009 will be a year to remember,” says California's Charlie Van Der Kooi, who expanded just before the crisis hit.
If you had asked Larry Kamper a year ago about his 2009 outlook, he would have said that he and his two New Mexico dairies were in a great position.

On the heels of 2008's high milk prices, "we were within six months of paying off all our debt,” Kamper says.

But all that changed in the first two months of 2009. The plunge in milk prices, colliding with enormous feed costs, "hit hard and fast,” he says.

Through the following months, Kamper paid $6.25/cwt. just to feed the nearly 6,000 cows he milks at his dairies near Roswell, N.M. His milk checks brought in only $10/cwt. He watched hay prices skyrocket to $192/ton and corn soar to $222/ton.

By running what he calls "a tight ship,” however, Kamper has held on. Nearly a year after the worst dairy downturn in 35 years began, he believes the worst might be over. The 53-year-old expects to survive, as do thousands of other producers. But 2009's financial bloodletting and emotional turmoil have taken their toll, and many are scarred and angry.

"It's been too bad to even talk about,” says one Idaho dairy producer, who didn't want his name used.

As a result of this year's down-turn, producers' losses have reached billions of dollars. In some areas, like the Upper Midwest, 2009 losses stand at $100/cow/month, says Greg Steele, dairy lending specialist with AgStar Financial Services, which serves the Upper Midwest area.

It's worse in California's San Joaquin Valley, home to the nation's largest milkshed. Area losses for 2009's first nine months average $133/cow/month, says Robert Matlick, a business consultant with the accounting firm Moore Stephens Wurth Frazer and Torbet, LLC.

"Do the math on a 2,500-cow herd, and that's a $3 million loss in net worth,” Matlick says. "The year has been a financial disaster.”

By now, the causes of the dairy industry's downturn are well-known: the drop in demand due to the global and U.S. recession, the shrinking of the export market, a surplus U.S. milk supply and sharp increases in dairy feed costs.

Producers had no choice but to watch milk prices collapse within months, plunging 50% from 2008's highs of $20/cwt.

"It's been tough,” says Terry Van Maanen, who milks 650 cows at his dairy near Rock Valley, Iowa. "Financially, it's put me back a year. It's eaten into my equity.”

Things were progressing fairly well until June and July, Van Maanen says, when he began buying forages to replace the previous year's supply. "That's when I began feeling the cash-flow effect,” he says.

By October 2009, his mailbox milk price had risen to $13.90/cwt., $2/cwt. higher than he saw in the summer. Still, he says, "at the end of the month, we're wondering where all the money went.”

In one sense, Van Maanen has been lucky. He expanded his dairy long before the crisis hit. In the profitable years that followed, he retired a good chunk of his debt.

"I've still got a little room on my line of credit,” Van Maanen says. "The guys who are in trouble are the ones who went through an expansion right before the crisis hit.”

That's exactly what happened to California's Charlie Van Der Kooi. In 2004, the longtime dairyman bought land to build a new dairy near the small San Joaquin Valley town of Riverdale. But several problems arose, adding unforeseen costs to the project. Changes in air- and water-quality requirements forced him to add extra environmental features and limit the number of cows he could milk. During 2005–06, steel, cement and fuel costs jumped sharply.

Then, in September 2008, as Van Der Kooi was still smoothing out the kinks in his new operation, an envi-ronmental activist group sued his dairy. Although the lawsuit failed, it cost Van Der Kooi nearly $30,000 in lawyer fees. Only in August 2009 was his dairy fully cleared to operate.

Today, he's milking 1,800 cows and operating with a skeletal crew. "I'm hitting my numbers and almost as efficient as I can be,” he says. Even so, 2009 has been "brutal,” he says, with losses of $5/cwt. to $7/cwt.

"We've lost all our equity,” Van Der Kooi says. "A year ago, we could have sold this dairy for $20 million. Now we'd be lucky to get $8 million. If I had to sell my dairy today, I'd walk away with nothing.

"This dairy has been a battle,” he adds. "If you want to succeed, watch what I do—and do the opposite.”

As 2009 winds down, a price recovery appears to be on its way. In October, USDA projected that all-milk prices could climb back to $14.30/cwt. in 2010's first quarter. They could rise another 50¢/cwt. to 70¢/cwt. by the second quarter. That's up by some $2/cwt. over this year's dismal performance.

Further, USDA expects 2010 to feature a second consecutive annual milk production decline. That should temper the surplus supply that contributed to 2009's downturn.

Finally, export prospects are improving, say USDA and the U.S. Dairy Export Council, although the latter group cautions that a return to favorable con-ditions may not occur until well into 2010.

Can U.S. dairy producers hang on until then?

Iowa's Van Maanen believes he can. "I've seen enough good years and cycles to know the good times will come again,” he says.

Kamper, in New Mexico, is not optimistic for 2010, although he thinks he'll make it through. He doesn't expect to see prices reach his $15/cwt. production cost. "We're not going to make money next year,” he says.

Whatever 2010 brings, it won't soon heal the wounds of the last 11 months. For many, recovery could take years, and some may never fully recoup their lost equity. If there's one consolation for producers in this toughest of businesses, no matter where they dairy, they have been anything but alone in the struggle to survive 2009.



WEATHERING THE STORM

Stan Burkholder says it's been a humbling year on the 670-cow dairy he operates with his wife, Janice, near Chambers-burg, Pa. Prices fell $3/cwt. below their $16.95/cwt. production cost. "It made us hunker down,” he says.

Although the couple incurred debt after completing a new freestall barn in November 2008, they had a 25-year history of dairy profitability. Moreover, the Burkholders had paid off older debt in late 2008, putting them on good terms with their longtime lender, AgChoice Farm Credit. The bank suggested they borrow additional operating capital for 2009.

"We didn't think we would need it, but we did,” Janice says. "We used all of it.”

The Burkholders have strong incentives to hold on. For starters, their corn crop this year was one of their best ever. "That helped us get past the rotten price of milk,” Stan says. "It helped our spirit and will help us for next year.”

Secondly, they want to continue dairying since the next generation of their family has an interest in the farming operation. But they wonder how long others should continue dairying if they don't have someone to take over the business.

"For people 58 to 65 years old who don't have another generation coming along, you have to wonder how long they should hang on,” Janice says. "How much equity can they afford to lose? It may not be worth it if [all the money that's tied up in the dairy] is your retirement.”



WHAT BANKERS SAY

For Greg Steele, a dairy lending specialist with AgStar Financial Services, 2009 was "as severe an economic downturn as I've seen in my career.”

Al Porter, president and CEO of Farm Credit of New Mexico, says, "2009 was the ugliest year I've ever seen since entering the business in 1980. A lot of people feel like their whole livelihoods have been stripped away.”

But lenders also say that dairy closures and bankruptcies have been far fewer than expected. And they're hopeful that 2010 will be better.

"We anticipate that dairies are going to have the ability to show profits,” the Wisconsin-based Steele says. "But cash flow will be very tight for most of 2010 as they recover from 2009.”

Steele believes that this year's price collapse has reinforced the need for producers to better understand how risk management strategies can protect their business equity. "There are people out there who didn't lose money in 2009,” he says. "They had a margin locked in. But they were the exception.”

Neal Crapo, a California-based senior vice president for Wells Fargo, reports that some of his bank's dairy customers also did better than many through the downturn. "Those are the ones who had a decent capital base and hedges in place for both feed and milk,” he says.

Crapo believes 2010 could be "a pretty reasonable year” for the industry. "We're hopeful,” he says, "that a lot of dairies will recapitalize, continue to monitor costs and work on paying down debt.”

At Farm Credit of New Mexico, where dairy represents nearly 38% of the portfolio, Porter advises producers to "do the best you can to lock in feed costs, and hold on as best you can.”

Bonus content:



The Hard Facts of 2009

Back to news


 

Comments

 
Spell Check

No comments have been posted to this News Article

Corn College TV Education Series

2014_Team_Shot_with_Logo

Get nearly 8 hours of educational video with Farm Journal's top agronomists. Produced in the field and neatly organized by topic, from spring prep to post-harvest. Order now!

Markets

Market Data provided by QTInfo.com
Brought to you by Beyer
Close