Year of Pain: Lenders weigh in on lean times

March 5, 2009 12:08 PM

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.”

Wells Fargo, AgStar, Farm Credit West and Rabobank all stress that they remain committed to the dairy industry. The lenders emphasize that one size doesn't fit all, and each dairy has its own individual circumstances.

They also agree that the current financial crisis will pass and there will be a return to profitability.

"We'll continue to work with producers on a case-by-case basis,” says Farm Credit West president and CEO Ken Graff. "The downturn is not going to last forever, and the dairy industry will survive.”

Until then, dairy producers should consider these survival strategies:

Don't hide. Know every area of your dairy business and your break-even points. "Knowing your cost of production is always a good business management principle, but it's more important than ever,” says AgStar's Steele. Rabobank's Dingler agrees: "It's important for everybody to do a monthly reality check.”

Have a plan. Evaluate every line item of your budget to save money where possible. More than likely, you're already trimming costs everywhere you can. Maybe you're doing more yourself around your dairy instead of hiring out services. Ideally, you should share your survival plan with your banker. For example, you may have little debt on your herd but you're losing $100,000 a month. You might request—and receive—additional credit to help you weather the next eight to 12 months.

Talk with your lender. If you need relief, your lender may be able to restructure your loan or help you access new equity or liquidity. Do you have land to sell? Can you get an advance on your cows? Even if those options aren't possible, stay in contact with your lender. "Keep an open line of communication with your banker so there are no surprises,” Dingler says.

AgStar's Greg Steele visits with California calf raiser Rochelle Koch at February's World Ag Expo in California.
Keep your consulting team informed. Work with your nutritionist, vet, breeder, accountant and other service providers. "They've all got to be aware of what you're trying to do,” Matlick says. "One area can't be tweaking things while another is going in another direction. You've all got to be working toward the same goal.” Adds Steele: "It will take lenders and vendors to work through this together.”

Defer capital expenditures. Take control over whatever part of your finances you can.

Prepare to pounce. Have your paperwork ready to go at a brokerage house. Eventually, milk prices will rise, providing an opportunity for forward contracting. An upward price increase could result from a weather scare or another herd retirement round through Cooperatives Working Together.

"If we get a $1.50 price bump, I'm going to recommend to my clients that they take a hard look at contracting 25% to 30% of their volume for the back trading months,” Matlick says. That would cover July through December 2009.

Network, network, network. Talk with anybody and everybody. "There may be an idea out there that you can use,” Matlick says. It's also a good time to use outside sources, adds AgStar's Steele. Those can include financial and production consultants to help scrutinize specific areas of your operation. "There's value in talking with your peers, even if it's for moral support,” Steele says. "It sounds corny, but it's true.”

Bonus content:

Wells Fargo's Dairy Market Update:
Click here (scroll down to "Dairy”) to read the latest Dairy Market Update from Wells Fargo economist Michael Swanson.


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