Often, during financial stress, farmers are encouraged to cut more costs, but is a there a better way to achieve relief in a tight market?

Low milk prices over an extended period of time have created a great deal of financial stress on many dairy farms. Recently, a dairyman called and asked to sit down together to discuss options. As we sat in the kitchen, he asked the question about further cost cutting. Although it was a question being asked by his lender, I believe it is the wrong question.

Frankly, prices have been low long enough that I am sure most costs that could be cut have already happened. Rations have been examined to eliminate additives that may not have a payback, hired labor hours have been reduced, and optional maintenance has been deferred. But going beyond these and cutting essential investments that result in less milk production, reduced reproductive performance, or that create situations where labor is stretched beyond what is sustainable are normally counterproductive.

However, the financial reality is that something has to give. If not these, then what? I have talked with several producers lately about three general considerations: increase returns, cut waste and re-evaluate the business model. Let’s look at each individually.

1. Increase returns. Not only do I not want to lose milk production, but I would like farms experiencing financial stress to ship more milk by whatever combination of more milk per cow and more cows is most achievable. If you have underutilized barn capacity, buying milking cows may be feasible in some instances. Pencil out the investment costs and the predicted net returns. Reduce risks by buying from a known peer rather than at auction. Keep investment costs lower by purchasing animals past peak milk production. Buying pregnant cows would be a bonus.

Are there unused assets that can be sold to generate cash? Though this is a single time event, it can begin to help you focus on investments that generate money.

2. Cut waste. Rather than just cutting costs, look to reduce waste in the operation. Waste can be considered as something unproductive, having lower returns than should be expected or that increases costs. I challenge producers to identify three to five areas of waste in their operation and work to reduce them. In many cases, improvement can be achieved through management changes. Here are some areas to look at:

• Calf (bulls and heifers) losses above 2 percent
• More than 5 percent of heifers freshening after 24 months of age
• More than 5 percent of cows (second + lactation) with a dry period longer than 70 days
• Feed spoilage, shrink or loss
• Any fresh cow problems
• Quality premiums missed
• Milk fat percentage less than 3.6
• Employees standing or walking around or busy doing less valuable work
• Time wasted because of missing or poorly functioning tools
• Cull (including deaths) rate greater than 25 percent 

These are just a few areas to look at and evaluate. The point is that you are already investing in each of these areas and you need those investments to pay back at the highest rate. When performance doesn’t meet these levels, dairy producers should evaluate management in those areas. 

It may be that wise investments are needed to realize improvements. Use a partial budget to make the case to your lender that investment will not only increase the net returns but also have a positive cash flow. A partial budget spreadsheet and dairy cash flow spreadsheet is available from Michigan State University Extension. 

3. Re-evaluate the business model. One family farm was faced with looking at their heifer raising options. They needed to decide to either buy the land and heifer barn they used or to seek an alternative. In this case, purchasing that land and older facility would add nothing to income and may not be the best option. This is a good time to consider a business model where calves are sold and replacements purchased or having heifers raised by someone else. These alternatives put the emphasis on managing the number of animals needed.

Another farm is working with a fellow farmer to raise heifers for them in exchange for keeping springers. The compensation is based on the daily cost of raising the heifers and value of the springers. The one had excess capacity that will now be used to increase returns. The other had animals in excess of his capacity. In this case, both producers will have needs met without cash outlay. 

The knee-jerk reaction to financial stress may be to cut costs, but that may not improve the financial situation beyond the current month. It is better to improve the value of the operation by evaluating performance and maximizing investments while eliminating areas or assets that don’t return well.

The stresses caused by the current economic situation can lead to unhealthy choices for yourself as well as your business. Michigan State University Extension has resources and educators that can help you identify and manage stress. Use the stress you are facing as the instigator to drive improvement.

Source: MSU Extension

After hours harvesting forage, managing livestock and milking cows, new Cornell University agricultural economic research shows family members who work on the family dairy farm make $22,000 less annually than comparable hired managers, but are handsomely compensated with “socioemotional” wealth.

In recent years, farmers and ranchers have enjoyed profitable times, but many experts, including the USDA, are predicting stress ahead in the ag economy. The American Bankers Association is helping producers prepare by providing key financial considerations.

“Thanks to recent boom times, many farmers and ranchers are well-positioned financially for the next couple of years, but falling commodity prices, a stronger dollar and a probable increase in interest rates should encourage all producers to get their financial house in order,” said Steve Apodaca, senior vice president of the ABA’s Center for Agricultural and Rural Banking. “One of the most important things a farmer can do during volatile times is keep the lines of communication open with his or her lender.”

To help producers prepare financially for the changing agricultural economy, ABA has prepared the following tips:

1. Cash is king. Carefully examine every capital purchase that will require additional debt. Ask yourself if the expenditure will generate the cash flow needed to pay for itself. If the new item can’t create enough new cash to pay for itself over a reasonable period of time, defer the purchase.
2. Let a farm budget be your financial road map. Without a budget, you’ll be financially lost. Use a farm budget to track all income and expenses and update it frequently—it will help you maintain the direction of the business.
3. Analyze your farm’s financial position and performance. Are you getting the maximum return from your investments? If not, why? Are your non-farm assets generating a maximum return? If not, can any be sold?
4. Examine your debt structure. Finance long-term assets, like real estate, with long-term debt. Finance shorter-term assets, like machinery, with shorter-term debt. Is it possible to increase your long-term debt to pay down your short-term debt? When deciding to use your long-term equity, make sure your need is extremely significant.
5. Prepare for your financial review with your banker. Have current inventories, cash flows and balance sheets ready, and provide the information your banker requests. If you are having financial problems, put your thoughts about how to resolve them on paper so your banker can review them with you.
6. Ask your banker about the USDA’s guaranteed farm and rural development loan programs. Your debt can be restructured over a longer period at a lower rate if the USDA provides a credit guarantee to the bank. If your banker does not know about the programs, set up an appointment for you both to visit a USDA Service Center.
7. Review your hazard and fire insurance coverage. Increasing your deductibles can lower your premium. Carefully review every item on your inventory list and consider eliminating coverage on obsolete or low-risk items.
8. Examine your life insurance policies. Many whole-life policies contain provisions that allow you to borrow against or deduct premium costs from the cash surrender value at low rates. What type of life insurance do you have? Is it worthwhile to maintain a costly whole life policy when you could get similar coverage from a less expensive term policy?
9. Deal with financial problems immediately. Talk to your banker early and often. A good way to avoid serious financial problems is to identify and resolve them early. Take a team approach; create a personal “board of directors” of people you know and respect—including your banker—who can be your sounding board.
10. Keep a clear perspective. Think through business problems by temporarily getting away from them. Take a weekend off, or resolve to see at least one movie before it comes out on DVD. However you do it, it is important for you balance and shift your focus to other activities—it will make your home team stronger.

Source: ABA

Whether milk prices rise or fall, the Livestock Gross Margin for Dairy program is a good choice for managing risk. Here’s why.

By Ron Mortensen, Dairy Gross Margin, LLC

Managing risk involves answering questions regarding a dairy’s financial situation. What is your break-even? What do your cash flow projections look like? What milk price does it take to meet your objectives?

These questions are a little different than market-oriented topics. That is another can of worms. Are milk prices in an uptrend? Is demand growing or shrinking? Are there new highs in milk prices (or new lows in feed prices) that should be considered in a marketing plan?

In answering both the financial and market questions, we have always talked about blending marketing tools to reduce risk for your dairy operation. For example, the blend could be up to 33% in forward contracts, 33% in USDA’s Livestock Gross Margin for Dairy program (LGM-Dairy) or put options and 33% open. The reason for the mix: If prices go higher, you only have 33% sold. If prices go lower, you have 66% covered with LGM-Dairy (or put options) and futures. Blending provides the opportunity for managing financial risk, while still benefitting from strong prices if they occur.

LGM-Dairy and options strategies have worked great for the past few months. You may have paid a small premium. But the market moved significantly higher, giving you a big cash flow boost over the minimum price protection from the LGM product.

The last few months were a big win for those of you who set up the marketing strategies with something open on the top. Why is this important? Because everyone needs to earn back some of the losses for the past tough years and/or build cash reserves for the future.

A picture seems to say it all. Margins are good from a historical perspective. How long they last is still an issue. This chart does tell us, once we get to the high end, that margins do move lower. Selling into a big discount or lower prices can be hard. The advantage of using LGM or options is that, if the milk futures markets do move higher, you do not get trapped. If markets do move lower, you have coverage.

The big question: What if I could take these margins and have a minimum guarantee? Would it give me good cash flow?

A final thought: It can be hard to sell into a discounted futures market. This is the situation right now, with milk prices lower almost every month for the next 10 months. The discounts can turn out to be correct, and cash milk prices can go lower. However, prices can climb higher if strong demand continues. LGM-Dairy or options are a great choice. If prices go lower, you have coverage. If prices move higher, you can capture the gains.

Ron Mortensen is principal of Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products, and owner of Advantage Agricultural Strategies, Ltd., a commodity trading advisor. Contact him at ron@dairygrossmargin.com or visit www.dairygrossmargin.com.

Proposed changes to the tax code restricting the use of cash accounting by agricultural operations would reduce agriculture’s access to capital by as much as $12.1 billion over the next four years, according to a study released by Kennedy and Coe, LLC and Farmers for Tax Fairness.

The study prepared by the independent research firm, Informa Economics, revealed that U.S. agricultural producers forced to switch from cash-basis to accrual-basis accounting under new laws would have to pay out as much as $4.84 billion in taxes during the next four years. Additionally, borrowing capacity of these operations would decrease by another $7.26 billion over the same time period.

“The Informa study quantifies what we’ve been hearing from producers across the U.S.,” said Jeff Wald, the CEO of Kennedy and Coe, a national agricultural accounting firm. “This tax payment and subsequent loss of financial flexibility will have a major negative effect on America’s agriculture. Meeting the immediate tax burden is going to be very difficult for most of the affected operations.”

According to the study, “In aggregate, these farms have less than $1.4 billion in current cash on hand to pay the additional taxes. If the tax bill associated with deferred income comes in an unprofitable farm year or if the producer cannot otherwise meet the capital requirements, the farmer or livestock producer may have to downsize to survive (e.g., sell land or livestock).”

“The impact of these changes would extend far beyond producers and would affect their lenders, processors, and other key suppliers,” said Brian Kuehl, Director of Federal Affairs for Kennedy and Coe. “Producers will no longer have these funds available to buy tractors and combines, or invest in labor and other inputs. These purchases support a lot of small towns and ag-related businesses, small and large. The economic effects of these proposals are potentially staggering.”

In 2013, the U.S. House Ways and Means Committee and the majority staff for the U.S. Senate Finance Committee both released discussion drafts of tax-reform proposals that would reduce the number of agricultural operations that can use cash method of accounting.

“Farmers in America have used cash accounting for decades,” adds Kuehl. “Cash accounting is a simpler form of accounting and allows farmers to better manage volatility and risk. They are already at the mercy of external factors for input prices, commodity prices, and weather. Requiring a change to accrual-based accounting takes away the one thing they can actually control: their cash flow. It just doesn’t make sense. Producers already face enough risk.”

The study used U.S. Department of Agriculture data to estimate the financial impact of congressional proposals to require agricultural operations with more than $10 million in gross receipts to shift to the accrual form of accounting.

In January, 33 agricultural organizations including the American Farm Bureau, the National Cattlemen’s Beef Association, National Corn Growers Association and National Pork Producers Council sent a letter to the Senate Finance Committee expressing their concerns about the proposed changes to the cash-accounting rules.

“Cash accounting combined with the ability to accelerate expenses and defer income gives farmers and ranchers the flexibility to manage their tax burden on an annual basis by allowing them to target an optimum level of taxable income, commensurate with long-term annual earnings,” according to Bob Stallman, President of the American Farm Bureau Federation. “Cash accounting also gives farmers and ranchers the flexibility they need to plan for major investments in their businesses and in many cases provides guaranteed availability of some agricultural inputs.”

A full copy of the Informa Economics report can be found online atwww.FairFarmTax.com (http://bit.ly/informa-study).

Source: Kennedy & Coe

If you have been attempting to secure credit for your farming operation in recent months – you likely have found bankers to be very cautious. You likely have heard the bankers indicate how carefully the government bank examiners are scrutinizing there loans and portfolios. Where were those bean counters when Freddie Mac and Fannie Mae gave out money more freely than an inebriated sailor?

Financing has really changed from the mid 1990’s when the dairy industry was going through a major retooling. During the 1990’s a business plan could be put together for a dairy and if the operators met the “Five-C’s of Credit” the plan had a strong likelihood of being approved. Today, the Five-C’s are more rigorously scrutinized than ever.

Not only is the character of the owner(s) important but the reputation of the business is also important. Does the community have a positive perception of the business and the employees that work for the company? Does the agricultural business use currently approved production practices and modern technology? What kind of environmental track record does the operation have? Have they been a good neighbor?

Capacity refers to the business’s ability to meet its obligations, remain viable over time and simply make money.

Commitment is a given. Does the key person(s) in the operation have a history of overcoming challenges? I just spoke with a producer struggling to remain positive through the challenges of this wet spring. Larger operations have a distinct advantage in respect to the day-to-day struggles of operating a farm because the emotional struggles can be shared by the staff. Farms that have made it through hardships and made financial progress over the long haul are attractive to lenders.

Collateral is the fourth of the 5 C’s of Credit. Collateral has to do entirely with the strength of the balance sheet. Are the assets fairly valued or are they inflated to make the balance sheet look more positive? During much of the late 90’s and early 2000’s, many dairy farm balance sheets were upside down. That is, the lenders owned more of the farm than did the farm. This was due to the fact that for a dairy to modernize, it took a lot of new capital. Once the dairy had retooled it’s self for the future, the debt was paid down and the balance sheet recovered. When it comes right down to the nitty-gritty, can the lender get out from under the collapsed business without losing money? Most, if not all ag lenders, want to avoid a foreclosure like the plague.

Lastly, the conditions of the loan are addressed in the business plan. Conditions generally include markets, consumer trends, economic predictions and environmental considerations. We all know how global our economy has become. Farming has historically been an industry based on the production of commodities. Increasingly, more agriculture producers are vertically integrating by entering into the processing and marketing of their products to wholesalers or directly to the consumer. This takes a great deal of market research to meet the condition requirement of the loan proposal.

Most producers will not pursue direct marketing of their products but lenders are requiring prospective borrowers to come prepared with multi-year monthly cash flow projections complete with a sensitivity analysis designed with a range of product prices and cost projections. Most experienced agriculture lenders now require a marketing plan using risk management tools as a part of the cash flow projections.

In these tough financial times, the 5-C’s of credit remain important but they may not be enough. When the banker rejects a strong proposal the borrower must receive honest feedback. What are the specific reasons for the rejection? Are the objections fact or does the bank lack capacity to make the loan? Is the lender technically up to date to properly evaluate the loan request? Agricultural lending has become so involved that many banks have made the decision to withdraw from the market but are reluctant to express this to prospective borrowers.

Work hard on strengthening the 5-C’s of your farming business, find an agricultural lending partner that is knowledgeable regarding modern agriculture and be on top of your financial game at all times.

Greg Booher, Farm Business Instructor at Lakeshore Technical College, East Central Wisconsin provides assistance to dairy producers in the region. Greg.booher@gotoltc.edu

Unbelievable, historically low interest rates have now been with us for four years. Many dairy producers have continued to ride the variable rate because those rates are rock-bottom low. Variable rates generally change monthly, but no one has noticed because, in the last four years, rates have gone no place.

Variable interest rates are mostly based on the Prime Rate, which, by definition, is supposed to be the best rate to the best customers. To a large degree, that definition has been lost. Prime is the Over Night Fed Funds rate that banks charge one another to borrow money back and forth overnight, which today is 0.25% plus 3.00%, giving us a Prime Rate of 3.25%.

The second rate used for variable rates is called LIBOR (London Interbank Offered Rate), which is a composite of bank rates across the globe. That rate is running around 3.60% at the writing of this article.

Sometimes lenders will have an inter-bank rate of their own based on their cost of funds and internal factors.

Regardless of how the variable rate is derived, it will be a lower interest rate than a fixed or locked-in interest rate. The real question is what is right for your dairy? A lower variable rate that can change monthly or a longer-term fixed rate?

A lender will normally offer you borrowed rates that are tied to their cost of funds or deposit or bonds that fund those loans. Remember, all a lender does is take money with one hand, pay the depositors an interest rate for the use of the money and loan that money back out at a higher rate, then use the difference to pay staff and show a return. The lender will match the deposited money to the borrowed money for a specific amount of time. So, when the depositor’s certificate of deposit or bonds matures, the loan comes due for a renewal.

So we do not forget, the overall U.S. interest rates are watched and moved by the Federal Reserve, which is totally separated from the government. They have a two-part mandate from Congress to keep people employed and keep inflation under control. The Fed, as it is commonly known, controls the money supply, which, in turn, moves interest rates up or down. It is the overnight Fed Fund rate that people focus on, which will move the U.S. bond market all the way to the 30-year U.S. Treasury Bond. All other borrowing rates in the U.S. are based on the U.S. bond market, considered to be the safest place to invest money.

Over last four years, since the “Great Recession,” the Fed has been trying to stimulate the U.S. economy with low interest rates. This is in hopes of getting businesses to employ more people and get the general public spending more money. The U.S. economy, or GDP (Gross Domestic Product) of all goods and services, is driven 70% by consumer spending. The Fed has even been buying U.S. Treasury debt or bonds to keep interest rates low. So far, economic recovery has been slow. The Fed has gone so far as to say it plans to keep interest rates low until the end of 2014. Recently, some of the Fed Governors who vote every six weeks on interest rates are thinking the Fed has done enough and rates should start moving up.

So what does all of this mean for your dairy? There are a lot of moving parts to the Fed’s decisions. Interest rates cannot stay low forever. Once interest rates start to move, “all” longer-term fixed rates will begin to move up. It is possible they could move fast. Those producers who lived through the 1980s remember all too well 16% and even 18% interest rates. Today’s general economy could not stand for anything near those rates. A movement of a few percentages would get the public’s attention.

To take out whatever risk you can in this high expense rate environment of operating a dairy would be responsible. Talk to your lender about a longer-term interest-rate fix. You still have to make the final decision. It certainly is time to give it some serious consideration.

Gary Sipiorski has a long career in the banking industry, doing business primarily with dairy producers. He has been associated with the Citizens State Bank of Loyal, the Graduate School of Banking in Austin, Texas, the Independent Community Bankers of America, the Governor’s Task Force on Growing Agriculture in Wisconsin, and the Advisory Council on Agriculture, Industry and Labor for the Federal Reserve Bank of Chicago. In 2008, he joined the Wisconsin-based nutrition firm, Vita Plus Corporation, where he is dairy development manager. Contact him at 608-250-4267 or GSipiorski@vitaplus.com.

Dairy Today – The year ahead may not be another record breaker for crop profits like 2012, but no question, 2013 still looks to be a good year for profits for producers who can pull the marketing and buying trigger when margins present themselves.

This is true both on the sales and input side. Here are five hot trends and strategies savvy producers are making good use of:

1. Become a True Profit Hedger.
   Increasing numbers of progressive farmers are taking a lesson from the books of successful grain and other agribusiness companies: Don’t be exposed. That means to lock in inputs, such as fertilizer and seed, plus lock in commodity prices, at the same time. That’s called locking in a true profit margin, leaving nothing for guesswork. More farmers are doing this, true hedging, and more will be doing so in 2013.
2. Be Risk Adverse.
   Managing risk doesn’t stop with crop insurance and forward price selling. Despite low interest rates, you want to be in a strong cash position, a minimum of 33% working capital to revenue, experts say, and two months’ worth of expenses in the bank, CDs, money market accounts, investments readily convertible to cash. This not only protects you from any downturn, it also gives you cash to take advantage of great asset deals when agriculture undergoes a correction.
3. Think Global.
   Four international hot spots in 2013 will have a lot to do with your profits, and you need to keep your eye on all of them.
   1. Corn and soybean crops in Brazil and Argentina this winter. If crops there are less than ideal, prices could sail sky high.
   2. How far Chinese economic growth tumbles—or rebounds—and what impact that has on meat use, and all importantly, oilseed and grain imports.
   3. Whether Europe can resolve its debt problems.
   4. What kind of a production year the Black Sea region has particularly Ukraine and Russia, both likely to plant a lot more of everything to take advantage or rising prices.
4. Manage Volatility.
   Price volatility, true, is not going away, but volatility goes far beyond that. For instance, new corn and soybean growing regions in the U.S. are extending into north and west, areas with highly volatile weather and production one year to the next, and this has not been factored into a lot of models.
   Furthermore, crop growing regions globally are expanding into areas with highly volatile weather one year to the next, too. As a businessperson, this means huge fluctuations in your profits from year to year that you need to be prepared for. For example, if weather is great around the globe next year, corn could be $4-something at harvest, if terrible; it could be $8-something.
5. Cheap Money.
   Eventually, the U.S. economy will turn around and when it does, look out interest rates. As a result, lock in as much of your interest rates in fixed rate middle and long term instruments as possible, with the absolute minimum in short-term variable rates. The good news on rates, however, is that you have a little time: rates in 2013 are likely to stay near current levels, that is to say, historically low. But when rates are 4% and 5%, half the long-term average, the pressure can only be up, so be advised.

Dairy Herd Network – Ponder this scenario:  You have four children. One of them wants to come back to the dairy farm. The other three work off-farm.

“We can afford to pay you $1,000 per week,” you say to the farming child. “But you know, we always said we wanted to treat you kids equally, so we’re going to pay each of you $250 per week. That way you’ll all be treated equally.” Is that fair? No, it’s certainly not. Most people would agree that the child who works for the business should receive the full $1,000.

“If that’s fair during life, what changes at death?” asks John Baker, an attorney and administrator of the Beginning Farmer Center, part of Iowa State University Extension.

“There’s this presumption that if we divide things equally, in some way that makes it fair,” Baker says. “I don’t know where that idea came from because ‘fair’ and ‘equal’ are not the same thing.”

Distribution of the business assets can be an equitable arrangement for both on-farm and off-farm heirs. Here are some considerations to keep in mind during the planning process.

Assets, not heirlooms

“Farmers tend to look at farm business assets as though they are family heirlooms. They don’t consider them to be business assets,” Baker says.

Consider the situation where you have a set of plates that great-grandma brought from the old country. There are only four left and you have four children. Naturally, you’d want each one of them to have part of the family legacy.

“I think that’s a wonderful thing to do. It passes on the family history,” Baker says. “It’s not a very good business transition model, though, because you’re fractionating the ownership of the business assets.”

It’s wise for not only you, but also your heirs, to leave their sentimental attachment at the door of the planning process.

Elwyn Voss, financial services representative with The Voss Group in Norwich, N.Y., asks his clients to think about this situation: Say you have a son or daughter who left the farm 20 or 25 years ago. If that child dies, what is the brother or sister on the farm going to get out of that estate?

“The answer is zero,” Voss says. “If your brother or sister leaves the business and goes off and is very successful in whatever they do, they don’t think, ‘Gee, my brother or sister back on the farm ought to get something out of this.’ So why do we have this problem with the farm?”

The problem, Voss says, is sentimental attachment.

“It was their home. They saw mom and dad work it, and most of the time they didn’t see their sibling work it. He was going to high school and then college,” Voss says. “When he came back, they never really saw him working. They were all gone.”

Think it through

As you work toward a plan for asset distribution, think through the potential ramifications of your actions.

“If we have $10 million of assets and $5 million in debt, we have $5 million in equity leftover,” Voss says. “The son taking over the farm has all that debt to deal with… If he’s one of four children, the next thing you know, he’s got to deal with threefourths of the equity. So the non-farm equity becomes his farm debt.”

Your plan for distributing the business assets also can put heirs into business with each other when they had no intention of doing so. This can backfire on more than one level.

“My experience as an attorney tells me that death brings out the best and worst in families, and usually it’s within about half a second of one another,” Baker says.

Plus, your unintentional business partner’s knowledge of modern dairy farming practices can be severely limited.

“I tell people that I grew up on an acreage,” Baker says. “My father got rid of the cattle back in the early 1950s. I don’t know anything about that business anymore. It would not be a good business decision to put someone in business with me, and yet that’s what we see happen.”

Do it now

Taking the time to put together a comprehensive asset distribution plan will not only move the business forward, but equitably compensate both on-farm and off-farm parties.

“There are lots of tools that can be used very effectively by farm business owners to put together a comprehensive business succession plan that helps to keep the business assets together and also provides a form of compensation for the in-business heirs and the non-business heirs, without destroying the business,” Baker says.

“If you don’t sit down and do some business succession planning, there’s a good chance that your family will no longer have a farm business. And, there’s a good chance that the farm business will no longer have a family.”

Dairy Today – In California, Texas and Idaho dairy country, anti-lender sentiment is high amid shrinking credit lines.

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.

“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.

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.”

By: Catherine Merlo, Dairy Today Western and Online Editor