Lenders tighten requirements, raise interest rates

By CAROL RYAN DUMAS

Capital Press

SUN VALLEY, Idaho -- Agriculture lenders say the fallout from the dairy crisis isn't done yet.

However, they are positive about the future of the U.S. dairy industry, saying milk prices are improving and many of their producer customers are on solid ground. But they warn things will be different when it comes to lending money.

"The 15 years prior to 2009, for the most part, the industry was very, very profitable," said Jon Maughan, account manager for Northwest Farm Credit Services in Boise.

For the 10 years before 2009, the average net income for producers was $1.26 per hundredweight, he said. The perfect storm of high feed costs, lost exports and processors banning rBST milk brought average losses of $3.86 per hundredweight. Some lost as much as $10.66 per hundredweight.

Maughan and other bankers speaking at the Idaho Milk Processors Association conference in Sun Valley said the lessons learned will bring changes to the lending industry.

"The bar is moved," he said. "Banks cannot be expected to bear 100 percent of the risk on dairies that are extremely leveraged and have no cash flow."

Lenders will have tighter loan covenants, increased requirements and increased interest rates, he said.

While the unbridled growth in the industry was aided by processors and lenders, "producers have been asked to accept all the risk for the growth they were asked to do," said Cecil Brown, senior vice president of Bank of the West in Chino, Calif.

"Not going forward," he said.

Banks will be asking for more information, reporting and monitoring, business plans for mitigating risk, expansion plans and feed-equity requirements.

"It's not going to be business as usual. Everybody has some responsibility," he said.

Banks will require more capital, said John Gibson, vice president of Farmers National Bank in Twin Falls, Idaho.

Rabobank will require more reporting, with dairymen carefully managing their balance sheets and profit margins, said Mike Henard, senior relationship analyst in Twin Falls. Any expansion will have to be justified by a solid business plan, not for tax reasons or to add a new family member to the operation.

Bob Witt, senior vice president of Wells Fargo in Ontario, Calif., said while banks won't tell dairymen how to market their milk, his bank will loan more if producers hedge some of their production.

Maughan said dairymen's balance sheets have been devastated and the bank considers them at higher risk if they're not hedging.

As for how many dairies have been forced out of business, Witt said "there haven't been that many."

"There are a number of empty dairies" across the country, Cecil Brown said.

While no one had a firm number of failed dairies, all the lenders agreed there will be more and reminded producers that bankruptcy laws are favorable to farmers.

They also said they have producers who are on solid ground who could take over those operations and for those who want to expand, there's a lot of opportunity.

They advised producers to be in close contact with their lenders going forward and to get a list of essential things they'll need to provide their lender for renewing loans.