First thing loan officers want to see is businesses returning to breaking even

By CAROL RYAN DUMAS
Capital Press

In this long period of low milk prices, lenders say they're sticking it out with their dairy customers and hoping the market will soon return them to more balanced times.

Longtime ag loan officers with three lending institutions in Southern Idaho sat down with Capital Press to explain what's going on from their side of the desk.

Dave Stout, vice president of Northwest Farm Credit Services commercial lending group, has been in the business for about 30 years. His office holds about $750 million in dairy loans, serving about 100 dairies in Southern Idaho.

"I've never seen it look this bad and with these severe of losses," he said.

His numbers show that average cost of production at 2008 year end was $16.50 per hundredweight for Southern Idaho dairies. For most of 2009, milk prices have been about $10 a hundredweight.

"Most are losing $6 to $7 a hundredweight, which is devastating; that's about $100 a cow per month," he said.

Dick Graves, senior vice president of D.L. Evans Bank, a 40-year veteran of ag lending, estimated his clients' losses in the $100-to-$150-per-cow range.

"Multiply that by 5,000 cows, that's a lot of money," Graves said. "There's been a tremendous drain on equity, and it's going to take many years to recover, even with good prices."

Stout agreed, saying it will take years for dairy farms to work their way out from under the debt load built up in the past six to nine months.

In the first six months of 2009, Stout's dairy clients lost everything they made in the unprecedented high-price years of 2007 and 2008.

"The first to be affected was anyone that expanded in the last three years. They used all their equity," Stout said. "As it has dragged on, it's affecting every dairyman out there."

One bright spot is that feed costs are decreasing, primarily hay and silage, and cost of production for the latter half of 2009 should be about $14 a hundredweight.

"The unknown is if our milk prices will get to $14," he said.

John Gibson, vice president and branch manager for Farmers National Bank and a 32-year veteran in the loan business, said experts he has talked to think the worst of the crisis may be nearing an end.

"There's optimism right now. Schools are starting and milk is short," Gibson said. "Milk supplies are tight right now, and that's a good sign. It means the price is coming back. Dairymen are saying milk will be $15 by January; brokers are saying $12 to $13 would be good."

In the meantime, dairies and banks are trying to hold on.

"I would think we have some customers who are quickly running out of equity," Stout said. "I don't know if there are a lot of options for them. They're limited. And banks know we don't want to let go of them."

Stout said he doesn't foresee any foreclosures on Farm Credit's customers, and he has heard of no other lenders foreclosing.

Gibson of Farmers National said his bank has not had to foreclose on any dairymen, but he is unsure how long banks can continue financing producers.

If low prices persist, Stout said, the dairy industry will see some reshaping as operations are forced to downsize and perhaps sell off whole or part of their operations.

"But I am certainly not saying: 'Boom, bring out the trucks and get the cows,'" Stout said. "If you're in the dairy (lending) business, you have some tough loans right now. ... I think all the banks have done a good job of staying with their customers."

With fall and winter approaching, dairymen are facing large annual expenses.

"Dairymen are needing to buy their year's worth of silage or pay for harvesting their own," Graves said. "It's going to take money to take care of that, and I'm not sure where that money's going to come from."

Graves said major real estate lenders have gotten more conservative, and that has dried up a source of capital for a lot of dairymen.

"Banks are trying to shore up collateral in some ways. And with these dairies borrowed out at nearly 100 percent of their equities, it's going to be extremely difficult to put any more money into those operations," he said.

It's not just dairy farmers and their bankers feeling the financial pinch. The farmers that dairymen buy feed from and the businesses that sell supplies to dairies are also having to do without normal cash flow.

"Main Street is starting to feel it," Graves said.

Gibson said those in the larger agriculture community -- agribusinesses, crop farmers, hoof trimmers -- are sticking by their dairy neighbors.

The bankers expressed optimism that they, and their customers, will survive the crisis.

"This thing will turn around," Stout said. "The dairy industry has been a really good industry for us to finance, and we want to continue to finance it in the future. We've got a lot of customers who are going to be just fine. I think all our customers are going to get through it."

Graves agreed: "We're all in a hopeful mode this thing is going to turn around; we thought it would before now. The biggest thing is we've got to get rid of our surplus inventories. We hope CWT helps with that, getting rid of some cows."

Gibson said consumers can make a big difference, too. "So drink milk, that's the bottom line," he said. "Eat cheese."

Staff writer Carol Ryan Dumas is based in Twin Falls. E-mail: crdumas@capitalpress.com.