Lenders unwilling to finance already extended operations

By CAROL RYAN DUMAS
Capital Press

The price outlook is improving in the dairy industry, but it'll be a long road to recovery for dairymen who experienced unprecedented devastation in 2009.

"We're really, really, really hoping better times are ahead," said Wilson Gray, extension livestock economist with the University of Idaho at Twin Falls. "We're wanting to be more optimistic."

With Class III milk prices diving below $9 per hundredweight, producers suffered all of 2009, not even coming close to cost of production.

"Futures are trying to get $15 to $16 on Class III," Gray said. "We're close to or at breakeven, at least in Idaho."

Returns over feed costs are positive for the first time in many months. California is showing a 60 cent positive milk-feed ratio for the first time in about a year, Gray said.

But producers have a huge financial hole to climb out of and lenders aren't going to be as generous as they have been in the past. Most dairymen have a lot of debt to pay back before banks will loosen their purse strings, Gray said.

Considering a 1,000-cow dairy, losing $100 per cow per month for 15 months, that producer would have to make up the $1.5 million in debt before the bank is going to want to lend any more, Gray said.

Lenders are going to be far more conservative extending credit.

"You're going to see lenders set a mark on asset values irrespective of markets and only loan a percentage of that," he said.

Most banks were loaning about 70 percent of market value before the bad times hit. So if a replacement cow was $1,800, they would have loaned $1,200.

"They aren't going to do it any more," Gray said.

What's more, if a dairyman is paying $5,000 an acre, way above market value, for farmland to spread manure, he better not expect a lender to loan on that amount.

"The bottom line is (producers are) going to have to have a lot more cash, more equity, or they aren't going to find anyone" to loan them money, he said.

The good news is, the industry seems to be stabilizing. The last herd buyout by Cooperatives Working Together was only about 25,000 cows, and involved only 11 Western dairies.

"Production is starting to come down, 1 percent, and will come down more," Gray said. "We could see more herd culling to get some cash to get some of that debt paid off."

There's good news in USDA's December Livestock, Dairy and Poultry Outlook. That report forecasts Class III prices will average $15.15 to $15.95 per hundredweight and the all-milk price will average $16.35 to $17.15 in 2010. It also forecasts a rise in all product prices and exports.

"The bottom line with dairies is the outlook is better, but they're not out of the woods yet," Gray said.

Price forecast

             2009                2010

Cheese $1.29-$1.30 $1.61-$1.69

Butter $1.19-$1.22 $1.43-$1.54

NDM 91 cents-93 cents $1.24-$1.30

Whey 25 cents-26 cents 35 cents-38 cents

Milk

Class III $11.3-$11.4 $15.15-$15.95

Class IV $10.75-$10.95 $14.60-$15.50

All milk $12.70-$12.80 $16.35-$17.15

SOURCE: USDA ERS