Lenders forecast slow recovery

Carol Ryan Dumas/Capital Press Dave Stout, vice president of commercial lending for Northwest Farm Credit Services in Twin Falls, says it will take producers years to dig out from under the debt theyÕve accumulated.

Average dairymen lost $6 to $8 per hundredweight during 2009

By CAROL RYAN DUMAS

Capital Press

Ag lenders say they are sticking by their dairy customers to keep them in business, but it's getting tougher to do.

"Six months ago, we all thought this would be over by now," said John Gibson, vice president and branch manager for Farmers National Bank in Twin Falls, Idaho.

"We're working on each individual situation," Gibson said. "We're working with them as much as we can, but it's getting tighter all the time."

Dave Stout, vice president of commercial lending for Northwest Farm Credit Services in Twin Falls, said the lender has helped customers restructure loans so they have a chance to pay down debt. Many loans that had five-year terms are now on 10- to 15-year terms.

"We're working with them as best we can so they have an opportunity to stay in the dairy business," he said. "Our concern is that so much debt has been added, it's going to take a long time to dig out of this hole."

His average customer in 2009 lost $6 to $8 a hundredweight on milk for the year.

"Even if he locks in $1 hundredweight profit, it'll take six to eight years to dig out. That's pretty tough to do," he said.

Stout said the firm has had no foreclosures or bankruptcies among its dairy customers, but he's heard of three bankruptcies with other lenders. Less than 5 percent of Farm Credit's dairy accounts have been moved to its credit department, what many call special assets.

Gibson, too, said some of his bank's dairy clients have been moved to special assets.

"We have a 'work-out' situation with the dairies. Most of them we're able to work with at this point," he said.

Fred Dixon, regional sales manager for Wells Fargo Financial Leasing in Boise, said his company is pleased with the performance of its dairy portfolio. His group focuses on providing real-estate-secured loans to customers in the dairy industry.

"We've been diligently working with our customers over the past year to re-establish real estate values and lend more money when there is room to do so. Many customers have been using that money to pay down cow and feed lines so they can continue to operate," he said.

Dairymen have been used their real estate equity to pay operating expenses, he said.

Dixon said Wells Fargo Financial has also restructured loans so customers can feed their cows.

While feed prices have moderated, milk prices are moving down again.

"The future isn't as bright as it was at one time," Gibson said.

Dairymen are heading into some tough months, he said. Holiday demand is over, February is a short month and the spring flush will bring more milk. He's looking for downward pressure on milk prices.

"California is doing a good job reducing milk supply and we hear plants are short," he said. "We hope the milk price will start strengthening, but that hasn't happened in the last couple of weeks."

According to the U.S. Department of Agriculture, milk production in California was down 2 percent in January from January 2009 levels. National milk production slipped 1 percent to 14.8 billion pounds.

Production was up in some states like Wisconsin, the nation's No. 2 dairy sate, which increased 5 percent to 2.2 billion pounds in January. That's up 97 million pounds above January 2009.

Other states with large increases were Washington, which was also up 5 percent, and Minnesota, which was up 4 percent.

News that a record number of replacement heifers are in the pipeline could also bode ill, Gibson said. It could affect the price of cows, which would affect a dairyman's collateral.

A dairyman could also increase cash flow by putting on more cows, but more milk could move milk prices lower, so it could be self-defeating.

"It's not an easy answer, anytime we get in a surplus situation," he said. "It's complex, and they're all different. Dairymen can't diversify as well as farmers."

Dixon said most dairymen are at a break-even point now, but it's going to be a long road to recovery.

"It's going to take time and increased milk prices to get back to where they were in 2008," he said.

The lenders said they haven't taken on many, if any, new dairy customers during the downturn.

"The dairy industry is one we want to continue doing business with," Dixon said. "There are a lot of good dairies who need help getting back up on their feet and as soon as we can help them, we will."

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