In recent years, an explosion of growth has occurred in the dairy industry, with many operations milking 500 or more cows. However, much of this growth has been confined to certain regions of the country.

Do the dairy producers in these growth areas have better genetics? Better rations or herd health programs? No. The secret to many of these operations is the loan structure that their banks or lending institutions offer. In many cases, these farms are able to secure financing that promotes growth and expansion.

In particular, how a bank structures loans for the purchase of cattle can have a big impact on growth. Banks are willing to loan money for buildings and land, but often producers have trouble securing the right type of financing for cows.

Most banks are afraid of cattle loans. Bankers feel the collateral in cattle is too risky, as the animals can die or be sold. But, it is the cattle on a dairy farm that generate revenue. Loans need to be structured to ensure an adequate supply of cattle to the dairy farm to meet cash flow requirements.

Most banks structure cattle loans on three- to five-year notes. These term loans can slow growth when cow numbers fall below capacity and cash flow drops.

Instead, the dairy producer must have access to equity to maintain herd size and cash flow without taking out more loans. Securing a line of credit for cattle, so the equity can be accessed without a new note, is better suited for maintaining and growing herd size.

West coast structure
I have often wondered why the western dairies have grown and expanded at a rapid pace. Sure, the weather and feed is conducive to high levels of milk and profits, but a recent meeting with a large west coast banker revealed a more definitive reason for that region's continued growth. He indicated that in 25 years of banking, only five dairy producers in his portfolio have ever paid off their cattle notes.

The western dairy producers' continued access to equity, coupled with a desire to expand and good planning, has sustained their growth pattern.

Now, this growth is not only in the West. This type of loan structure can be found in the Northeast and Midwest as well. In the future, the growth and expansion of the dairy industry will be closely aligned with the institutions that provide innovative financing.

Creating a teachable moment
So, what happens when your banker refuses to structure your debt to allow for growth? This occurred last year to me and two of my dairy clients. The bank turned down our request initially because of uncertainties over non-term debt structure.

We did not let that deter us. At our expense, we took five bankers to California and met with officers from the two largest banks that service the dairy industry there. After the meetings, our local bankers were convinced they could restructure their loan covenants to meet our requirements.

However, nothing is free. The documentation and information required by the bank was much greater than if we'd taken the term debt structure.

If your loan structure is not what you want, look for better terms and structure. If your banker is afraid to loan you money, or wants it back too fast, find another bank. Or, take the time to educate your banker on how your business operates and the type of debt structure you need. Don't be afraid to invest time and money in showing your bankers how other banks allow dairy farms to grow.

Paul Johnson is a veterinarian and consultant in Enterprise, Ala., and owns a 700-cow dairy.