This is a difficult time for dairy producers. They continue to face environmental challenges, rising operating cost, and low milk prices.
I have been an agricultural lender for more than 30 years, and have not seen such a difficult time that has lasted so long. Operating cost, including labor, continues to escalate. The cost of feedstuffs has remained constant, but many fear that in-creases are on the horizon. Recently, a small decline in the cost of young stock and replacements has provided some relief.
Survival of the fittest
In most areas of the nation, dairymen are producing milk at a loss. In addition, they are being forced to dig into their equity base to pay bills. It is becoming a “survival of the fittest” scenario. There is no clear direction for what the dairymen should do, and no one knows what the future holds.
The American dairyman continues to use innovative production techniques. He continues to focus on cow health, safety and comfort. But the cost of producing a hundredweight of milk is rising at a faster rate than the efficiencies created from using these new techniques. We continually hear about over-production, but dairy processors continue to expand their facilities and want more product.
What is the answer? Dairy-men are among the most resilient people I know, but how much more can they withstand?
Today, many dairy families are making tough decisions. And, many other dairy farm families will face those same tough decisions soon enough. At what point is enough, enough? Are there any additional changes that can be made? Are you utilizing all of your available resources?
Work with your lender
What role do the lenders play during these tough times? Financial institutions face their own concerns and challenges.
In light of the accounting scandals that have plagued corporate America recently, many banks have adopted more conservative lending policies. Often, decisions are delayed and the institutions request more information from potential borrowers.
Now, more than ever, you must have good information about your business — and be able to discuss it with your lender. Know your operational costs. Be prepared to answer more in-depth questions about your business. Be open and honest with your banker. There has never been a more important time than this to have good financial information available.
Bankers want to know “YOUR” plan, what “YOU” are doing, and how “YOU” are handling this difficult time. Have you made any changes in the operation, and what were the results from those changes? What trigger points will you use to make more changes? How will you monitor the progress of those changes? What are your expectations, and how can you quantify them?
The dairymen that bankers want to be associated with are those that:
Utilize all of the tools available to them.
Make sound decisions.
Maintain outstanding financial reporting.
Are constantly searching for better ways of doing business.
Bankers are not knocking on the dairymen’s doors like they were last year, and financing is more difficult to obtain. But those institutions that are committed to agriculture are still financing dairymen.
Personally, I see the dairy as a great investment for financial institutions.
Hopefully, the dairy industry has reached the low end of the current business cycle and is headed upward again. I said this once before and will say it again, “As long as the general public drinks milk, eats cheese, and does not find an alternative for child growth and development, the dairy industry will survive.”
I can’t imagine life without hot fudge sundaes!
Anthony DeRose is a executive vice president of Wells Fargo Bank in Visalia, Calif.