At the beginning of 2017, some analysts said milk prices would be on the uptick by the end of the year. Boy were they wrong. Throughout 2017 and into 2018 milk prices have continued their slow grind downward, putting significant pressure on dairy balance sheets throughout farm country. Safeguard your lendable equity this year, if you plan to need operating loans going forward.
“Across the country 2017 was a breakeven year at best,” says Curt Covington, senior vice president of agricultural finance for Farmer Mac. “The majority of dairymen probably fell under the breakeven line.”
Still, Covington says most of the banks that Farmer Mac works with report most dairies are still in “decent shape” in terms of having lendable equity to secure financing for 2018. Covington warns that a slow recovery could put additional strain on finances.
“As difficult as things look for 2018, there’s going to be a lot of burn in liquidity,” he says. “Those that were marginally successful or might have been on a credit watch list by their lender could potentially find themselves in a little bit of trouble come later in the year”.”
According to Jackson Takach, economist and director of economic and financial research at Farmer Mac, 2018 will be a rough year.
“What happens when you’ve got a tough row to hoe? You lend on equity and you lend on capital,” he explains. “Starting the year, [lending conditions] are going to be ok, but then they are slowly going to get worse.”
Not only will farm balance sheets make lending conditions more difficult by the end of the year, but Covington says regulators could have an impact on farmer access to credit, too.
“Regulators have their antennas up on the dairy portfolio,” he says. “When you have two years of losses, the regulators may put pressure on banks to downgrade specific credits and potentially force a downgrade of portions of a portfolio.”
If that happens, many farmers will put expansion plans on hold, and they will seek alternative financing for feed, inputs and commodities.
“Dairymen are pretty adept at finding other folks to help carry some of the water for them,” Covington says. “Still, some guys are going to be forced out of business, unfortunately”