For Dairies, Last Straw with Lenders?

In California, Texas and Idaho dairy country, anti-lender sentiment is high amid shrinking credit lines.

Nationally, dairy customers are the most stressed of all the Farm Credit System’s agricultural customers, says Bill York, CEO of AgriBank, based in St. Paul, Minn.

Corn and soybean farmers have crop insurance to fall back on if crops fail. But dairy producers will struggle to find enough feed to get through the next year, and will pay dearly for it if they find it.

“There will be a lot of creativity in putting together rations in the coming months,” York says. “And there will be need for increased operating loans to cover those costs.”

In California, Texas and Idaho dairy country, anti-lender sentiment is high amid shrinking credit lines. Some producers claim that lenders have withdrawn support for the dairy business and are too quick to move troubled dairies into special-asset status.

“Lone Star Land Bank courted a lot of dairy loans in 2006, but they’ve decided to exit the dairy industry,” says Darren Turley of the Texas Association of Dairymen.

Wells Fargo, one of the nation’s largest dairy lenders, disputes claims that it has withdrawn its support from the dairy industry.

“Wells Fargo has banking relationships with individual people and businesses, not industry groups,” says bank spokesman Gabriel Boehmer. “Wells Fargo remains committed to dairy producers throughout the U.S., including California, whose businesses and strategies appear to be viable over the long term. Wells Fargo believes that successful dairy producers will recognize that the risk profi le of this industry has changed and will make appropriate adjustments to succeed.”

Herd liquidations and dairy closures aren’t always because the lender didn’t do its job, says Mitchell Harris, CEO of AgTexas Farm Credit Services. “A lot of lending and dairy business models were not designed to handle the level of challenge we’re seeing in the dairy industry,” he says.

But Harris also urges producers not to paint all financial institutions with the same broad brush. “We haven’t foreclosed on a dairy since AgTexas was formed in 1999,” he says.

While AgTexas is still making loans to dairies, it’s busy counseling worried dairy producers, Harris says. The lender has used USDA loan guarantees to help some of its dairy borrowers work through the tough times.

“If you’re working with a borrower who has a challenged situation, the worst thing you can do is pull the operating line,” Harris says. “There are a lot of reasons why you want to keep that line of credit in place. It’s not just about compassion. As a lender, you need to consider the impact of caring for and preserving the cattle while helping the borrower to preserve as much equity as possible. If the herd husbandry is not adequate, the value of the dairy herd can deteriorate by 50% in a matter of hours or days.”