Lenders: There are ways to survive current challenges on the farm
An audience of 110 bankers representing 48 Wisconsin banks and some 50 other ag related folks attended the recent Wisconsin Ag Bankers Conference in the Wisconsin Dells.
An array of speakers mostly discussed agriculture in terms of the “big picture” including supply and demand for agricultural products (including dairy products) on a national and world basis.
Jason Henderson, Extension Director at Purdue University, talked about a new phase of the Ag cycle based on volatility of farm product prices because of drought in some parts of the U.S. and the uncertainty of U.S. ag policy, especially trade policy.
He says our unclear trade policy creates uncertainty and cited the long drawn out NAFTA discussions followed by the question of China’s plans in dealing with the U.S. as examples. China imports 87% of the soybeans they consume with one-third coming from the U.S.. The new 25% tariff makes U.S. soybeans uncompetitive with South America, he says. The result could be a U.S. soybean production drop of 15% and a price drop of 5%.
Henderson added that U.S. agriculture faces many risks: debt, inflation, interest rates, exchange rates and trade wars with two keys to success— driving efficiency and creating value. The efficiency is producer oriented supply and creating value is customer oriented demand. He posed this question: Who is the ultimate customer and do they want the same things?
How can a farmer affect/impact either? A farmer, with few exceptions, sells to a processor (his customer). However, the farmer does not impact consumer wants and needs, he produces what others process and sell.
Dr. Marin Bozic, University of Minnesota Ag economist discussed the world and U.S. dairy supply and demand situation with a new U.S. farm bill in the making. He cited the rising dairy exports—up 14% year to date—as a positive sign for the industry. On the other hand, the decline of milk price premiums paid (for excess components, cell count, hauling) have dropped from $1.90 per hundred in 2012 to just 0.40 today which has severely impacted dairy farmers.
Bozic, who was born in Croatia and received his Ph.D. at the UW-Madison, suggests that dairy farm consolidation will continue and sees total dairy farm numbers in the U.S. falling from 40,000 to 20,000 to 25,000 in coming years.
“We are going to see a number of dairy farmers that are no longer competitive. We would be doing them a disservice by offering handouts that would prolong their hope but really there is nothing there to hope for.” he says. “Some of the bankruptcies we see are based on family history (the farm has been in the family for generations and the current owner feels he can’t get out) rather than the financial facts.“
Bozic says the bipartisan budget bill passed in February contained needed changes to the Margin Protection Program which he believes will make the program more effective and he hopes dairy producers will give the program a second chance. He says it’s possible there will be additional changes to MPP in the upcoming farm bill.
Ag Secretary Sonny Purdue announced the enrollment period for the new dairy margin protection program runs from April 9, 2018 to June 1, 2018.
In spite of the challenges facing dairying, Bozic says, “There is always opportunity for the management oriented farmer to succeed."
The wide-ranging discussions at the conference gave ag bankers background in the challenges facing grain and dairy producers as they work with their borrowers. As my conversations with bankers showed, financial stress is impacting farmers of all sizes and may become more serious two years from now. Every lender expressed the same thought: “Every farmer, farm and situation is different and we try to help them meet the challenges they face. This conference tells us there are ways to survive."
Interestingly, the suggestions to producers who plan to stay in business are unchanged from those taught decades ago: efficient production, know the costs of production and tight management. As to adding value to consumer dairy products, is building new dairy plants without a market for those dairy products a solution to the consumer value challenge?
Federal court data show that the Western district of Wisconsin had the highest number of farm bankruptcies in the country last year. The Western District of Wisconsin had 28 farm bankruptcy cases in 2017. The district is made up of 44 counties and includes more than half of the state's geographic area. There are 94 federal court districts in the U.S..
"Wisconsin farmers are earning less because of low commodity prices for corn, soybeans and milk,” said Christopher Seelen, an Eau Claire attorney who represents creditors in bankruptcy court. "People seem to have jobs, and the economy seems to be going well for most folks."
Simultaneously, input costs have remained steady or increased.
"Unfortunately for some of these farmers who are suffering through these low grain prices, the economy is not going as well for them."
Rent per acre, debt from purchasing equipment or other investments have caused farms to take on debt, said Rachel Dux, vice president of corn exports for Compeer Financial, a farm credit cooperative.
"Some of that debt is catching up to them with the prices falling. We're not seeing that income level that can handle the debt loads that they have," Dux said.
More farmers are turning to seed or equipment companies for lines of credit instead of traditional agriculture lenders, something that could lead to more bankruptcy cases, said Paul Mitchell, director of the Renk Agribusiness Institute at the UW-Madison.
"In all honesty, the bankruptcy rate seems a rather small number considering the many thousands of farms in the area and challenges they face," Mitchell said. "My guess is that the dairy farms 'on the edge' are selling out before the financial situation becomes too serious."
Dairy herd losses
A glance through the Wisconsin dairy herd auctions listed in the farm papers during the period of April 4-13 showed 11 herds selling out. Herd sizes ranged from 25 to 200 cows with most in the 30 to 65 cow range. Remember, however, the cows in most cases were bought by another dairy producer to replace or add cows in their own herd, thus resulting in continued or higher milk production.
Answers to the current farm financial dilemma are few and far between but many farmers do find them. Hopefully the supply/demand situation will change for the best.
John Oncken is owner of Oncken Communications. He can be reached at 608-222-0624, or e-mail him at email@example.com.