September 5, 2017 at 3:32 p.m.

A critical financial situation

Lenders offer advice for making it through the industry’s low milk prices, high production costs

By Krista M. Sheehan- | Comments: 0 | Leave a comment

ST. CHARLES, Minn. - In a dire dairy situation, many producers have been financially struggling to make it through the industry's low milk prices and high production costs.

Two Minnesota lenders, Jim Allen, president at Merchants Bank in St. Charles, and Russ Keller, senior lender at AgStar Financial in St. Cloud, commented about the nearly $7 milk price drop from 2008 to 2009 and offer some advice about how to handle the financial stress. Both work with a high percentage of dairy farmers and together they have over 55 years of finance experience.

"It's rather critical," Allen said about the financial position of his dairy clients. "Dairy farmers were struggling over the winter and were looking forward to higher prices this spring, but they haven't come about. Now the situation has gotten deep enough to affect anyone milking cows."

Keller also said most of his dairy clients are in an unfavorable situation, other than the handful who decided to forward price their milk last June.

Both say the situation has become so severe that producers have taken cost saving measures to try to handle the costs.

"Producers are cutting back on all expenses that they possibly can, at least those that do not affect milk production quality or herd health," Allen said.

Some dairies have postponed repairs and maintenance, and have put off updating buildings or constructing new facilities, Allen said.

"That's a Band-Aid until things get better, but I think it's an indication of how severe this cash flow shortage is for a lot of dairy producers," he said.

Although Keller said most dairies "are at the top of their management game" because of the low prices, he gave some reminding tips about how to cut back on costs. He suggested culling cows that aren't paying the feed costs and turning nonproductive assets - land that doesn't fit in the operation or unused equipment - into a source of cash.

"Leave no stone unturned to try to trim those costs," Keller said. "It's a survival mode now. It's tough going here and you have to be creative sometimes and think outside the box."

But Keller also said dairy producers shouldn't give up hope during sour prices.

"Talk often and early to suppliers and lenders," he said. "No one likes surprises in finances. If you can't pay one month make sure you tell your lender and make an effort to pay part of it. Most lenders are willing to work with you if you are in good standing and have a plan ready to discuss alternative payment options."

But there are times when the price can take a toll on a dairy.

"We try to be very realistic and try to look at the overall business plan to keep the dairy profitable," Keller said. "Encouragement and optimism is used (during low prices) when optimism is called for - and that's a vast majority of the time - but if there are some issues, the producers need to be told to make that tough decision and look for other avenues."

Allen said during times like these, he has to be a cheerleader and a counselor.

"You have to be realistic, but you don't want to paint too dismal of a picture, either," Allen said. "Most [producers] aren't down and out. You talk to them and give them a hug at the same time."

Fortunately, producers in the Midwest have an advantage because many are able to harvest their own feed, and they have access to land and water, which can be a challenge in other areas of the country, Keller said

If they follow history, Allen said the prices are likely to increase soon. He said the base price in 2006 averaged $11.99, in 2007 averaged $18.76, in 2008 averaged $17.90 and through April 2009 had been at $11.30.

"What we've received so far this year in price didn't significantly differ from what we've experienced three years ago in 2006," Allen said. "Mainly [we're] trying to work with our customers to get them through this point because we're confident the prices will come back."

Until that time, producers will have to stick together and lean on each other for support or possibly make a tough decision.

"The prices are taking longer to fix themselves than we want to," Allen said. "We're hoping better prices are around the corner for everyone."[[In-content Ad]]


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