Voluntary livestock liquidations on the rise, say bankers
Grim financials for dairy and pork producers were casting a pall over proceedings of the National Agricultural Bankers Conference in San Antonio, TX, last week. For the first time in 25 years, sessions were concentrating on topics such as organizing loan workouts, handling bankruptcies, and stresstesting loan portfolios.
Not many foreclosures or bankruptcies have gone public yet, but voluntary livestock liquidations are definitely on the rise, many lenders said.
“This downturn has damaged the industry so badly that there will be a certain number of dairymen who will never recover, no matter how good prices are going forward,” said Curt Covington, senior vice president and agriculture division credit administrator for Bank of the West in Fresno, CA, the chairman of the ag bankers’ group. “My message to producers is to take a long, hard look at their business and preserve equity today if they can. They need to have meaningful discussions with their lenders and trusted advisers.”
The average California dairy lost $6 per cwt. through the first half of 2009, and many aren’t likely to show positive cash flows until sometime in 2010, he added. Contrary to past experience, it’s been the medium-sized 1,000-cow dairies with older facilities and low debt levels that have handled the crisis the best, not mega-sized operations, he said.
In eastern Pennsylvania, where 90 percent of his clients are plain sect Mennonites or Amish, “the hardest part of my job is telling customers they might have to carry a lunch pail for a living when their whole life has been based on farming,” said Mike Firestine, senior vice president of Fulton Bank in Lebanon, PA.
“I don’t think it’s fair to take every last cent of their assets. Land values are still holding up, and they could get out of debt and still come away with a nice house and some savings” if they liquidated now, said Firestine.
Between dairies and confinement poultry and pork production, there’s more agriculture under roof in Lancaster County than any other county in the nation, Firestine said. Yet that capital-intensive farming has come under assault by a collapse in global protein demand and high feed costs the past 24 months.
Expenses key to survival
“It’s hard to put a number on it, but with a 40 percent drop in income for dairy and higher feed and fuel bills, it’s not a good scenario. No dairy farmers are generating black right now,” he said. Key to surviving is to cut expenses and get breakevens below $16 per cwt. Even then, growers will need milk prices to stay high long enough to recoup a year of losses. “If you’ve got a breakeven at $17, you’re bankrupt,” he said.
Contract pork production—once the entry route for newcomers with excess labor and little equity — is undergoing a rapid and perhaps permanent transformation, Firestine and other ag lenders believe. Many said that packers will be the main beneficiaries and increase their market share of pork production once all the dust settles. “Pork will look much like the poultry industry when this is all over,” Firestine said.
Contract farrowing and finishing agreements “are being shredded as fast as they were written,” said Mark Nowak, a senior loan officer with Farmers State Bank, Freeborn, MN. Though the late 1990s prompted an exodus of independents, “this might be the last push,” he said.
Troy Broers of American State Bank in Sioux City, IA, said producers who farrow under contract “are the ones getting a beating right now.” He serves the top dairy, hog and cattle county in the state and estimates that the rate of broken hog contracts is 30 percent or higher.
“There haven’t been a lot of loan defaults or foreclosures yet, but people are refusing to buy contracted pigs and want to renegotiate payment terms,” he said. Long-term, this part of the country will retain its competitive advantage in the swine business because of its access to relatively low-cost feed and a plethora of packers.
However, Broers expects to see a lot of empty 30- to 35-year-old confinement hog buildings this winter and operators without heirs who chose to concentrate on grain production instead.
In Minnesota, the state’s mandatory farm debt mediation services report a surge in their caseloads since spring, and most of those approximately 400 borrowers involve dairy and pork producers.
Michael Stewart, an agricultural lawyer specializing in debt restructurings with Faegre & Benson LLP in Minneapolis, thinks more farmers are declaring it quits rather than opting for Chapter 11 or 12 bankruptcies.
“Bankruptcy (reorganizations) only help if you can make money after you’ve received some debt concessions. A lot of these producers just can’t cash flow at current prices, so they liquidate their assets. There’s one less family farmer,” Stewart said. — DTN