Signs of Light at End of the Dairy Tunnel
Submitted by Editor on Fri, 11/20/2009 - 4:48pm.
Dick Wanner
Lancaster Farming Staff
LANCASTER, Pa. — If you wanted to be cheered up about the current state of the dairy industry, last Thursday morning was not a good day to attend the monthly Ag Issues Forum sponsored by the Lancaster Chamber of Commerce and Industry at the Farm and Home Center.
Three keen observers of the dairy business talked to the group of assembled farmers and agribusiness people, and all three had the same message.
It’s bad. Nobody knows when it’ll get better. And not everybody’s going to make it.
Steve Hershey, a dairyman who operates a 300-cow herd in Manheim, Pa., with his brothers Dale and Clare, likened the situation to driving on the Pennsylvania Turnpike. “They say there might be a light at the end of the tunnel,” he said. “But what if it’s like is the turnpike, where you get through the tunnel, and then there’s another tunnel.” Anyone who’s ever driven through the Blue Mountain tunnel’s 4,339 feet into six seconds of sunlight before plunging into the 4,727-foot Kittatinny Mountain tunnel knows exactly what Hershey was talking about.
His family operation is in relatively good financial condition, he told the crowd, but only because they sold a farm for about 90 percent of what they’d paid for it five years ago. The farm sale pretty much covered their losses for the year, but he has no idea how it’s going to be in the years ahead.
He’s concerned about other farmers, too. He mentioned a receipt he got recently on a purchase he’d made at Daniel’s Farm Store in nearby Leola. There was a note at the bottom of the receipt that said, “Short of cash? We take heifers.”
“What’s a dairy herd going to look like next year, if they’re selling heifers this year to pay bills?” Hershey asked.
Lowell Fry, an ag lender from Fulton Bank, does see a light at the end of the tunnel, but he predicts that some dairymen aren’t going to make it through the first tunnel, much less the second. “Banking has changed,” he said. “Credit managers are running the banks now, not the sales managers.
“The sales managers told us to go out there and put loans on the books. Now the credit managers are asking us what we’re doing. And regulators are watching our every move.”
Fry said ag bankers were guilty of a lot of asset-based lending in the 1980s. If a farm was worth a million dollars, the owner could borrow $800,000. Now if a farmer needs a loan, he’s got to demonstrate his ability to pay it back. He’s going to have to demonstrate positive cash flow.
“Your financial reporting is going to have to improve,” he said. “We’re going to be asking for more information more often. We’re going to ask for a budget. We want to know your total cost of production. If your cost of production is $16 a hundred, we want to know what you’re going to do to lock in that $16. It might be marketing, contracting, hedging, put options — we’ll need some kind of assurance.”
He said farmers in the Midwest are miles ahead of farmers in the East when it comes to using the Chicago Board of Trade and hedging strategies to lock in profits. “But in the East, we’re at the mercy of the open market, swinging in the wind, and the banking industry won’t be able to deal with that.
“A farmer might spend hours and hours shopping for a new tractor, or trying to figure out which kind of herbicide to use next spring. But he’ll spend hardly anytime at all on understanding how to market his product.”
Fry said bluntly that not all dairymen are going to make it. And he urged those who know they’re going to get out to manage their own exits. “If you don’t do it,” he said, “somebody will do it for you.”
John Frey, from the Center for Dairy Excellence also addressed the group, presenting what he believes are options for the dairy industry.
One option he believes won’t work is called “Fortress USA” and involves focusing completely on the domestic market, closing our borders to dairy imports and attempting to limit the effects of globalization.
Option two is to maintain the status quo, which means perpetuating the problems that are now plaguing the industry.
Option three is for the U.S. to become a consistent exporter of dairy products, with broad worldwide marketing efforts, an overhaul of the federal milk marketing order system, efforts to improve forward contracts and futures markets and other measures to improve stability. It’s the option Frey sees as the most promising for U.S. producers.
A fourth option, for the U.S. to become a global dairy player, could divert management and financial resources overseas, Frey believes.
Dick Wanner can be contacted at rwanner.eph@lnpnews.com or (717) 419-4703.
Dick WannerLancaster Farming Staff
LANCASTER, Pa. — If you wanted to be cheered up about the current state of the dairy industry, last Thursday morning was not a good day to attend the monthly Ag Issues Forum sponsored by the Lancaster Chamber of Commerce and Industry at the Farm and Home Center.
Three keen observers of the dairy business talked to the group of assembled farmers and agribusiness people, and all three had the same message.
It’s bad. Nobody knows when it’ll get better. And not everybody’s going to make it.
Steve Hershey, a dairyman who operates a 300-cow herd in Manheim, Pa., with his brothers Dale and Clare, likened the situation to driving on the Pennsylvania Turnpike. “They say there might be a light at the end of the tunnel,” he said. “But what if it’s like is the turnpike, where you get through the tunnel, and then there’s another tunnel.” Anyone who’s ever driven through the Blue Mountain tunnel’s 4,339 feet into six seconds of sunlight before plunging into the 4,727-foot Kittatinny Mountain tunnel knows exactly what Hershey was talking about.
His family operation is in relatively good financial condition, he told the crowd, but only because they sold a farm for about 90 percent of what they’d paid for it five years ago. The farm sale pretty much covered their losses for the year, but he has no idea how it’s going to be in the years ahead.
He’s concerned about other farmers, too. He mentioned a receipt he got recently on a purchase he’d made at Daniel’s Farm Store in nearby Leola. There was a note at the bottom of the receipt that said, “Short of cash? We take heifers.”
“What’s a dairy herd going to look like next year, if they’re selling heifers this year to pay bills?” Hershey asked.
Lowell Fry, an ag lender from Fulton Bank, does see a light at the end of the tunnel, but he predicts that some dairymen aren’t going to make it through the first tunnel, much less the second. “Banking has changed,” he said. “Credit managers are running the banks now, not the sales managers.
“The sales managers told us to go out there and put loans on the books. Now the credit managers are asking us what we’re doing. And regulators are watching our every move.”
Fry said ag bankers were guilty of a lot of asset-based lending in the 1980s. If a farm was worth a million dollars, the owner could borrow $800,000. Now if a farmer needs a loan, he’s got to demonstrate his ability to pay it back. He’s going to have to demonstrate positive cash flow.
“Your financial reporting is going to have to improve,” he said. “We’re going to be asking for more information more often. We’re going to ask for a budget. We want to know your total cost of production. If your cost of production is $16 a hundred, we want to know what you’re going to do to lock in that $16. It might be marketing, contracting, hedging, put options — we’ll need some kind of assurance.”
He said farmers in the Midwest are miles ahead of farmers in the East when it comes to using the Chicago Board of Trade and hedging strategies to lock in profits. “But in the East, we’re at the mercy of the open market, swinging in the wind, and the banking industry won’t be able to deal with that.
“A farmer might spend hours and hours shopping for a new tractor, or trying to figure out which kind of herbicide to use next spring. But he’ll spend hardly anytime at all on understanding how to market his product.”
Fry said bluntly that not all dairymen are going to make it. And he urged those who know they’re going to get out to manage their own exits. “If you don’t do it,” he said, “somebody will do it for you.”
John Frey, from the Center for Dairy Excellence also addressed the group, presenting what he believes are options for the dairy industry.
One option he believes won’t work is called “Fortress USA” and involves focusing completely on the domestic market, closing our borders to dairy imports and attempting to limit the effects of globalization.
Option two is to maintain the status quo, which means perpetuating the problems that are now plaguing the industry.
Option three is for the U.S. to become a consistent exporter of dairy products, with broad worldwide marketing efforts, an overhaul of the federal milk marketing order system, efforts to improve forward contracts and futures markets and other measures to improve stability. It’s the option Frey sees as the most promising for U.S. producers.
A fourth option, for the U.S. to become a global dairy player, could divert management and financial resources overseas, Frey believes.
Dick Wanner can be contacted at rwanner.eph@lnpnews.com or (717) 419-4703.
