September 2010

No Crying Over Spilt Milk: Strategies for Lending in the Dairy Industry

Lenders in the dairy industry are accustomed to volatility. As long as the volatility in inputs and outputs was moving in tandem, lenders could expect their borrowers to achieve some minimal “guaranteed” margins and debt service remained possible. However, that changed beginning in 2007…



Operating Success Opportunities

In an industry with many producers and large buyers spread over a wide geographic area and government intervention in pricing, imports and exports, volatility out of the control of the individual dairy producer is expected. Over the past 30 years, dairy farmers and their lenders have seen milk prices paid to dairy farmers change from $9.00 per hundred pounds of milk (cwt) to $21.00 per cwt, and every point in between, without any typical trend line. During this time, feed costs experienced similar volatility.

As long as the volatility in inputs and outputs was moving in tandem, lenders could expect their borrowers to achieve some minimal “guaranteed” margins and debt service remained possible. However, that changed beginning in 2007.

Milk Prices and Feed Costs

Traditionally, dairy farmers and their lenders experienced volatility in gross revenues; however, the relationship between milk per cwt and corn costs per bushel maintained a relationship that allowed operating margins to continue to be generated. In mid-2007, milk prices peaked at approximately $18.00 per cwt, with dairy farmers receiving over $20.00 per cwt depending on their butterfat, protein and other test performance levels. While dairy farmers and their lenders remembered the 2006 price levels of $12.00 per cwt, they did not expect to see corn prices spike 200% from $2.00 per bushel in 2006 to $4.50 per bushel in 2008.

The “Class III Milk Prices Compared to Corn Costs” chart shows milk prices and corn costs over the past 20 years. The margin that had been maintained over the prior 18 years began to erode in 2008.