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Do banks want to lend to me?

Art Moessner Published on 04 August 2011


Bad memories are deeply embedded in the human mind and will be carried with us for the rest of our lives. Most of us remember 2003 and 2006 because of low milk prices and the accompanying financial trauma the industry experienced.



Fortunately, in 2003 and 2006, input costs were relatively stable, asset values remained steady and were followed with profitable milk prices that more than compensated for any losses experienced during the down cycles. The dairy finance world pre-2009 understood that milk prices and profits cycled every three years and profitable days were around the corner to cure dairy financial woes.

Then came 2009 … which hit us all like a brick upside the head. A global financial crisis, low milk prices, volatile feed costs and declines in cattle and real estate values all converged at one time. Many dairymen saw 50 percent of their equity lost in one year, and many lenders took significant loan losses on dairy loans for the first time in history.

Many dairymen had to tap all of their equity in their assets and extend trade credit to get through the storm. 2009 is a bad memory that we would like to forget, but instead will wake us up occasionally in a heavy sweat, heartbeat racing and life flashing before our eyes.

2010 was a moderately profitable year for most in the industry, which allowed financial healing. Most dairymen, however, are a long way from recovering equities lost in 2009 and cattle and real estate market values continue to be far below historical values.

2011 has shown volatile milk prices, the second year of upward milk prices in a three-year cycle, extreme volatility in feed prices, a potential for higher interest rates, inflation fears, soft cattle and real estate values and demand and a world economy on edge.


All of these factors combined cause a dairy lender to ask questions such as: Why expand a dairy portfolio in such a volatile environment? Will historical cycles in the industry hold true, or will cycles be deeper but shorter? Are higher feed costs and breakeven milk price levels here to stay?

Many dairymen have borrowed up on livestock, feed, real estate and/or trade credit. Borrowing cushions have been significantly reduced, and lenders are now valuing livestock at current market, whereas in the past some comfort was taken in a conservative advance rate based on a market value of livestock well above the bank’s collateral value of livestock.

The combination of higher leverage (more debt and less equity), lower liquidity (feed lines advanced higher and trade credit stretched as far as vendors will allow) and lower collateral cushions (softer cattle prices and more debt on the credit lines) have increased the risk of lending to the dairy industry and has led to more caution in lending practices.

Perceived added risk in dairy lending has changed the dairy loan underwriting focus. More attention is now on quality and frequency of financial reporting, risk management and stress testing.

1. Financial reporting: Banks have lower tolerance for underwriting dairy loans with tax returns and borrower-prepared financial statements. In most cases borrowers are providing CPA-reviewed accrual basis financial statements (preferably quarterly) prepared by a CPA experienced in working with dairies. A dairyman needs to be able to show the bank good-quality and consistent financial information that well represents the financial condition and profitability of the dairy operation.

The lender inputs the financial statement data into spreadsheets to show historical trends in financial position and profitability. Lenders look favorably on a borrower’s ability to generate financial information internally to show profitability, performance and collateral position on a monthly basis.


Ideally, dairy management is tracking financial performance, understanding financial information and communicating the dairy’s financial progress or lack of progress to the bank. This way dairy management can see a storm coming and generate a plan to attack the issue before it becomes a problem.

2. Risk management: Milk prices and feed costs are becoming more volatile and unpredictable. Historically, many dairies have had the luxury of low collateral advance rates/low leverage to allow the dairy to borrow additional money to ride out a downturn in the dairy industry. In most cases, this is no longer the case and a repeat of 2009 has the potential of putting many dairies out of business.

With this in mind, many dairymen have educated themselves on dairy and feed hedging strategies and are at least knowledgeable of risk management strategies via use of futures and options.

3. Stress testing: This topic has been discussed in more detail in a previous article. (See Stress testing is for banks … and dairies on page 27 of the June 11th issue of Progressive Dairyman .) It consists of projecting likely future cash flow. Then, downside projections are prepared and breakeven milk price and feed costs are determined to assess the amount of cash flow cushion available to cover potential declines in milk price and/or increase in feed costs.

The breakeven milk price is the net milk price that will cover all operating expenses, living expenses and principal payments. At the breakeven milk price, the dairy does not have to tap borrowing sources and equity to cover the dairy’s basis cash needs. A dairy projecting a $17 per hundredweight breakeven milk price is a concern because milk prices have historically not sustained at such a high level.

How much of a drop in milk price can the dairy support from projected levels to breakeven? How does the dairy’s breakeven milk price compare to other dairies? A stress test also determines a dairy’s burn capacity. This means that after taking a realistic historical loss factor of X dollars per month, how long will it take to burn through all of the remaining borrowing capacity in livestock, feed and real estate to maximum bank advance rates?

In general, lenders want to see a dairy have the loan capacity to get through another downcycle year before all borrowing capacity is exhausted.

Dairy lenders are fewer in number but are still looking for new clients. Traditional underwriting standards are tighter today but still include:

• Strong herd and financial management

• Average profitability during normal milk price years

• Reasonable leverage and liquidity

• A collateral position that is within the bank’s guidelines with cushion to absorb shocks to cash flow such as lower milk prices or further rise in feed costs

Volatility equates to risk for a bank. As such, our borrowers and prospects need to find ways to mitigate that risk through use of risk management tools and a thorough understanding of breakeven milk price and feed cost analysis. Dairy lenders will be more comfortable with your operation knowing management is proactively managing their risks, know where they financially stand and can communicate in areas of finance which are most important to the lender. PD

Art is a senior vice president and the manager of agribusiness banking at Bank of the West’s office in Fort Collins, Colorado.

References omitted due to space but are available upon request to .

Dairy management can see a storm coming and generate a plan to attack the issue before it becomes a problem. Photo by PD staff.

Art Moessner
  • Art Moessner

  • Senior Vice President
  • Bank of the West
  • Email Art Moessner