It doesn't get better...

At least in the near-term IMHO for the dairy industry.  I was stunned and dismayed by the comment below from an ag lender:

Your comments about dairy hit home way too hard. As an ag lender with some 150 dairy accounts in our portfolio. We have the 800 numbers for all suicide hotlines in the counties we serve next to EVERY phone, and on every corkboard. We have taken calls from borrowers who are standing on top of the 80' silos and asking why they should not jump. A husband went to the barn recently to milk the cows and when he came back to the house the wife had removed all her clothing from the house and all the children and their pillows were gone. Can you say STRESS! As loan officers were are not trained in these areas of expertiese, but that is our calling at the moment. Trying to get on the learning fast track.

Now I read this morning about collateral damage farther up the value chain.

Companies disappear all the time. Sure, it may be news when large corporations with well-known brands go belly-up. But think about it: Businesses like Circuit City, Northwest Airlines and Countrywide are gone now.

24/7 Wall St. recently looked at a number of large American companies, some of which are owned by foreign companies, to see which will disappear in 2011. A vanishing firm may go bankrupt and its assets sold off, it may be closed after being bought by another company or it may cease to exist due to a merger.

The website looked at a variety of companies: those that are in deep trouble, the merger and acquisitions targets, firms in industries that have too many competitors for any to become highly profitable or corporations that Wall Street believes are worth more in parts than as a whole. The 19 companies below were picked from this universe, because odds they are they won't exist a year from now:
...

Dean Foods
The maker of dairy products like Land O'Lakes and Silk has struggled as much as any other large public company this year. The costs of raw milk, butterfat, soybeans and sugar have risen sharply. Dean Foods has also been crippled by debt. The firm's shares were down as much as 60% at one point during the last 12 months.

Despite all the bad news, hedge fund investor David Tepper bought a 7.35% stake in the company. Dean Foods shares rose 9% after the announcement. Dean has already sold its yogurt business to Schreiber Foods. And Tepper, one of the cleverest investors on Wall Street, has probably bet the balance of Dean Foods will be sold off in parts. Probably the Fresh Dairy Direct-Morningstar and WhiteWave/Alpro business units would draw the most bidders. Watch for Dean to be broken up, to satisfy debtholders and large investors.[More]

The casual references to "demand destruction" floating around the grain pits really masks the reality of the process. We're talking about wiping out an entire level and lifestyle of dairy production. I understand the economics and the fact this process may have artificially delayed by policy for too long - making it even more painful than it might have been. But I still wonder if we are repeating the buildup into too-big-to-fail dairy units.  

I know some lenders are sitting on dubious dairy loans, and not just smaller producers mentioned above. I have heard that they are pressuring regulators to not force them to mark-to-market just like housing lenders struggled with.

But even a slightly-less-than-huge corn crop coupled with the insane drive by the ethanol industry to further skew the corn market by mandate has to be a threat to dairies of every size and consequently lenders of every size. (While it is attracting more bipartisan opponents, the ethanol lobby has been a bad one to bet against.) Plus the resurgence of cotton apparently has dampened optimism about new acres to produce corn. The growing supply-demand balance will not serve corn farmers well in the long run either, as missing customers and consumer resentment will linger for decades.

My great fear is these pressures will not simply downsize the dairy industry but eviscerate it by cascading failures. Consider what cow prices will do when liquidation starts and how that sucks down the little remaining equity in many herds, in turn pressuring more lenders.

I imagine voices in the heads of many producers are screaming "Get out now!" but their hearts cannot embrace the idea. And as the wrenching words of the ag lender above display, I fear small banks especially will suffer with their customers in a valiant, but ultimately futile effort to out-wait this downturn. This market can stay irrational longer than producers can stay solvent - to use the old adage.

This chapter will not end well. And my sector (grain) will not look back with pride on our role.