Saturday, January 22, 2011

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.


Anonymous said...

Dairy, hog, cattle...choose your poison.If your livelyhood is connected to the meat/milk industry, hang on tight! $6 corn and $50 hogs just won't compute, while the experts say it's just below break even. Get real. Last time I looked $4.80 corn begat a breakeven at $60+. This livestock industry is headed south in the next 30 yrs, as in Mex. or Brazil. Animal rights, over regs( cage free hens), and a young generation unwilling to risk mega bucks on livestock.

JRthe original said...

Good post John. I think we are turning but very slowly. I have heard to many stories just like your first one.

Chuck said...

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

Well, what can we (grain producers) do to make it better?

John Phipps said...


1. Don't dance in the end zone.
2. This year, grow like it was your farm that depended on it.
3. Lose all ethanol subsidies. Hold the mandate at 10%.

Dave in Virginia said...

It's Monday and I just read the post on the Dairy industry. While I understand what you're saying and don't really disagree there is another side.
I can remember when the only farmers buying new machinery were Dairy farmers and grain farmers that were almost broke. Even today the only grain farmers not in total hock to the banks are those using 20+ year only equipment.
Yes we do need a better balance--the real question is "What is that balance?" It certainly isn't one sector riding in new equipment with cuban cigars and the other sector wearing rags.

Derek said...

John, I appreciate your recurring commentary on the dairy industry. This year has brought some of your best posts yet. You have repeatedly hinted at the dairy industry following the trends of hogs, chickens, grain, etc. of huge specialized operations. IMHO the last few years of high grain prices have been easier on the smaller producer who grows his own feed and has the dairy sized where he can additionally sell some grain from the available land base. It looks like the fatal problem for both Dean's and dairy farmers is too much debt. As you mention, no size of operation is exempt from this problem. IMHO too big to fail just means too big.
The cascading of cow prices you mention has already occurred for replacement dairy cattle--there is absolutely no demand. The one blessing we have is the strong cull cow prices. It looks to me like the best answer is cull, cull, and cull some more, and then sell some more grain. These dynamics will change one day, and the ones with the staying power will be here to enjoy it.

John Phipps said...


It is fair to cite the cyclical nature of our various sectors, but we risk wandering into "just world" defenses here, i.e. that dairy farmers somehow deserve this fate since the world eventually evens out and is inherently just. (I think I posted about this philosophy)

My view is there are definite questions of degree when allocating causes (blame) and seeking remedies. Certainly the dairy sector has shackled themselves in a bizarre non-market pricing scheme that prevents more efficient testing of businesses, and virtually guarantees catastrophic dislocations because of its inherent inflexibility.

But the market consequences of the dairy marketing policy pale, I believe in comparison with the expensive and rigid mandate for ethanol.

Indeed, mandates are being attacked - often by grain farmers - in other disputes: EPA, health care, NAIS, etc. How we justify ours while holding mandates are wrong for other beneficiaries mystifies me.

Perhaps it would be best to stand aside let corn prices eliminate the higher costs dairies. But that action risks one of the most powerful poster children for our "advocacy" campaigns. It also increases our reliance on ethanol to support our corn prices - a real political gamble IMHO. And this action will further align farmers vertically (diary/grain/hogs)rather than horizontally (farmers). This is why the AFBF has become impotent to reach policy decisions as witnessed by their inability to identify any budget cuts while demanding they be made.

I agree dairy has been up when we were down. But the scope of the possible washout should corn continue to climb would not leave grain farmers unscathed in the long run. Nor is it absolutely necessary.

I'll try to ponder more on what we might do.

Thanks for making me re-examine my position.

Derek said...

I agree with your concern about ethanol policy and what long-term effects it will have. However, I am one of the few dairy farmers who think dairy can coexist with ethanol. The key is DDGs. This constitutes the majority of feed we purchase. Perhaps some of the ethanol incentives could be targeted more to the DDGs to somehow ease the burden on the livestock sectors.
I guess my real point was that in an era of specialization, a diversified farm (dairy/grain)could still see some advantages.