By Janet Kubat Willette
jkubat@agrinews.com
ROCHESTER, Minn. — It’s a challenging time to see the road ahead, an AgStar senior vice president said at the Dairy Policy Conference.
Joe Deufel, AgStar senior vice president and chief credit officer, said dairy enterprises make up about 10 percent of AgStar’s portfolio. Grain is the company’s largest enterprise, followed by agribusinesses, swine and dairy.
AgStar serves 69 counties in Wisconsin and Minnesota. It has more than 23,000 clients and nearly 600 employees. AgStar has $5 billion in loan assets.
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AgStar’s dairy portfolio was strong at the end of 2008, with less than 2 percent in unacceptable ranges, but he expects that’s deteriorated due to low milk prices. A loss of $200 to $400 per cow adds up fast, Deufel said.
The typical dairy in AgStar’s portfolio has 200 to 300 cows and involves multiple families. Their cost of production is $16 to $17 per hundredweight and most are diversified, he said. Their production per cow is more than 22,000 pounds and they grow or control their own replacements.
The dairies had a good year in 2008, he said, with earnings in the $300 to $800 per cow range. Working capital and owner equity improved. Traditionally, dairies have less liquidity, but Deufel wants dairies to work on this. This isn’t the time, but when milk prices recover, he asked milk producers at the April 8 conference to increase their liquidity. He encourages producers to be aggressive and ongoing in their forecasting.
AgStar has assistance programs available to help its clients who are experiencing financial stress, Deufel said. Assistance may include deferring principle payments. Communication is the most important part of a relationship between a lender and a client, he said.
"We’re committed to work with our clients," Deufel said.
Each bank is unique and how it sits today depends not only on its loan portfolio, but also its investment portfolio. He predicted some lenders will exit from certain industries in an attempt to rebalance their portfolio. AgStar has worked to diversify its portfolio in the last decade, Deufel said.
He said lending institutions may also do things differently because of regulatory pressure.
Deufel also shared information from a recently commissioned AgStar real estate value study. The study compared 2008 to the 1980s and found that farm income is better, equity is stronger and the debt to equity ratio is a third of what it was in the 1980s.
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The study found there’s the potential for land values to slip 15 percent to 20 percent, he said.
"It is not the bubble … the huge bubble that we saw in the 1980s," he said.
Fair and medium quality land as well as recreational land are decreasing in value, while high quality land is still selling well, Deufel said.
In the long-term things will be OK, said Toby Madden, a regional economist with the Federal Reserve Bank of Minneapolis.
Madden said the housing boom was an artificial demand stimulus and its collapse has left many people unemployed, including his son, a cousin and a brother.
The nation must decide who will take the losses from all the people who took out loans they can’t repay, Madden said.
History has shown that if the nation deals with the problem directly, there will be significant expansion following the downturn. On the other hand, if there is hand-holding, the economy will be stagnant for a long period of time.
During every recession, people have adjusted and done well.
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"It’s not all that bad," Madden said. "Certain sectors are recovering and certain sectors haven’t been hit yet."
