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Managing a Dairy in Crisis: A Lender’s Guide

Managing a failing dairy is always a challenge for agricultural lenders. The complexity of large dairies, the nature of the collateral (live animals and perishable feeds), and the tight margins that exist when milk prices fall or corn prices rise (or both), create substantial risk for lenders, and little room for error.

Only a well-managed dairy can survive in such a market. Dairy operations with weak management are the first to fall. The temptation to cut corners is high for these dairymen. This might delay a non-payment default, but more often than not it puts the dairy into a tailspin from which it is not likely to recover.

The key for lenders is to spot trouble early. A lender fooled by a continuous stream of timely payments, while herd maintenance is ignored to save cash for debt service, is likely to face a hopeless situation when loan payments are finally missed.

Getting a well-qualified dairy consultant inside the dairy, and doing so early, is therefore critical. It is true that consultants often discover serious problems, and just as often ask for Bank funding to fix them, but fear of this is no reason for a lender to wait. In many situations the bleeding can be stopped quickly.

A darkened dairy, but one that is fully-permitted, can and often does bring a higher auction price than the exact same dairy in fully operational mode. It is thus possible to take a failing dairy, sell the animals and feed, clean the place up, and get a better return than trying to manage the dairy as a going concern, typically an expensive and labor-intensive undertaking. The point is that it is often possible to drastically cut current expenses and increase collateral values at the same time.

If, however, the dairy is viable as a going concern, a skilled consultant can often generate plus-side margin sufficient to pay receiver-related and operational expenses as well as debt service. In almost every case, then, an early call to a highly-qualified dairy crisis manager will avoid, or at least lower, the Bank's losses.

© 2020 Varnum LLPNational Law Review, Volume VII, Number 31


About this Author

Michael S. McElwee, Varnum Law Firm, Financial Services and Bankruptcy Attorney

Mike has a multi-state practice focused on debt restructuring and complex commercial litigation. He serves many businesses, but specializes in automotive, agriculture and telecommunications. He also regularly represents health care research facilities, ambulance agencies, and other health care clients. Mike served as a law clerk to the late Honorable David E. Nims, a United States Bankruptcy Judge. Prior to joining Varnum, Mike was an FBI agent working in foreign counter-intelligence.