Economic crisis imperils dairy farms

Lancaster County dairy farmer Dale R. Hershey recently spent some sleepless nights riding his stationary bicycle, debating whether to endure an expected $70,000 loss this year or sell out.

Hershey,  61, lost $10,000 in February - his milk check was half what it was a year ago because of a breathtaking collapse in milk prices.

"When you're losing money every day, it just sort of takes the love out of what you do," he said last week.

Partners with two brothers on a property that has been in the family since 1867, and where last week alfalfa and rye fields were a lush green, Hershey decided to stick it out, partly because he believes the worst is over.

Milk prices have always been cyclical, swinging between highs and lows because of relatively small changes in supply and demand, and usually not in tune with the overall economy.

But the current slump is especially treacherous because it coincides with a deep global recession that has crippled dairy exports and a credit downturn that is straining banks when farmers need to tap lines of credit just to pay their bills.

Milk prices paid to farmers peaked in July, during the commodities bubble, in the mid-$20s for 100 pounds, or about 8.6 gallons. Now the price is about $12, which means farmers lose $3 to $7 for every hundredweight of milk they ship because their costs have not fallen as far, experts said.

"These margins are historically low margins. We all have our fingers crossed that come August, September, it's going to look like we're pulling out of this," said John Frey, executive director of the state-sponsored Center for Dairy Excellence in Harrisburg.

"If we don't, it will forever change the dairy and agriculture industry in Pennsylvania. It's not a time to be taken lightly," Frey said.

A quick turnaround is crucial for agriculture in Lancaster County, which in the 2007 agricultural census ranked 10th nationwide in the value of dairy production and ninth in the number of cows.

Bankers, farmers, and other observers said it was uncertain how long farmers there and elsewhere in the state, the nation's fifth-biggest dairy producer, could hang on without an uptick.

Already, large herds are coming under the gavel. At the end of January, a Lancaster County herd of 1,400 Holsteins was sold because, according to reports, the owners did not want to go through the downturn.

One of the largest herds in Chester County - 910 Holsteins, including 400 heifers - is scheduled to be sold at auction Thursday and Friday. Owner John St. John said last week he had to check with his lawyer before he could comment, and he did not return follow-up calls to the farm near New London.

Sandy Wieber, a spokeswoman for St. John's lender, MidAtlantic Farm Credit in Westminster, Md., said management could not comment on individual borrowers.

MidAtlantic Farm Credit chief executive Bob Frazee said the cooperative lender, established in 1916 as part of the federal Farm Credit System to ensure a steady supply of loans to agriculture, was doing all it could to help.

However, speaking generally about the dairy industry, Frazee said that sometimes the conversation with a farmer starts with the question: "Is more credit the right and constructive thing for your business?" That can sometimes lead to a sale.

Lenders at Fulton Bank, HomeTowne Heritage Bank, Susquehanna Bank, and AgChoice Farm Credit said that they had not yet seen a huge spike in delinquencies, but that they also work closely with farmers, opening lines of credit, temporarily converting loans to interest-only, and reducing payments by stretching them out.

Walter Zeisit, who lives near Dale Hershey, is in a tough spot with HomeTowne, a division of National Penn Bancorp Inc. in Boyertown. The 52-year-old dairy farmer borrowed $800,000 from HomeTowne to build a barn to expand his herd from 65 to 150. But the loan was not enough to finish the barn, and the bank was reluctant to lend more.

He said his representative at the bank, another Dale R. Hershey, was still trying to work something out.

Zeisit, who started using the barn a month ago, still owes contractors $200,000. The barn, which has a high arched roof of plastic-coated canvas with thick and cheerful red stripes that stand out from afar, had been planned for five years, he said.

Like every other dairy farmer, Zeisit is losing money every day, but he knows the contractors need to be paid. He is thinking of selling some road frontage for development to pay those bills, or selling out entirely. His children are against that, he said.

He's tired of reading in agricultural publications, such as the weekly Lancaster Farming, that farmers need to tighten up.

"I've been tightening up belts since I'm living," he said.

These days, it's hard to find a dairy farmer who is not reeling.

"A year like this probably sets us back five years," said Duane Hershey, who milks 500 Holsteins on a farm near Cochranville in western Chester County. "We have to go back and ask to have our loans extended."

Fulton Bank has been good to work with, Duane Hershey said, but he hopes never to experience another year as bad as this one. If he does, he has to be prepared.

"We're going to need to put some money back to survive years like this. If I've learned anything, it's going to be that," he said,

To cut costs, he is examining every aspect of his operations. One day last week, he spent an hour on the phone, looking for a way to save money on feed additives for calves. He found that if he buys his monthly supply in one four-ton load instead of in 50-pound bags, he can save $100 a month.

Dairy farmer Dale Hershey has a broad view of agriculture from his seats on the boards of MidAtlantic Farm Credit and AgFirst Farm Credit, and he knows that optimistic projections for a dairy turnaround later this year could prove wrong.

In that case, he would have resort to selling land.

"It was meant to be our retirement," he said, "but if it has to become our survival, it becomes our survival."