MONTICELLO, Wis. - As lender Dean P. Havens winds his way through Wisconsin's dairy country on a sultry late spring day, he comes upon one of the casualties of a dairy industry soured for some small farmers.
He points out a farm whose owner sold his herd of milk cows and paid off debt. The farmer is still there - but gone from the competitive dairy business, which is forcing producers and the bankers who finance them to face some tough realities.
"It's one less guy for me to loan to," said Mr. Havens, agricultural loan officer at $35 million-asset Bank of Monticello, as he navigated the bank's station wagon through the south-central Wisconsin farm country.
"What this all boils down to is, who you're going to loan money to?"
In a state with a $17 billion-a-year dairy business, lenders are wondering whether highly leveraged smaller farmers can survive.
Wisconsin farmers and bankers blame federal policies that have encouraged milk production in western states. California won the production crown from Wisconsin in 1993.
In 1984, 17.36% of U.S. milk production came from Wisconsin. Last year the share was down to 14.59%, according to the state's Agriculture Department.
Wisconsin produced 6.7% this March than a year earlier, reported University of Wisconsin, Madison, professor Bob Cropp, who tracks the dairy industry. But milk prices haven't changed much in a decade, so farmers need to produce more per cow to stay in business.
It's particularly tough for the smaller dairy farmer without much cash, Mr. Havens said. He has seen at least a quarter of the small producers leave the business in recent years.
"I worry about my farmers a lot," he said. "I see too much of them right now. They need me more than I want them to."
Rick Risberg, vice president, $100 million-asset F&M Bank, Kaukauna, agreed. "I've seen more need for closer financial supervision and people looking for advice."
To be competitive, some farmers are specializing and modernizing operations with new technology, while others are staying the course and depending more on off-farm income, said Stephen Beaver, director of agriculture and rural economic development at the Wisconsin Department of Development.
Technologies include improvements like the $12,900 Total Mixed Ration machine - which essentially mixes different foods for cows - that Mr. Havens' customer Steve Babler bought last month to help increase milk production from his 47 cows.
"This is the kind of guy who's going to make it," Mr. Havens said. "He's aggressive enough and cautious enough."
Other available improvements include automated milking parlors, which help farmers milk cows faster, and embryo transplants to breed the best calves.
"When we adopt technology, there's a price tag that goes with it," said Dwaine R. Sievers, president of $42 million-asset M&I Bank of Cambridge.
Bankers must determine whether farm management can successfully take on larger operations, he said. "We really have to treat the farm of the future as a business. A lot of us have looked at people who've borrowed money for 30 years and not put them to the test."
In addition, many larger farms are expanding. "These days there's people with 100 cows looking to expand to 300 or 600," Mr. Risberg said. "The size of the leap is much larger than it was in the past."
That has led to more competition between financial institutions for the business, he said.
And loans for some purchases are nabbed by the equipment dealer; Mr. Babler got a one-year interest-free deal from his dealer, Mr. Havens said.
Also, some expansions can move customers beyond the lending limits of smaller banks.
As large farms expand, many smaller dairies have disappeared. The number of dairy farms in Wisconsin decreased to 29,000 in 1994 from 43,000 a decade earlier. That actually was less of a decrease than total U.S. dairy farms, which dropped to 149,990 last year from 284,700 in 1984.
Some farmers, often nearing retirement, have sold their land to nonfarm developers for higher prices than they could get from farmers.
But there's still plenty of loan demand, Mr. Havens said. "You have to figure out which ones are the good credit."
So far banks don't seem to be having major loan problems or losses from dairy farmers.
"It is more concern about the future," said Mr. Sievers, who also coordinates farm lending for $12 billion-asset Marshall & Ilsley Corp., which has $400 million in agriculture loans across the state.
Looking ahead, the state is focusing on the industry with a program headed by Mr. Beaver called the Dairy 2020 initiative, which includes 12 dairy-related representatives including Mr. Sievers.
Its mission is to improve the competitive position of the state's dairy industry and its plans include exploring guaranteed loan programs to help farmers obtain money for modernization.
Despite their concerns, lenders are optimistic about the business. "I think there will always be small operations that continue to be profitable," Mr. Risberg said. "This isn't an end to the small dairy farmer."
Mr. Havens said he may have to expand his market area. But, "One of the advantages of a small bank (is) we look at ways to do things instead of turn them down," Mr. Havens said. "That's why I think we'll be in business."
And whether it's Mr. Babler investing in new equipment or Sandy Knoll, farming on her own since last year, Mr. Havens trusts his hunches for knowing who can survive.
"I can tell you five minutes after meeting somebody whether they're going to make it or not," he said.
