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Banking and Financial Matters Blog

Are Too Many Eggs in One Basket?

Authored by John D. Leary
Posted on April 19, 2017
Filed under Banking and Financial Matters

In the last two weeks, 75 Wisconsin dairy farmers were notified by their dairy that it could not accept their milk.  The dairy and its farmer suppliers are caught in a U.S.-Canada trade dispute over “ultra-filtered” milk.  Almost overnight, a market disappeared. The net result is a million pounds of milk per day in Wisconsin needs a new home, and time and options are limited. 

In 2016, Wisconsin farmers exported more than $3.4 billion worth of agricultural products to 150 countries.  https://datcp.wi.gov/Documents/2016AgExportHighlights.pdf.  Of that total, over 50% was exported to Canada and Mexico, which are signatories to the North American Free Trade Agreement (“NAFTA”).  Another 31% went to China, Korea, and Japan. 

More than just agricultural borrowers may be affected by trade policy.  In total in 2016, Wisconsin alone exported over $21 billion of products.  http://inwisconsin.com/export/wisconsin-export-data/

For Wisconsin dairy farmers, the closing of the Canadian ultra-filtered milk market and the nature of dairy farmer’s general reliance on a single processor has conspired to threaten the existence of dozens of farms, and is a grim reminder of the effect trade disputes can have on a business.

The rejection of the Trans Pacific Partnership Trade Agreement (TPP), the potential renegotiation of the NAFTA, and a tougher trade stance with China may all further impact future exports.

Trade policy is not the only cause of cancellation notices in Wisconsin this spring.  Another 20 dairy farmers received cancellation notices due to their dairy losing a cheese contract.

The immediate concern for lenders is if their borrowers are among those receiving cancellation notices.  With the spring flush approaching, there is going to be more milk, not less, and many dairy processing facilities are already approaching full capacity.  Do your borrowers have markets for their milk?

Dairy farms are not the only agricultural sector affected.  For example, Mexico is threatening to find alternate sources for corn and other U.S. exports should a threatened 20% border tax be imposed to pay for a border wall between the U.S. and Mexico.  http://www.agriculture.com/news/crops/mexico-prepared-to-source-south-american-corn.    

The recent news of nearly 100 dairy farmers receiving cancellation notices is an unfortunate reminder of the old adage not to put all your eggs in one basket.  Even if you don’t have a borrower directly affected, lenders should still heed the reminder of risks of trade policy and inability to diversify.

For dairy farmers, that means reviewing your borrower’s milk marketing efforts and assessing the risk.  Is there a contract, how long is it for, can it be cancelled, if so, what are the notice requirements, how strong is the buyer, are there alternative buyers, how can your borrower reduce risks, etc.?  If exports diminish, can the domestic market absorb the difference?  If not, what is the impact on pricing?

Most business don’t have the same perishable goods risks a dairy farmer does, but both the potential changes in trade policy and the inability to diversify markets are current and significant risks for borrowers in many sectors.  And over concentration in market sectors can be a risk for lenders as well.