Ask a major-league pork producer what's on his mind after several years of losses and the question will likely be, when are banks and the Farm Credit System going to write down their livestock loans? Why haven't lenders helped to prod the necessary cutback in pork production numbers?

Judgment day for pork, and especially the dairy industry--could come before Christmas, according to ag lenders and bank directors I've interviewed from several parts of the country in recent weeks. Though they asked not to be identified, they described the dilemma they will face as they decide who has the capacity to survive and who has dug themselves too deeply into debt.

Officially, only 3 percent of the Farm Credit System's dairy loans and only 1 percent of its swine loans at mid-year, the Farm Credit Administration reports. But that probably doesn't measure the severe decline in collateral value and net worth that mandate classifying these operations as high risk loans. Last summer, USDA estimated that perhaps 25 percent of the dairies could face financial problems. (Commercial banks are not required to report their problem farm loans by commodity, so it's difficult to assess their exposure.).

"Clearly dairy and hogs are in as serious a situation as any time in my career," one veteran ag lender told me. "Lenders as a group are starting to feel their way and to decide what's the best method to work through problems, but the industry hasn't figured out the best solution yet."

This scenario helps to explain the dilemma: Two or three years ago when some of these new dairies were in the planning phase, they may have invested $7,000 per cow in breeding stock and facilities. Even with substantial money down, they may have $4,000 to $4,500 in debt per cow now, and can't project repayment in any way or form, he says. (He pegs cow values at about $2,000 today).

"Do you foreclose? If you'd recover 60 cents on the dollar--if you wrote the loan down to $3,000 per cow, your losses wouldn't be any less but they might make it. That's the discussion that needs to take place over the next three to six months, but it won't be a universally saluted strategy."

Anyone who lived through the 1980s recalls the animosity generated when some neighbors had loans forgiven or defaulted on their land contracts. People who made great sacrifices to honor their commitments felt cheated. This scenario is likely to replay later this year. What's different now is that federal law requires Farm Credit System lenders to accept terms when a borrower propose less costly workouts than foreclosure.

Large, regional hog players are the closest to "hitting the wall," my lender friend adds, but up to now, they have enjoyed a "too-big-to-fail" status. "You could wreck some farm communities if we let them go under," he says. A lot of small farmers depend on those paychecks from their integrator and may not have other contracting opportunities in their area. When the nation's largest poultry producer, Pilgrim's Pride, declared bankruptcy earlier this year, hundreds of its contractors suffered their own financial problems.

One definite lesson for lenders going forward: The days when someone could build a dairy or a specialized hog or poultry building on just a few acres with just 20 percent down is probably over, at least without a Farm Service Agency government guaranteed loan. Highly specialized facilities on limited acres pose more collateral risk than we can factor into loans today, the lender says, because empty buildings have little resale value.

One hopeful sign is that all farm lenders have been extremely profitable in recent years and say they have the capacity and reserves to absorb some losses and stay well within their regulatory guidelines. That won't make the painful options on debt write-offs any easier though.

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