By CAROL RYAN DUMAS
The fragility of dairy operations in California means the industry will have to find more ways to maximize the value of milk for producers if the state's dairy industry is to remain viable, a major lender says.
California dairies saw substantial equity erosion when milk prices dropped in 2009, and are suffering from skyrocketing feed costs.
In a report released last week by its food and agribusiness research and advisory group, Rabobank recommended a collaborative effort between processors and producers, pointing out the opportunities in developing export markets.
California's price to dairy producers have averaged $1.50 per hundredweight of milk less than the U.S. average since 2007, a difference of about $400,000 for an average California dairy with 1,100 milking cows, Rabobank reported.
Long-term profitability will depend on meeting the growing global demand for a variety of milk byproducts for such products as sports drinks and baby formula, tailoring products for the export market and building relationship with foreign customers, said Vernon Crowder, senior vice president with Rabobank and co-author of the report.
"Such changes will involve infrastructure investments and practices that differ from current industry standards, including less reliance on milk marketing orders," he said.
Milk marketing orders can discourage investment, lower incentives to divert milk to higher value use, encourage overproduction, make long-term contracts more difficult, and minimize profits, he said.
The focus and opportunity is in making export markets a primary market for California dairy products, and the industry atop focus on milk pricing formulas and focus on markets, he said.
California's exports now represent 20 percent of its milk production, but the industry is processing products tailored for domestic markets and not capturing the higher value of products tailored for the world, he said.
Historically, returns for dairy producers on the world market were less competitive than domestic returns, discouraging California processors from making the necessary infrastructure changes to produce more marketable products, according to the report. But the export market has become more attractive since 2008.
James DeJong, dairy industry analyst with Rabobank and co-author of the report, said California has an advantage in the export market due to its access to the West Coast and particularly Asian countries.
Historically, California has provided incentives to processors to ship cheese to the rest of the U.S. But, he said, it's cheaper to ship to China than it is to New York.
Considering fuel cost and the high price of grain for feed, California's dairymen need to look west for opportunity to raise the value of their milk, Crowder said.
Processors will need to be the driving force behind innovation to develop new products, increase capacity and developing relationships with key export customers. Cooperatives, in particular, will be a critical factor for industry success and will require substantial support from their members.
But it can be done, Crowder said.
Northwest Dairy Association (Darigold) has been successful by engaging in the world market and investing in different product lines. Prices to its dairy producer members in Oregon and Washington averaged $1.42 per hundredweight of milk higher than California's from 2007 through 2011, Rabobank reported.
In the long term, if California dairies are going to succeed, they have to get more value for their milk, and there's opportunity abroad, Crowder said.