Experts push for risk management, more market information

By WES SANDER
Capital Press

SACRAMENTO -- Industry experts told lawmakers that dairy producers need better risk-management strategies and improved access to global market information to survive the next downturn.

The Assembly Agriculture Committee is seeking ideas for legislation to help smooth market volatility in the dairy industry.

At a Jan. 13 hearing of the Assembly agriculture committee, chairwoman Kathleen Galgiani, D-Livingston, referenced the terms "burn rate," which is the speed a dairy owner depletes savings in order to stay afloat, and the "walking dead," which are dairy owners who have called it quits but cannot find buyers for their assets.

"Hopefully we can find a way to keep this (industry) a little bit more stable," said Assemblyman Tom Berryhill, R-Modesto, the committee's vice chair.

"We cannot afford to lose the small dairyman that's out there," Berryhill said. "We've lost a lot of folks, and there are a lot of folks right on the edge."

Economist and dairy consultant James Gruebele said the industry will pull out of its market dip this year.

"I do expect 2010 to be a much better year for dairymen than 2009 was," Gruebele said. "World prices are recovering. The markets are working."

Gruebele said dairy producers could benefit from better risk management. While producers used futures contracts to hedge their feed prices, they didn't do so to secure revenues.

"They didn't do anything on the milk side," Gruebele said. "And that is the worst of all worlds, because they contracted feed at high prices, and feed prices came down. They didn't do it on the milk side, and milk prices fell. So it was a double-whammy."

Bill Schiek, an economist with the Dairy Institute of California, said hedging is complicated by a scarcity of reliable information on factors affecting global markets. A 2008 drought in New Zealand impacted the world supply, but U.S. producers didn't see it coming, Schiek said.

"There are not really good, uniform international suppliers of information," Schiek said. "USDA is a great wealth of information. Unfortunately, other countries don't have the same data collecting force that USDA has, and it's a bit harder to put the information together."

Sean Haynes, a portfolio manager with Rabobank, said that dairies will need to adopt risk-management strategies to secure funding when their equity dips during future downturns.

"They're going to have to adopt some type of risk-management strategy through (using) contracts, hedging, growing your own feed," Haynes said. "And it's going to be margin management -- not just feed costs, not just milk costs, but how much do I need to break even with my dairy?"

Haynes said only about 5 percent of dairies employ such strategies, and only about half employ sufficient accounting techniques to be able to make the right decisions.

Haynes further suggested that California's dairy industry consider a statewide exporting co-op similar to New Zealand's.

"They have become one of the best worldwide producers of milk products hands-down," Haynes said. "I don't see why California can't do the same thing, given our proximity to ports, given the technical basis that we have ... and the quality of milk, and the (stable) production of milk that we have."