Conditions Sour for California’s Dairy Farmers

(Wall Street Journal)  – California dairy farmers are retrenching amid falling prices and drought in the largest milk-producing state, a shift that could further reshape the U.S. industry by enabling farmers in other states to expand.

California producers, who pump about a fifth of the nation’s milk supply, say they’re struggling to maintain output as they weather a precipitous slump in the global dairy market and grapple with rising feed costs stemming from yearslong drought. Their travails are prompting at least one large milk processor—California Dairies Inc., a cooperative with nearly $5 billion in annual sales—to limit investments in milk-handling capacity.

In California, “I think we have seen as high as the milk production is going to get,” said Eric Erba, chief strategy officer at California Dairies, which says it produces about 9% of the nation’s raw milk.

Milk output in the Golden State slumped 3% over the first eight months of this year from a year earlier, while overall U.S. output climbed 1.5%, according to federal data.

California dairy farmers’ struggles could extend an industry shake-up.

ENLARGE
For three decades through the 2000s, production moved West, with dairy farmers drawn to California’s ample open land and benign climate. They set up milking operations that were far bigger than those in other states and cheaper to run. Raw-milk output soared, and new dairy-processing plants cropped up. In the early 1990s, California grabbed the country’s milk-production leadership from Wisconsin.

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But since last decade, California’s growth in milk output has slowed. Dairy farmers and industry observers say the rising burden of land costs, environmental permitting and scarce water is making California less attractive than other states.

In traditional dairy states such as Wisconsin, New York and Michigan, all with ample access to water, production has increased over the past five years. New York’s average milk production has climbed 9.9% to 1.16 billion pounds a month since 2010, according to government data.

Some dairy processors—which buy raw milk from farmers and turn it into cheese, butter and other products—are taking note, enabling dairy strongholds like New York and Vermont to draw additional investment in processing capacity.

California dairy farmers have “lost their competitive advantage,” said Jerry Dryer, editor of newsletter Dairy & Food Market Analyst Inc. “There’s clearly a resurgence in the dairy industry in the Upper Midwest” and other traditional dairying areas.

California dairy’s latest troubles stem from a nearly two-year-long spike in raw-milk prices—driven in part by drought in New Zealand—that encouraged farmers globally to ramp up output. Raw-milk prices world-wide have dropped since last fall’s record highs as downshifting growth in emerging markets withers demand. Yet U.S. farmers outside California continue pumping more milk to bolster revenue, further dampening prices.

California dairy producers, close to ports that ship to Asia, were big exporters—and are under particular pressure from the slump, say industry analysts. U.S. dairy exports fell 11% by weight in the first seven months of this year from year-ago levels, according to the U.S. Dairy Export Council. Raw-milk prices in the U.S. are down 35% since September of last year and have hovered around $16.70 per hundred pounds in the past four months, according to the U.S. Department of Agriculture. Meanwhile, a gallon of milk cost on average $2.74 in U.S. stores in the first week of October, down 31% from a year ago.

“All of the pressures of the world market seem to be flushing out in the San Joaquin Valley,” which accounts for nearly 90% of California’s raw-milk production, said Dave Kurzawski, a dairy specialist at commodities brokerage INTL FCStone Financial Inc.

The drought that started in 2012, the worst in California’s modern history, is compounding their problems. Many California dairy farmers are still bruised from a deep price slump during the recession late last decade that drove about 100 farms out of operation in 2012. Now farmers are curtailing production of water-hungry crops like corn and alfalfa used for cow feed, making it more expensive.

Eric Borba is coping by shrinking his milking herd in Porterville, Calif. With cattle prices at lofty levels due to tight supplies, he is sending more animals to slaughter this year, reducing his milking cows by 4% to about 3,500. It cut output by 3% this year versus the same time in 2014.

Meanwhile, like other California dairymen, he’s betting more on alternative investments like tree crops to sustain his business. The 54-year-old in the past three years expanded his land devoted to almond, walnut and plum trees to 500 acres from 300, while reducing to 1,500 the acres on which he grows wheat and other feed crops for his cows.

“It’s just a different mentality today than it was before,” Mr. Borba said. “Instead of trying to milk as many cows as possible, let’s diversify.”