Rabobank: California dairies at a pivotal point

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With many dairy operations still trying to gain ground from the 2009 collapse of the sector, Rabobank’s Food & Agribusiness Research and Advisory (FAR) group is recommending that the industry work collaboratively to find more ways to maximize the value of milk for California producers.

The bank’s research team released a report today titled “California Dairies: Getting More Moola,” which details suggestions/recommendations for maximizing value and cites a variety of reasons why the traditional way of solving milk pricing issues isn’t necessarily the answer producers need.

The report, authored by Vernon Crowder, agricultural economist and senior vice president with Rabobank, and James DeJong, dairy industry analyst with Rabobank, addresses a variety of opportunities for California’s dairy industry to be profitable for the long-­‐term, including the pivotal role that processors will play in the future of the industry.

“The time really has come for California’s dairies to make some necessary and long overdue changes that bring the industry more inline with a free market system,” said Crowder. “Such changes will involve infrastructure investments and practices that differ from current industry standards, including less reliance on milk marketing orders.”

In the past, California producers have leaned heavily on milk marketing orders (MMO) to protect them from unbalanced pricing, and although the various systems have been refined over several decades, the structure of setting minimum prices and redistributing milk revenue to producers remains the same. Crowder and DeJong’s report notes that while such policies have worked in the past, the future progress of the industry now depends on product innovation that increases the underlying value of its dairy products.

“There’s a growing demand on the world market for a variety of milk by-­‐products and California dairies need to position themselves to capture that market share,” said Crowder. “California dairies can’t simply continue to produce and market products for the satisfaction of their own domestic market, they really have to think globally.”

Crowder and DeJong’s report recognizes that historically the returns available on the world market for dairy products were less competitive than domestic returns, discouraging California processors from making the necessary infrastructure changes to produce more marketable exports.

Since 2008 however, the export market has become much more attractive and countries like New Zealand, where production also greatly exceeds local consumption, have enjoyed the benefits of making products that are tailored to the world market. The report suggests that dairy processors will need to be the driving force behind such innovation to develop new products, taking steps to increase their production capacity, maintain new production capacity and develop relationships with key export customers to make sure members are receiving the highest value for their products.

The report references The Northwest Dairy Association (Darigold), a cooperative servicing members in the Pacific Northwest, as a well executed example. The organization’s exporting practices have been one of the keys in their ability to pay its Oregon and Washington members, on average, USD 1.42 per cwt higher than California dairy averages from 2007 to 2011.

The report concludes that while California dairies have historically benefited from MMOs, the time has come for the industry to take steps that allow dairies to compete in the global market and invest in the necessary infrastructure that will enable them to produce products that cater to export customers’ demands. A full copy of the report is available to the media upon request. Click here for more information.

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MA  |  March, 13, 2013 at 08:57 PM

Obviously these FAR experts don't understand that the only way the milk price will substantially improve is for the industry to get out of the expansion mode that so many of our producers embrace as their road to riches...shorten up the milk supply and the price will head up to more favorable levels...to try to satisfy a global market is ridiculous....the only thing a global market does is soak up the milk that we shouldn't have made in the first place. There is no way that we should think of competing with the down under milk producing states for a Class lV market. If anyone wants to produce milk for a $16 global market, they had better think again!!

ID  |  March, 14, 2013 at 11:56 PM

You should check world prices and see that the down under folks are getting about the same per hundredweight as us. They have expanded production and the global demand is still outpacing their growth capabilities. New Zealand has been very profitable but when their price matches ours, and they can't keep their market supplied... Those buyers come to us. Trying to stay in a domestic market and give ourselves supply management is a lazy excuse for being better at innovation and development of markets. Not to mention, pretty dang socialist.

Jo Dairyman    
USA  |  March, 15, 2013 at 07:23 AM

I agree with Hendry! Peter you can't continue to Export Farmer Equity. The Ethanal mandate has caused our feed cost to go up! America has decided to burn feed in their cars. We export less corn. Farmer cannot continue to allow every body who is connected to the dairy industry to make expert the the producer. Even if you grow yor own feed the dairyman is leaving money on the table. Running feed through cows is costing you money if you cannot get a reasonable return. With Imigration, labor, Obama care, ect just how do you think this is gonna work. By the way why doesn't any talk about all the illegals cleaning America's hotel rooms.

NE US  |  March, 16, 2013 at 09:21 PM

When the American dollar gets stronger our milk will be even harder for us to export... I too agree with Henry, I haven't sold my farm three times as S California cities were expanding. We also need to look at our advertising $s. If Budwiser or Coke-a-cola had our advertising firm for one year not only would they fire them, they would of run them up a flag pole.... We keep doing business with the same incompetents..... We can't keep doing the same thing and expect different results, that is a sign of a learning disability!!!!!!!!!!!

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