The Heat Is On for California Dairies

Can a proposed Federal Order overcome California’s worsening drought, rising costs and the lure of profitable nut crops?

California dairy producer Devin Gioletti says four years of drought have cost his family operation hundreds of thousands of dollars, from higher irrigation costs to lost income from fallowed crops.

But there’s another dynamic at work that may be as big a game-changer for California’s dairies as the drought, Gioletti and other producers say.

A major shift to permanent crops, particularly almonds, pistachios and walnuts, is consuming acreage once planted to dairy feed crops. That relentless expansion has swallowed fields of cotton, alfalfa and corn silage and increased competition for new production ground and ever-shrinking water supplies. It’s raised rent and land values and forced dairies to work harder to find affordable feed. Even dairy producers are feeling the pull, with many adding orchards or vineyards to their own operations or replacing portions of feed-crop acreage with permanent crop plantings.

“It’s just as big a factor as the drought,” says Gioletti, who milks 2,300 cows near Turlock, Calif. “Almonds are blowing everything else away.”

Gioletti’s family operation also farms 1,700 acres of corn and oats, 300 of alfalfa and--yes--250 acres of almonds.

In California, a major shift to permanent crops, particularly almonds, pistachios and walnuts, is consuming acreage once planted to dairy feed crops.

Across California’s Central Valley, where 99% of U.S. almonds are grown, almond acreage has increased to 940,000 acres, up 47% in the last 10 years. Only hay accounts for more acreage in California, with vineyards ranking third, just behind almonds. Walnuts and pistachios are now seventh and tenth, respectively.

Unrelenting global demand and strong prices are driving the growth of these permanent crops. Today, almond growers can gross from $7,000 to $12,000 an acre. Competition for land to plant crops like almonds has driven prices to $25,000 and more per acre.

“There’s never been an opportunity like that in agriculture,” Gioletti says. “In every dairy producer’s mind, there’s the thought, ‘Why go through the hassles of regulations and hard work when I can make more with almonds and have a better lifestyle?’”

California dairy producers need opportunities, even after 2014’s money-making year. With the 40% drop in milk prices from last year, many are seeing margins dip below their cost of production. That’s no small matter in the nation’s No. 1 dairy state, which produced 42.337 billion pounds of milk in 2014. California also leads the nation in the number of milk cows, with 1.78 million.

While feed costs have moderated some 15-30% from last year, concerns about feed availability and price are likely to intensify along with the summer heat of the Central Valley. That’s where most of the Golden State’s 1,485 dairies are located. Also high on the list of California’s dairy concerns: rising inputs, such as labor and energy, and fears of water shortages and water-well breakdowns.

Four consecutive years of below-normal snow and rain have depleted California’s mountain snowpack and reservoirs to less than 20% of normal. Federal and state cutbacks mean many farmers will receive no surface water in 2015. That leaves only groundwater to irrigate crops. Farmers are waiting in line to drill new wells or upgrade the ones they already have, even as concerns grow about groundwater over-drafting.

For dairy producers, those water concerns will alter 2015 crop choices.

Melvin Simoes at his dairy near Tulare, Calif.

“You’re going to see a lot less corn planted and more milo and sorghum,” says dairy producer Melvin Simoes. “They’re not as good a quality of feed, but they only take a couple of waterings.”

Simoes milks 1,600 cows 3X near Tulare, Calif. With his milk prices down to $14 per cwt., his operation is tightening the screws. “We’re trying to milk just the top cows,” he says. “We’ve prepaid a lot of things, like medicine and feed.”

Strong beef prices are helping Simoes Dairy, as are lower feed costs. Rolled corn prices have dropped to about $200 a ton, down from last year’s $300. But, while alfalfa prices have fallen to the $280 per-ton range from 2014’s $325, Simoes worries that won’t last.

“There are so many more trees and a lot less alfalfa in the Central Valley,” says Simoes, who recently converted 160 acres to almond production. “Once we all start competing for alfalfa, that will drive the price up.”

“I can navigate through cheap milk prices, but I can’t navigate without water,” says Mel Medeiros, here at his dairy near Riverdale, Calif.

For now, Mel Medeiros is cushioned from feed scarcity at his two dairies near Riverdale, Calif. He has a large carryover of feed rations, which he’ll use to help feed the 1,500 cows he milks. But the drought weighs heavily on him.

“I can navigate through cheap milk prices, but I can’t navigate without water,” Medeiros says.

Whether California’s 2015 milk production will decline in the face of these challenges is unclear. Gioletti says his family’s dairy will maintain output at normal levels. Simoes isn’t sure which way his production will go. If it’s an especially hot summer in the Central Valley, output will drop as cows struggle to produce milk, says Medeiros. California’s January milk output fell 2.6% from year-earlier levels. [Editor's update: USDA's milk production report for February 2015 showed California's milk output dropped 3.8% from February 2014.] Whether that drop reflected lower milk prices or drought-related concerns, it could be a sign what’s to come.

Against that backdrop, an effort is underway to bring more change to the state’s dairy industry.

The state’s three largest dairy cooperatives--Dairy Farmers of America, California Dairies Inc. and Land O’Lakes--petitioned USDA Feb. 4 to create a Federal Milk Marketing Order for California. They hope the move will lead to higher milk prices for California producers.

Many believe California’s current state pricing structure, in place for more than 60 years, has substantially underpaid its dairy producers.

“For far too long, California’s dairy families have struggled under a system that artificially discounts the value of the milk they produce, to the tune of more than $1.5 billion in the past five years,” says Sybrand Vander Dussen, president of the Milk Producers Council.

California dairy producers are waiting to see what happens over the next year or two of the petition’s life.

The change to a Federal Order could be “good for California dairymen,” says Gioletti, who is a board member of Western United Dairymen, which supports the petition. “It could help bring more income to dairies and lessen the desire to exit the industry or grow other crops.

“But we need to be cautious,” he adds. “By the time of the producer referendum, it could look a lot different. The processors will be involved and the final rules can be changed.”

Medeiros supports the Federal Order but believes it will ultimately bring California producers only 80-95 cents more per cwt.

“Will it save us?” he asks. “No, because we’re competing with almonds and higher input costs. I need $28 milk.”

In the meantime, California dairy producers are bracing for a rough spring and summer.

“The party’s over from 2014,” Gioletti says.

Simoes agrees. He’s holding off repairing the shades of his freestall barns and pouring concrete until he knows which direction prices are headed.

“It’s a weird time in the dairy business with these fluctuating prices,” says Simoes. “We’ve gotten better operating when times are bad than when times are good. I just put on my boots every day and try to figure out how much milk I can put in the tank for as cheap as I can.”

California Petitions for a Federal Milk Marketing Order

On Feb. 4, Land O’Lakes, California Dairies Inc. and Dairy Farmers of America petitioned USDA to create a Federal Milk Marketing Order for California.

“This marks the first time in our history that California’s major cooperatives--who collectively represent more than 75% of our state’s milk production--have asked to initiate this process,” says Rob Vandenheuvel, the Milk Producer Council’s executive director.

That’s significant, he adds, because the ultimate approval of a Federal Order in California is subject to a referendum vote of dairy farmers. A two-thirds majority support is needed for approval, and USDA allows cooperatives the option of bloc voting on behalf of their members.

As the first step in the Federal Order process, which could take up to two years, USDA will accept additional proposals from dairy interests regarding a California FMMO until April 10, 2015.

The federal agency also plans to host public outreach hearings in California in May. Those USDA sessions won’t likely conclude until 2016, Vandenheuvel says.

Vandenheuvel offers these highlights of the FMMO proposal:

• California would have the same pricing formulas/system as all other Federal Orders for all classes of milk (no more “California discount”).

• The California quota program would continue as it is today, providing a monthly payment above the blend price to quota owners.

• The transportation and fortification subsidy programs, both part of the California system, would continue under the proposed Federal Order.

• All California plants purchasing milk from California Grade A dairy producers would be pool plants. Voluntary depooling of any class of milk will not be permitted.  

• All dairy producers throughout California would receive the same blend price (notwithstanding the quota payments received by quota-holders), just as all California producers currently receive the same overbase price.

Learn more about the proposal here.