Dairy Farmers of America’s announcement last week of its plan to build a whole-milk powder plant focused on exports in Fallon, Nev., has the potential to be a four-way win for dairy producers.
Win #1: The plant, with ground breaking likely to come by early summer, will require 2 million pounds of milk per day when it’s operational in late summer 2013. That will require Fallon dairy producers to essentially double cow numbers, or recruit other producers to the region. Already, some producers in the area are making expansion plans. Their greatest hurdle (more on this later) will be to convince local lenders to supply the capital.
Win #2: Fallon producers will no longer be required to truck their milk to California plants. The savings will come not only in hauling costs saved but peace of mind. Moving Nevada milk into California’s state-controlled order has always been a point of friction. Nevada producers live in constant fear that that access to market will be cut off, and with it their livelihood. Other than Reno, the next closest processing plant is 500 miles away. To get some sense of that distance, that’s like moving milk from Sacramento to San Diego or from Madison, Wis., to Fargo, N.D.
Win #3: The Fallon plant frees up California processing capacity. After 2009 and 2010, the California industry has rebounded to pre-recession levels. So the Fallon plant announcement should be welcomed news on both sides of the state border, particularly by DFA members from both states. And it should help boost California’s Class I utilization—at least until California producers make up the manufacturing milk losses to the Fallon plant.
Win #4: And probably the biggest win of all: DFA is showing global customers it is willing to invest in processing capacity specifically designed to meet their unique ingredient needs. Yes, the plant will be capable of producing domestic skim milk powder if world demand for whole milk powder evaporates. But the mission of the Fallon plant, first and foremost, is to supply products to meet international customer needs.
This is precisely the point of the Bain Study, which shows a latent supply gap of some 7 billion pounds of milk over the next few years. To meet this need, the U.S. must produce products that the global market needs—not products we produce for U.S. markets that we happen to have in surplus every now and then.
With this commitment comes market risk. The Fallon milk price is being targeted at Class IV plus 25¢ to 30¢/cwt. Year in, year out, this is essentially our basic manufacturing price. Few dairy producers have gotten rich at these levels. It’s one reason some bankers are already showing reluctance to finance new, $2 million milking parlors in Fallon. (See Win #1.)
In the end, the Fallon plant is not an automatic home run. It shows that while some will benefit by its mere existence, others will take the risk that it will be successful.
DFA and the local Fallon producers who are willing to step up to the plate should be commended. Kudos to these guys for slapping on their batting helmets against world-class competition.
