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California Dairies at a Pivotal Point, Says Rabobank

March 12, 2013
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Bank’s report recommends changes in the industry to maximize milk value for state’s producers, including less reliance on milk marketing orders.

Source: Rabobank

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 and 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 in line 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. 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 its ability to pay its Oregon and Washington members, on average, $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.

Rabobank, N.A. is a California community bank and a leading provider of agricultural financing and full-service banking products to California consumers, businesses and the agriculture industry. Rabobank, N.A. is a division of the Rabobank Group, the premier lender to the global food and agricultural industry and a financial services leader providing commercial, retail and agricultural finance solutions in 48 countries.

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