California Dairy Processors, Producers Disagree over Farm Profitability

August 1, 2013 02:22 PM
California Dairy Processors, Producers Disagree over Farm Profitability

Processors claim dairy farm margins are improving; producer groups say dairies still struggling with red ink.

Claims by a California dairy processor organization that the state’s dairies are enjoying dramatically improved farm income are being called "specious" and "disingenuous" by producer representatives.

"For dairy farmers, the reality is just the opposite," says Michael Marsh, president of Western United Dairymen (WUD), a producer trade group that represents about 60% of California’s milk production.

Marsh was referring to a July 30 news release from the Dairy Institute of California, a trade association that represents milk and dairy processors on legislative and regulatory matters.

The release reports that California cheese makers and other dairy processors have paid the state’s dairy farmers over $400 million more in the first six months of 2013 than for the same period last year, according to data released by the California Department of Food and Agriculture (CDFA).

"That $400 million in additional revenue translates to about $250,000 more per dairy farm this year," says Rachel Kaldor, executive director of the Dairy Institute of California. She notes that the trend is expected to continue for the rest of the year due to strong global demand for dairy products.

"California dairy farmers are far, far from profitability or recovery," responds Marsh. "When you’ve been losing $2 million, and now you’re losing $1.75 million, you’re still losing money."

Marsh said that while total revenues into the state’s dairy marketing pool have increased, California dairy producers continue to lose money. CDFA numbers show that California milk prices for the first quarter of 2013 averaged $16.53 per cwt., with dairies’ average cost of production at $17.69 per cwt., says Marsh. (These cost of production numbers do not include a return on management or investment.)

"That’s a negative margin of $1.16 per cwt.," says Marsh.

This year’s red-ink numbers, however, are better than first-quarter 2012 margins, which yielded a loss of $1.72 per cwt., Marsh said. That was based on an average milk price of $14.91 per cwt. with the cost of production of $16.63.

But, in fact, dairy farm margins are improving, Kaldor notes. "One of the most common ways to gauge dairy farm profitability is to measure farm income over feed costs," she says. "For the most recent two quarters reported, dairy farmers are enjoying an average 57 percent improvement in their margins over the middle of last year."

Feed costs have moderated this year and are expected to decline dramatically over the remainder of the year — down about 40 percent from last year’s drought-driven highs, Kaldor says.

The assertion that dairy farm income is up dramatically "certainly doesn’t paint a picture of the industry we’ve been experiencing," says Rob Vandenheuvel, general manager of Milk Producers Council, another California-based producer association. "Everything is not fine. Yes, you can see an improvement, but it doesn’t mean things are great."

California dairy margins remain in negative territory, at $1.45 per cwt. or more, Vandenheuvel says. Over the last five years, the average-sized California dairy – with 1,000 cows producing 65 lb. of milk – has lost $2 million, according to Vandenheuvel.

California has lost 25% of its dairies in the last six to seven years, says Marsh.

Marsh and Vandenheuvel believe Kaldor’s claims that dairy farmers are enjoying improved margins are an attempt to influence CDFA Secretary Karen Ross, who is considering whether or not to grant a hearing on a temporary price fix that would benefit the state’s dairy producers. That announcement is due by Aug. 6.

California dairy farmers are seeking the hearing on a milk-pricing deal negotiated and agreed to in July by the state’s dairy farmers, cheese makers and the Legislature. The deal would create a short-term fix of $110 million in new money that cheese processors will pay into a milk pool to be shared by dairy farmers. The $110 million will come from increasing the price of California’s Class 4b milk (the milk used to make cheese) up to 46 cents, and by expanding the whey scale from its existing cap of 75 cents per cwt. of milk to $1.

Kaldor says processors supported CDFA last year when it temporarily increased the price of milk that processors pay dairy farmers.

"Those temporary price hikes will add about $62 million to dairy farmer income this year," says Kaldor. "But compared to the $400 million more processors have already paid, it’s very clear that vibrant dairy markets are far better at improving dairy farm income than reliance on regulated government-imposed price adjustments."

Producer groups, including WUD and MPC, maintain that CDFA’s milk-pricing policies have put dairies at a disadvantage to the state’s milk processors as well as to dairies in other states.

Kaldor warns that the state’s complex regulatory pricing system needs to change if California dairy farmers and processors are to compete in the new global market.

"Our current regulatory system was not designed for today’s marketplace," says Kaldor in the July 30 release. "Dairy farmers need to join us in understanding that competition builds markets for their milk, which leads to more farm income for them. We need to create a market-driven system with high levels of investment, vigorous competition and growing global demand for our products. We’re partners in this, and we should be working together to make it happen."

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Spell Check

8/6/2013 03:10 AM

  Isn't California full of either large coops(LOL,CDI) or producer owned (Hilmar) processors? So why a difference in opinion on this, the producer and processor are the same people. Lets just face the facts, dairying right now is tough period, but really tough in California. We need to have more people exit the business, there is too much milk.


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