California Goes Dry Uncertain feed market, higher energy costs for the state''s stressed dairies

May 15, 2009 07:00 PM
Despite his recent $35,000 well upgrade, the ditch behind California's Tony Souza will remain dry for much of the summer.

At the large heifer-raising ranch he manages on the west side of California's San Joaquin Valley, Scott Woodard has seen a sharp increase in job seekers this spring. Up to 20 people a day have appeared at his office, asking for applications. He knows why, but he can't do anything about it.

"The drought is driving field workers here to look for work,” Woodard says. "And we're not hiring.”

Now in its third consecutive year, the California drought has reached crisis proportions for many in the state's agricultural sector. Compounded by California's ongoing water infrastructure troubles and court-ordered reductions in water deliveries, the drought has diminished water supplies for thousands of farmers.

An estimated 300,000 to 800,000 acres of tomatoes, cotton, peppers and other cropland will lie fallow this year. In some west-side farming communities, unemployment has soared to 40%.

The drought hasn't driven California's dairy industry to those dire straits. Few dairies expect to be short of water for their milk barns or flush lanes, which already run efficiently with recycled water and other water-saving measures, says Michael Marsh, CEO of Western United Dairymen.

Processing plants aren't concerned that water shortages will affect their operations, adds Bill Van Dam, CEO of the Alliance of Western Milk Producers, whose members process 56% of the state's milk production.

Still, dairies haven't escaped the state's water woes. Many producers in the San Joaquin Valley, which produces most of the state's 41 billion pounds of milk, will be forced to dig deeper into their pockets to pay for increased groundwater-pumping equipment and energy bills.

Moreover, with milk ranked No. 1 among the state's farm commodities, the dairy industry is entwined with crops that are affected by the water shortage. In addition, dairies' financial downturn has shaken other farm sectors, particularly alfalfa hay.

San Joaquin Valley dairy producer Tony Souza, like most of his neighbors, purchases feed commodities to supplement what he grows for his 2,500 milking cows near Tulare, Calif.

With feed now accounting for 60% of production costs, Souza and the rest of the dairy industry are warily eyeing the forage markets.

Alfalfa hay prices, which reached record highs last year, have dropped sharply as demand from financially stressed dairies has slowed. Souza says early April hay prices were $140/ton, compared to the $250 to $300 he paid last year.

Yet that price drop hasn't helped the many producers who, like Souza, contracted for feed last year as a hedge against skyrocketing feed supplies. "I wish I had waited to buy,” says a frustrated Souza. "A lot of us are in the same boat.”

Alfalfa hay is a key commodity for the state's dairies, which buy about 75% of California's yearly production. It's the most important ingredient in California dairy rations, with corn silage a close second.

"There's significant worry on the part of hay growers because they know many of their customers are unable to afford alfalfa,” says Dan Putnam, forage specialist with the University of California, Davis. "Right now, dairies are not buying.”

Reduced water supplies and depressed hay prices could force California alfalfa growers to scale back production this year. The dairy industry is their major customer.
Those concerns,
along with possible reductions in the number of harvest cuttings due to water shortages, could result in a 5% drop in 2009 alfalfa production, says hay market analyst Seth Hoyt.

Alfalfa is grown on about 900,000 acres, most in the San Joaquin Valley.

"Just about all of our growers are facing reductions in their water allotments compared to last year,” says Rick Staas, CEO of the San Joaquin Valley Hay Growers Association.

The cooperative's 275 members produced about 400,000 tons of alfalfa last year. The association is the state's biggest alfalfa hay supplier.

Faced with their depressed market and reduced water supplies, some alfalfa producers may opt for only one or two cuttings compared to the normal six or seven. Others may divert their water from alfalfa to keep permanent crops like almonds or walnuts alive.

All that "will definitely have an impact on how much hay is available,” Staas says. "But at this point, nobody really has a good idea of how big that impact might be.”

So far, early-season yields have been below normal. "Usually we see one ton or better at first cutting,” Staas says. "But what we're seeing now is only one-half to three-quarters of a ton.”

That could be due to lack of rain and early-spring cold snaps, he adds. Unexpected rain in early April also damaged a substantial amount of hay still on the ground.

Despite his industry's downturn, Staas doesn't believe the hay reduction will translate into higher costs for the dairy market. "The financial health of the customer base will dictate the hay price,” he says. "And right now, that financial health is not good.”

A few California dairy producers have started buying their alfalfa hay supplies a little early this year "in anticipation of a change of prices at year's end when supplies get short,” Staas says.

"We expect hay prices to go up by late summer or early fall,” he adds. "But the woes of the dairy industry will keep hay prices well below last year's level.”

For now, many California dairy producers are using up older inventories of forages to feed their herds. Souza has alfalfa and timothy hay he bought from Canada last year. He also purchased hay from Arizona, Nevada and Utah this past December and January, when it was cheaper than California-grown alfalfa. He expects his inventory to last him through August.

This year, he'll have just enough water to plant wheat and corn, although he'll divert some acreage to sorghum milo. "It uses half the water that corn does,” Souza says. "We won't get as good feed, but at least we'll get feed.”


Dairy sources don't expect the state's drought to play much of a role in dairy prices for the rest of the nation.

But American consumers may see increased prices at the grocery store, says Mike Wade, executive director of the California Farm Water Coalition. "California's water supply problems will push produce prices higher and increase our reliance on foreign food,” Wade says.

More than the drought, the ongoing national dairy crisis, including in California, will ultimately boost milk prices, says Peter Vitaliano, vice president of economic policy and market research for the National Milk Producers Federation.

"Anything that reduces supply will contribute to us getting back in balance and will strengthen prices eventually,” he says.

Spurred by the global recession and severe contraction in dairy exports, the industry has seen an unprecedented drop-off in demand, Vitaliano says. The result? A surplus of dairy supplies. That's driven milk prices some $5/cwt. below production costs for many dairies—both in and out of California.

"It could take a good part of this year and next for the dairy industry to regain its supply/demand balance,” Vitaliano says.

Struggling California has reduced its milk production in recent months, helped by processor-led supply management programs. March 2009 alone saw a 3.8% production decline. That's no small amount in a state that produces 41 billion pounds of milk each year. That effort, along with the new, nationwide herd buyout program from Cooperatives Working Together, should help the supply side.

"Painful as they may be, the actions taken to reduce supply will help in the recovery that helps all dairy farmers,” Vitaliano says.

Made more costly by this year's drought, surging water from an underground well irrigates a wheat field near a Tulare, Calif., dairy.

Dairy producer Tony Souza spent about $35,000 this spring upgrading a groundwater well on his farm near Tulare, Calif., where he milks 2,500 cows.

Already struggling with $10/cwt. milk prices and $15/cwt. production costs, Souza isn't happy about the new irrigation expenses. But he has little choice.

For 2009, he's been allotted only 30 days of surface water deliveries, a result of his state's third consecutive year of drought. In a good year, he gets 90 days of deliveries. The cutback is forcing Souza to pump deeper for water to keep his 600 acres of wheat and corn alive. The two crops supply about half of the silages for his dairy.

Souza is one of the lucky ones. His water supplies will get him through 2009. For Scott Woodard, water will be harder to come by. His operation raises heifers for about 40 dairies and employs 140 workers near Huron, Calif.

The ranch gets its water from the Westlands Water District, usually the state's largest recipient of federal surface water. Not this year. Westlands has only a 10% water allocation for the 600,000 acres of farmland it serves in Fresno and Kings Counties. Although farmers can tap into groundwater, Westlands says half of those acres will be idled this year.

That means the 790 acres Woodard normally plants for summer forages will lie fallow. To feed his heifers, he'll have to depend on outside suppliers for alfalfa and grain. "We'll be at their mercy,” he says.

Bonus content:

Read more about California''s drought at the Association of California Water Agencies website.

Gov. Schwarzenegger Tours Sacramento Delta with Secretary of the Interior Ken Salazar press release

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