Market Watch Diary Left Coast legacy

January 13, 2010 09:25 AM
Alan Levitt

There may be no greater legacy from 2009 than the decimation of the California dairy industry. Declining supplies there will have a great effect on the dairy markets in 2010 and perhaps
for years beyond.

California milk production dropped more than 4% last year, and it's tough to overstate how remarkable that is. This is by far the largest decline among records going back to the 1930s, but also the first contraction since 1978.

Think about that: Production grew every single year for 30 years, shrugging off stretches of bad weather, low milk prices, herd buyouts and expensive feed.

The reasons the global dairy crisis of 2009 hit California especially hard are well-documented: too much leverage, tightening of credit, expensive purchased feed, and lack of processing capacity that spawned production-base plans the year before.

Profitability will come back in 2010, but don't expect a quick return to growth in the Golden State. The state ended 2009 with about 75,000 fewer cows than it started with, and it'll take a while to rebuild the herd.

In November, milk production in California was 6 million pounds per day lower than the year before. As a result, dairy product supplies will be much tighter in 2010. California produces about 56% of the nation's nonfat dry milk (NDM), 33% of the butter, 20% of the cheese and 28% of the whey protein concentrate.

We've already seen a reduction in output of butter and powder since the middle of 2009. In the July to October period, California production of butter was down 11%, NDM was down 5% and other dry milk products (such as skim milk powder, whole milk powder, milk protein concentrate, casein and lactose) were down 23% versus 2008. Even cheese production was running more than 10% below 2007 levels, during a period when cheese production in the rest of the country increased more than 8%.

In the second half of 2009, manufacturers and marketers tapped into inventories to augment declining production, particularly for milk powder. In 2010, we will not have such large stocks from which to draw.

And while California has borne the brunt of the reductions, other Western states that had expanded in previous years also saw declines in 2009: Idaho, –2%; Arizona, –6%; Colorado, –2%.

When milk production declines, butter and powder production are usually the first to go. This time around, with production declining so disproportionately in California, the effect will be magnified.

Bonus content:

More California dairy data


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