Will Dairy Concentration Continue?
Sep 27, 2010
At least one factor will slow the trend. And it won’t be dairy policy.
“Past performance does not guarantee future results.”
That warning, which leads off every stock portfolio and mutual fund offering, is pretty sound advice when looking at the future structure of the U.S. dairy industry.
But first some background. Despite last year’s Depression-like economic conditions in the dairy sector, 500-cow and greater operations account for 60% of U.S. milk production. That’s an astounding 54% increase in market share since 2001. And the biggest farms, those with 2,000 cows or more, saw their cow numbers and share of milk production shoot up 150% from 2001. Actual number of 2,000-cow operations climbed from 325 in 2001 to 740 in 2009.
The other clear trend: All Western states, with the exception of Montana, North Dakota and Oklahoma, saw gains in milk production this decade. The entire southeast quadrant of the country, in contrast, saw milk production declines.
So will these trends continue? It’s a mixed bag. California has shown resilience in getting more milk per cow as feed costs shrunk over the summer. But California cow numbers continue to erode, going from 1,760,000 head in January down to 1,745,000 in August. New Mexico has shown no growth in cow numbers. But Idaho (+22,000 cows), Arizona (+11,000 cows), Washington (+6,000), Texas (+5,000 cows) and Oregon (+4,000) more than make up for these losses. On balance, Western states are up 33,000 cows this year.
The Midwest is a mixed bag as well. Michigan is the big gainer, up 6,000 cows since January. Wisconsin is up 3,000. Minnesota has held serve, but Iowa has shed 7,000 cows. Illinois and Ohio have each lost 2,000. Add it up, the Midwest is 1,000 head below breakeven since January.
The odd thing is that much of the support for supply management programs is coming from the West (OK, California) and pockets in the Northeast. Many (can I say most?) in the Midwest abhor supply management. The longer term trends show pockets of the Midwest beginning to reclaim market power. Wisconsin’s milk production is up 14% since 2001, though it still lags in cow numbers by nearly 60,000 compared to 2001. Much the same is happening in Minnesota, South Dakota, Michigan, Indiana and Ohio.
Without consensus on supply management, the Costa/Sanders and the Specter/Casey bills are dead-on-arrival in Congress. A survey
of Western United Dairymen members in California is illustrative.
A majority of those responding support supply management, but 86% don’t want it to be controlled by the government and they don’t want it to be mandatory. That’s an oxymoron. Without a government, mandatory program, you really don’t have supply control.
So what will put the squelch on dairy expansion? Access to capital.
Lenders have gotten burned big time through the Great Dairy Recession. They’ve allowed many of their underwater clients to continue milking with the simple hope that prices will continue to allow their clients to cash flow and begin to recoup equity losses. Pulling the plug simply complicates the problem because the sale of one dairy affects the asset valuation of all dairies on their books. The sale of a few jeopardizes the solvency of all. The points being:
1. Underwater dairies are trying to simply reach the surface. Further expansion is not, and will not be, in the cards for years to come.
2. Dairies with equity will need a lot more equity if they wish to grow. Thirty-percent equity positions after expansion is no longer tenable—if it ever was. Forty percent will be bare minimum; 50% will be the threshold for those without a stellar track record.
Yes, some dairies will find ways to continue to grow. Look for more off-balance sheet gimmicks like equipment and cattle leasing. But these techniques usually work only on the margins because they’re often a last-resort financing option.