Saturday, October 31, 2009

California's dairy industry: global markets, local effects

For the much of the past year, dairy farmers in California have been feeling the effects of a world-wide depression in milk prices. The dip--and the extended, continuing depression in the milk prices paid to dairy farmers that followed--have forced many farms under and driven many of those that remain deep into debt.

Dairy is the largest single product sector in California's $40 billion agricultural industry, and California has long been the country's largest dairy producer. Over 1600 dairies, down from 1750 as recently as last year, produce milk which is shipped to processors who then make different types of dairy based products. Most of these dairies are based in the Central Valley.

For example, in Shasta and Tehama counties, the two northern-most counties of the Central Valley, dairy farmers have been hit hard by falling prices and the increasing cost of doing business in the face of new state environmental regulations. Shasta county's last remaining commercial dairy shut down a few years ago, and dairy producers in Tehama county are struggling to stay in business.

The recent dip in dairy prices can largely be attributed to the fall in global demand for dairy that followed in wake of the general economic turmoil of 2008-2009. The depressive effect of the global fall in demand was compounded by higher prices for feed and other basic inputs. Although feed prices have returned to ordinary levels, the continuing surplus in milk supply is largely the result of the larger dairy herds that farmers amassed when prices are good.

The situation presently facing dairy farmers in California and beyond reflects a conundrum which is central to dairy production. When prices are good, many dairy farmers have every incentive to expand their herds. This is because they're able to expand their production capacity (the number of cows) in ways that crop farmers and beef cattle producers--who are more limited by the constraint of available land--are not. When prices dip, however, dairy farmers are uniquely vulnerable to the cost pressures of hungry herds and the necessity of continual investment in the equipment and technology required to make a modern dairy operation cost competitive.

A number of measures have been proposed to help temporarily prop up milk prices and support dairy farmers. Many of the proposals advanced mirror common agricultural support programs such as subsidies and price guarantees, and are described in further detail here. Some California dairy producers, however, were the beneficiaries of a unique effort to help elevate prices and allow for a graceful exit for some farmers. Cooperatives Working Together (CWT), a national organization representing dairy farmers, has funded and implemented a "herd retirement" program that pays dairy farmers to take cows out of production. Since December 2008, the CWT program has taken over 250,000 cows, with a production capacity of over 5 billion pounds of milk, and sent them to slaughter. The introduction of over 250,000 head of former dairy cows into beef markets subsequently depressed beef cattle prices, and increased tensions between dairy and beef producers.

In spite of the buyouts, price supports, and other measures employed to help assist dairy operations remain viable in the face of the lowest milk prices in decades, the situation facing dairy farmers remains dire. The continuing price crisis confronted by California dairy farmers illustrates the unique opportunities and draw-backs associated with local food producers' integration into global markets. Roger Hoskin, a dairy analyst at the U.S. Agriculture Department's Economic Research,
aptly described the economic environment facing dairy farmers, saying: "Call it globalization...When the export market is strong, they do well; when the export market is weak, domestic use is not enough."

(photo by the author)

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