Dramatic and fundamental changes over the past two years threaten California’s dairy industry and the dairy cooperative structure, according to Eric Erba, senior vice president and chief strategy officer for California Dairies Inc. (CDI).
Erba offered his frank assessment of the state’s dairy industry during the California Alfalfa & Forage Symposium, held Nov. 29 – Dec. 1.
”I’m not going to sugarcoat it. The industry has problems to solve,” he said. “Structural changes have happened very quickly, and most people were not prepared.”
CDI is the second largest dairy co-op in the U.S., behind only Dairy Farmers of America. It’s 425 farms and 385 members produce about 43 percent of the California’s milk production. CDI also operates six dairy processing plants, primarily focused on butter and milk powders, but has also branched out into cream cheese and milk protein concentrates.
2009 still a nightmare
Current trends impacting the state’s dairy industry have roots in 2009. With low milk prices and high feed costs, “2009 exposed a weakness in the western dairy model,” Erba said. “The effects of 2009 are still being felt today. It’s in the memory banks of dairy farmers, and it changed the way they do business in California.”
Less government involvement in creating pricing stability has resulted in greater volatility. And, while expansion into the export market has provided a strong market for California products, it has also exposed farmers to increased price volatility in global markets, Erba said.
While some producers thrive in volatility, many cannot survive. Initially, producers looked to reduce feed-cost risk, growing more feeds to control input costs. They also increased land base to meet manure management requirements. The transition to permanent crops (nuts) was embraced as a hedge to reduce milk price volatility.
While herd sizes have increased, California farm numbers are down from 1,752 in 2009 to 1,385 in 2016. The geographic footprint is becoming more concentrated in the Central Valley, where eight counties now account for 90 percent of the state’s milk production.
Latest changes occurring rapidly
For decades, California’s dairy industry has focused on how to balance milk production with processing capacity. According to Erba, they did it pretty well.
However, since 2015, an opposite problem has emerged. Now, the challenge is finding enough milk to keep the processing plants running.
California’s latest milk production peak occurred during the first half of 2014. As of October 2016, monthly output was below previous-year levels for 23 of the past 24 months.
“That problem became even more exacerbated in 2016, resulting in the need to begin considering which processing plants should be closed, since we can’t get enough milk to all the plants to keep them running efficiently,” Erba said.
Always heavily regulated, pressures on the dairy industry have picked up.
“Bills passed this year by the state legislature related to labor and environment will be very difficult for dairy to deal with,” Erba said. Environmental regulation has impacted dairy farms and processors, with CDI now forced to buy carbon credits for each of its six plants. “There’s going to be continued competition for land, water and now labor, which has never been an issue in the past.”
Those changes are setting off alarms.
“There’s growing concern about what we’re going to do to keep the industry stabilized, keep the milk here, keep the assets running and keep affiliated businesses in business,” Erba said. “Processors have fixed assets they can’t pick up and move and can’t convert it to anything else. They’re going to have to figure out a way to come up with a milk supply.”
Co-op relationships
The situation is also changing the cooperative-proprietary processor relationship. Historically, co-ops represented about 80 percent of the milk produced in California. Now, some private plants are looking to build milk supply contracts with direct shippers. That creates additional challenges for dairy cooperatives and the co-op structure.
“Dairy co-ops must figure out a way to be competitive and relevant to the industry,” Erba said. “Without the members or milk, the co-op does not exist. The challenge for co-op leaders is keep the dairy farmers within the co-op from breaking out and becoming direct shippers. The idea of relevancy is really pushing the idea of the dairy co-op out.”
Erba suggested three things to help co-ops remain relevant:
- Provide an acceptable level of return on member capital investment.
- Offer services not provided elsewhere, or offer them at a cost they can’t get anywhere else.
- Look toward consolidation to strengthen the cooperative influence.
For dairies that survive, there will be options, Erba said.
“Before, it was, 'Who is going to take my milk?,'” he said. “Now, it will be, 'Where do I want to ship my milk?' There will be higher premiums.”
“For dairy farms that survive, evolve and adapt, the future is going to be extremely bright and filled with opportunities. But, we’re going to go through difficult times between now and getting there,” Erba concluded. 
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Dave Natzke
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