California First, Last to Feel Milk Price Pain
California, which accounts for 40% of all U.S. dairy exports, is the first to feel the pain of weakened global export markets and often the last to get relief when those markets recover, according to James Williamson, an associate dairy analyst with Rabobank.
When global dairy prices decline, California commodity prices must also be reduced to remain competitive or new markets within the U.S. must be found to dispose of products. Because 75% of the U.S. population resides east of the Mississippi River, transportation costs must be subtracted to competitively move California products to eastern markets.
When prices recover, California farmers are slower to see benefits, primarily because of its state pricing system. Over the past 10 years, California dairy farmers have seen milk prices $1.85/cwt less than the U.S. All-Milk price, notes Williamson.
“Since Q4 2014, prices for California milk have buckled amid a glut of global supply,” says Williamson. “Some dairies saw losses as early as Q1 2015; however, pre-purchased feed and deferred income from a very profitable 2014 help support many dairies through much of 2015…. Dairies who diversified into nuts were able to remain profitable, as nut prices were at record levels for much of 2015.”
Nevertheless, California’s dairy herd declined 2.3% from 2014 to 2015, and milk production fell 4%. Williamson says 2016 has been more problematic because pre-paid feed inventories have been fed and cash reserves are now strained. Given these constraints, California’s milk production could fall another 3% this year.