WASHINGTON, March 4, 2015 – An era of robust dairy farm expansion for the nation’s top milk producing state has stalled out as producers in California face hefty constraints on output.

Golden State milk production rose steadily for a century -- right on through the Great Depression and World War II -- and has led the nation for more than 20 years, now accounting for 20 percent of U.S. volume. Plus demand remains high. Total dairy exports, mostly to Mexico and East and Southeast Asia, are up 50 percent by volume since 2011, and are expected to expand for years, though they'll slip a bit this year because other dairy exporting nations are boosting their production. Further, the state's young, expanding population of dairy consumers spells continued market growth at home.

Though California is still processing 42 billion pounds of milk a year, far more than any other state, its output has flattened. It ended 2014 a bit under year-earlier volume and is up less than 3 percent in the past six years, while Idaho’s output, for example, is up 14 percent.

“I see a future that does not include a lot of growth,” says Rob Vandenheuvel, general manager of the Milk Producers Council of California, voicing a common view among dairy operators there.

There are a multitude of forces straining California's milk production.

First, the severe California drought is in its fourth year, zapping water availability, including in the huge Central Valley, home to 80 percent of state’s dairies. Allocations of water from the state reservoirs were cut to zero for most farms in 2014 and probably for all farms this year. Why? For one thing, this winter's Sierra Nevada snowpack, which supplies a third of the state's water year-round, is just a fraction of the usual. So farmers are surviving by digging new wells and deepening others as water tables sink. And water costs, from whatever sources, are shooting up

The long-term water outlook for dairy farms is no better, even after normal rains return. Because of a 2009 law, California is striving to cut overall per capita water use by 20 percent by 2020. State water control agencies project that total use, meanwhile, will jump 16 percent from 2015 to 2030 because the population will climb 16 percent through that period. That means even less water for farms.

As with water, feed and forage for cows are getting scarce and painfully pricey, though U.S. grain stocks are up and prices down somewhat this year. Meanwhile, especially with the long drought, the state's acreage of alfalfa and other forage crops is shrinking. Dairies in the state have long depended heavily on hay from the Plains and Pacific Northwest. But Asian and Middle Eastern farms increasingly now compete for it. The hay is compressed and shipped in container ships that typically offer deeply discounted cargo rates for backhauls to China and other Pacific markets after delivering consumer products to West Coast ports. Exports of hay products jumped 45 percent last year over 2013.

Though a dockworkers dispute with port operators, now tentatively settled, has slowed West Coast hay exports for months, Roger Hoskin, a USDA economist, notes that rates for such backhauls are often less than it costs to ship the hay to California dairies. So, even in years of friendly rains and high hay production in the West, California dairies won’t see much price relief. The average winter price of alfalfa hay there, in the range of $100-$130 a ton a decade ago, no longer falls below $200, no matter how bountiful the U.S. hay crop may be.

Also looming over California dairies: regulatory costs and a bevy of required permits, mostly mandated since around 2006. James Garner, spokesman for Dairy Cares, a non-profit that promotes good environmental stewardship, explained some of the many hurdles dairy farmers must jump.

For example, farmers must pay experts to set up nutrient management plans, plus water quality plans that require annual soil and water testing. He says the estimated annual cost of complying with the clean water permit requirements is $20 million to $36 million for the state's 1,466 dairy farmers. "That's something like $13,000 to $25,000 a year per farm for just the water permit costs," he says.

On top of specific water and waste permitting regulations, all counties in the state’s dairy region require special permits to operate dairy farms, and the permits specify maximum herd size. Paul Sousa, environmental adviser with the Modesto-based Western United Dairymen, says dairy farms readily complied with the counties' initial reporting requirements and were assigned herd maximums. "Now, if they're motivated to stay in the industry, it can be done -- they can keep up with this stuff," he says of the bevy of permits and regulations. "But expansion presents a tremendous challenge -- then, you're into another whole realm of regulations and permits."

But the toughest economic challenge to California dairy farmers may be their own market: They get lower milk prices than in other states, partly owing to a statewide milk pricing scheme that operates separately from the USDA federal milk marketing orders that guide milk prices in the rest of the nation. The statewide average price to farmers for milk used for cheese-making averaged $2.43 per hundred pounds less than prices set by federal orders. The result: $450 million less for California dairy farmers in 2014 than if a federal order was applied, the Milk Producer Council reports.

MPC’s Vandenheuvel points to the vast increases in milk production in other Western states in the past couple of decades, including Arizona, Colorado, Idaho, Oregon and Washington. “Pricing plays a huge role,” more so than the big regulatory burden, he says, prompting California dairies to pick up and move to other states.

Now, the state’s three biggest dairy co-ops, after fighting with state agriculture officials for five years to align milk prices more closely to national prices, have joined in an appeal to USDA to create a federal milk marketing order, replacing the California state system. The three – California Dairies Inc., Dairy Farmers of America and Land O’Lakes – represent three-fourths of the state's milk production, making the odds that USDA will ultimately accommodate them quite high. And Improving the milk pricing system, says Vandenheuvel, “would be critical in slowing down the exodus” of the state’s dairy farmers.


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