Dairy farmers are tested by market uncertainties, costs

Issue Date: January 19, 2022

By Ching Lee

Soaring feed costs are impacting California dairy farmers.
Photo/Ching Lee

Despite milk prices strengthening in recent months, California dairy farmers say rising production costs, water restrictions and market uncertainties created by the pandemic continue to threaten their prospects for a more profitable year.

Several factors have led to the recent market upsurge. Perhaps most notable is the slowing of U.S. milk production as dairy farmers shrink their herds.

Hit with soaring feed costs, Stanislaus County dairy farmer Pete Verburg said dairies are having to use lower-quality rations, which affect milk production. With higher prices squeezing their margins, dairies are also culling their herds more heavily. He pointed to the decline in slaughter-cattle prices as more dairy cows flood the market.

For California dairy farmers, the hunt for feed is even more challenging because so much farm ground has converted to tree crops. Verburg noted when he started in the business, some 27 dairies operated on the road to his farm.

"Today, there's one dairy on that road, and I'm the dumb guy that owns it," he said. "They've all gone out of business, and every one of those places is now 100% trees, so feed for me is getting harder and harder to get because there's no one around me anymore growing it."

The drought has further crimped state plantings of alfalfa hay and silage crops grown for dairies, as growers devote their limited water resources to keep permanent crops alive.

Because feed represents 60% of his production costs, Merced County dairy farmer Simon Vander Woude said he's trying to manage that part of his operation "very intensively." He typically grows most of his forage, needing to buy only feed grains, but he said he's "unique in that regard." Depending on how the water year plays out, he said he may need to cut some acreage.

"Water is going to be an issue as far as whether you can grow silage," said Vander Woude, who serves as board chairman of California Dairies Inc., the state's largest dairy cooperative. "There's a lot of uncertainty around still."

Because he's in an irrigation district with more secure water supplies, Verburg said he can grow some of his own feed. He also drilled three wells in the last two years as a backup. He said dairy farmers who lack surface-water supplies and who rely solely on pumping groundwater are the ones "who will be really hurt."

Tulare County dairy farmer Tom Barcellos said he's trying to find additional feed because he didn't have enough water to plant all his acres. In wetter years, he typically can grow nearly all the alfalfa hay and forages for his dairy. Like most other California dairy farmers, he still needs to buy commodity feeds such as grain, millrun and dried distillers grains.

He said recent higher milk prices have made a difference in dairy farmers' monthly cash flow, but they're still trying to catch up from months of feed prices far outpacing their milk earnings.

"Right now, it looks promising, and the futures markets are up," he said. "Is that because so many dairies have quit?"

What remains uncertain, he said, is how the current surge in COVID-19 cases and reactions to it will affect markets and the economy going forward.

As with other California agricultural exports, port delays have snarled shipments of dairy products. Vander Woude said though "we're starting to catch up a little bit," there had been months when 60% of the cooperative's dairy shipments were canceled.

"We're still way behind on getting product to customers," he said.

Large volumes of the state's dairy products—primarily milk powder and some butter—head to the Middle East, Vander Woude said. A lot also goes to Mexico, with "a little bit" destined for China, he added.

With a favorable ruling this month by a dispute settlement panel under the United States-Mexico-Canada trade agreement, more U.S. dairy products may be heading to the nation's northern neighbor. The panel agreed with the U.S. that Canada is improperly restricting access to its market by allocating most of its dairy tariff-rate quotas to Canadian processors. This violates commitments under the trade deal, the panel concluded.

California shipped $136.4 million worth of dairy products to Canada in 2019, according to the University of California. Canada represents the third-largest export market for U.S. dairy products, with shipments reaching $478 million from January through October last year, according to the Office of the U.S. Trade Representative.

For the state's dairy sector, winning the trade dispute is "symbolically useful," said Dan Sumner, a UC Davis agricultural economist.

"It may allow a little extra Midwest milk products to go to Canada, leaving more room in Mexico and the U.S. market for California products," he said. "Every little bit is nice for producers."

Ben Laine, a dairy analyst at RaboResearch in St. Louis, agreed the panel decision is "an important symbolic victory." But it won't "move the needle on milk prices," he said, as less than 1% of total U.S. milk production goes to Canada. The panel decision "may open up some additional growth opportunity," he added.

"What it does do is provide more certainty for farms, particularly those in the Upper Midwest or Northeast, whose milk contracts depend on the ability to ship product to Canada," he said.

With so much turbulence in logistics and shipping right now, Laine said, "any uncertainty that can be removed from the equation is positive for everyone involved."

Dairy farmer Barcellos said he thinks the opening of Canada's dairy market "adds stability to the industry." With more product going to Canada, he said, it may nudge Mexico to buy more from the U.S.

"That is market access and future market access," he said. "I think it's a good thing."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.