April 12, 2014

Dairy industry rebounds at last in Northern San Joaquin Valley

The dairy industry in the Northern San Joaquin Valley is enjoying a growth spurt, thanks mainly to exports, but drought has brought new challenges.

Dairy farming in the Northern San Joaquin Valley has turned profitable, at long last, thanks mainly to booming exports for powdered milk and other products.

It’s welcome news for the several thousand residents who work in the plants that process milk from the region’s farms.

But not all is rosy. Farmers have to pay down debt built up over half a decade of generally low prices, and they face a drought that likely will squeeze their feed supplies this year.

“Everyone is glad the prices have improved, but there is just so much to make up because of the tremendous losses,” said Lynne McBride, executive director of the California Dairy Campaign, a farmer group based in Turlock.

Milk long has been the top-grossing farm product in the Valley and statewide, but it has not been as profitable in recent years as wine, nuts and several other industries. Prices plunged in 2008 with the U.S. recession and a decline in the export market, and they were above production costs in only one of the ensuing four years, McBride said.

Meanwhile, prices for feed rose because of high demand and the 2012 drought in the Midwestern corn belt. The corn prices dropped last year thanks to a bumper crop, but the California drought is cutting into alfalfa and other homegrown feeds.

“People are raising higher-valued crops and are not so interested in growing crops to feed cattle,” said Michael Gallo, chief executive officer at Joseph Gallo Farms near Atwater, which makes cheese and powdered byproducts.

The stretch of bad years reduced the number of dairy farms in the state from 1,950 in 2007 to 1,496 last year, according to the California Department of Food and Agriculture. Total milk production nonetheless rose as surviving operations added cows.

Ray Souza, a dairy farmer west of Turlock and leader in the industry, said it is doing better despite the challenges with drought and debt. “I don’t see the for-sale signs,” he said. “I don’t see the foreclosures. I don’t see the equipment being loaded onto trucks.”

The state each month sets minimum prices that processors must pay farmers for several classes of milk. For fluid milk in May, it will be $25.88 per 100 pounds, which is close to 12 gallons. The minimum was $19.39 last May and $12.68 in 2009. The prices tend to be lower for milk made into cheese, butter and other products.

Strong markets overseas

Gallo, who employs about 450 people, said he is seeing especially strong demand for powdered products in China. He cited the nation’s rising incomes, the reduced supplies from Europe and New Zealand, and lingering distrust of Chinese producers from a 2008 scandal involving melamine in milk.

Gallo, who markets cheese under the Joseph Farms brand, noted strong markets for these goods in Mexico and South Korea.

At Hilmar Cheese Co., increased sales are translating into higher income for the farmers supplying the milk, said David Ahlem, vice president and general manager for cheese at the Lander Avenue company.

It has an affiliated business, Hilmar Ingredients, that markets the lactose and whey left from cheesemaking. These dry products end up in infant formula, energy bars, soups, confections and many other products around the world.

“We see that demand continues as these developing countries look for more protein and more nutrition,” Ahlem said. He was speaking at last week’s dedication of a new administration building and “innovation center” for Hilmar Cheese, which employs 860 people in its hometown and 340 at a plant in Dalhart, Texas.

An additional 40 or so will work at a milk powder plant expected to open in Turlock next year. “That plant is designed for the export market,” Ahlem said.

Karen Ross, food and agriculture secretary for Gov. Jerry Brown, attended the Hilmar event. She said the industry has been on a roll since late 2013, thanks mainly to strong exports. “It is sustainable,” she said, “as long as we are positioned to totally capture those market opportunities.”

The nation’s dairy exports reached a record $6.7 billion last year, up 31 percent from 2012, the U.S. Department of Agriculture reported. The exports are dominated by dry products, which Souza said can be shipped at low cost out of California ports.

“The transportation cost of putting dairy products in China is less than the cost of putting dairy products in Chicago,” he said.

The U.S. Dairy Export Council, based in Arlington, Va., hailed the USDA report in a news release. President Tom Suber said the industry “is increasingly attuned to the needs of overseas customers, producing more of the right product, with the right specifications, in the right package, for buyers in dozens of markets around the world.”

Drought poses challenges

California leads the United States in milk production, thanks to climate and other advantages, but the drought is complicating the business this year. Winter was mostly dry, although Souza said late storms helped with some of the feed crops that will be harvested this spring.

Farmers will try to stretch their irrigation supplies on alfalfa and corn in summer and fall. McBride said that for farmers who need to purchase feed, alfalfa is running $320 to $340 a ton, compared with $270 to $280 a year ago.

High-value permanent crops such as almonds, walnuts and grapes have reduced the acreage available for feed crops in recent years. And with this year’s drought, many farmers are fallowing annual fields so the water can go to trees and vines.

Michael Marsh, chief executive officer at Western United Dairymen in Modesto, said the industry has to guard against “consumer pushback” from increased milk prices. But he also noted a strong outlook for demand, including the pizza makers that buy much of the state’s mozzarella.

“It’s diminished right now by the drought, but the margins for the farmers in California are positive,” Marsh said. “The enhanced margins are being used to pay off debts from the past five or six years.”

Gallo said the situation could change if dairy production increases in the Midwest, New Zealand or other major areas.

“California dairy farmers are doing well right now,” he said. “The problem comes when supply exceeds demand, which is bound to happen.”

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