California dairy should look west says Rabobank

A recent report from Rabobank agricultural analysts says the US state of California’s dairy industry “is in a position to capitalize on global market opportunities, as it is geographically well-placed to access certain markets, has a cost model low enough to engage these markets and has the production potential to capture more of the increased demand from emerging markets”. However, dairy processors in the US state will have to refine their engagement with importers and to adjust product specifications to meet importers’ demands, the study says.

On the minus side, volatility in both feed costs and price received for milk have become more pronounced in recent years, making margin management difficult. California dairies are quite reliant on purchased feed as well. “it has exposed California dairies to the full impact of wildly volatile feed prices and has harmed balance sheets significantly over the past five years,” the report states. Meanwhile, in Wisconsin, the second largest milk-producing state, farmers grow a larger proportion of their own feed.

When there are low feed costs, California’s milk production usually beats Wisconsin’s, but in 2009, California output fell more than 4% while Wisconsin’s output grew 3.1%.

That being said, demand is growing in global arenas, as traditional exporters such as New Zealand are struggling to keep up with demand from China, Korea and Vietnam. US dairy exports have grown since 2003 to account for 9% of US dairy production.

Rabobank notes that California dairy processors are well-positioned to benefit from the global expansion for milk products, due to several advantages, including physical proximity to Asia. “California’s infrastructure is clearly large and efficient enough to produce more raw milk. The state has expanded production of butter and nonfat dry milk, and these products offer California an opportunity to tap into global market growth, assuming the industry can get it right from a production, marketing and distrbution perspective,” the report states