Can California dairy survive water scarcity, labor laws, and green rules? Innovation vs. exodus in America’s milk capital.
EXECUTIVE SUMMARY: California’s dairy industry, the nation’s largest milk producer, confronts existential threats: severe water scarcity, restrictive labor laws, and stringent environmental regulations. Producers face tough choices—innovate or relocate—as feed costs soar, overtime mandates strain budgets and methane regulations drive compliance costs. While some operations pivot to water-smart practices, methane digesters, and automation, others exit for states like South Dakota with friendlier policies. Despite challenges, California leads in sustainability, cutting emissions by 24.3M metric tons via digesters. The industry’s survival hinges on balancing adaptation, cost management, and policy advocacy in a rapidly shifting landscape.
KEY TAKEAWAYS:
- Triple Threat: Water scarcity, labor overtime rules, and environmental regulations squeeze profits, accelerating consolidation.
- Innovation Wins: Despite costs, methane digesters, robotic milking, and water recycling showcase CA’s sustainability leadership.
- Exodus Trend: Producers like David Lemstra relocate to states with easier permitting, lower costs, and stable water access.
- Strategic Survival: Success requires automation, diversified markets, and the conversion of compliance (e.g., methane capture) into revenue streams.
California’s dairy industry is at a critical crossroads in 2025, facing a perfect storm of water scarcity, labor regulations, and environmental restrictions that threaten its position as America’s top milk producer. With 1.71 million cows generating billions in economic activity, producers are forced to innovate or evacuate as the state’s regulatory and resource landscape becomes increasingly hostile to large-scale dairy operations.
The Water Crisis: A Global Challenge with Local Intensity
California’s dairy producers aren’t just worried about water—they’re obsessed with it—and for good reason. The state’s ongoing water crisis has evolved from a periodic concern to an existential threat for many operations.
“As a dairy producer, this is an ever-growing challenge,” says Ryan Junio, owner of Four J Jerseys in Pixley, reflecting the sentiments shared across the industry.
The numbers tell a sobering story. California has overdrafted approximately 2 million acre-feet of water annually for years, creating an unsustainable situation that finally reached crisis levels during the 2014 drought. This prompted the state to implement groundwater regulations, which many producers believe should have happened decades earlier.
Tyler Ribeiro from Rib-Arrow Dairy in Tulare doesn’t mince words about the severity of the situation: “With the lack of water due to the lack of snowpack in the mountains, inability to store surface water, restrictions on ground pumping and now a potential tariff measuring contest, we could be in for a steady increase in feed costs through 2025.”
According to Food & Water Watch, California’s mega-dairies require approximately 152 million gallons of water daily to water and wash cows and buildings—”more than enough to meet the indoor water needs for the entire San Diego metropolitan area.” This figure doesn’t include water needed to move manure into storage systems or produce animal feed, which encompasses the most significant water footprint for milk production.
What makes this particularly challenging is how water scarcity creates a cascading effect throughout dairy operations. Reduced water availability means:
- Fewer irrigated acres for feed production
- Higher competition for available feed crops
- Escalating costs for purchased feed
- Reduced profit margins even when milk prices are high
“There is a lot of farmland that used to be farmable via groundwater that is not allotted that opportunity because of new regulations,” Ribeiro explains. “These new restrictions have already and will continue to decrease the number of farmable acres, making competition for feed crops increasingly more difficult.”
His assessment of the immediate future is blunt: “2025 will be the game of water and deep pockets. Those with water or the ability to bring in feed will fare well; those that can’t may face some difficulties moving forward.”
Global Water Challenges in Dairy
Water scarcity isn’t unique to California. Australia’s dairy industry faces similar challenges, with drought and extreme weather events limiting water availability for irrigation. Sustainable Table states, “As water scarcity due to climate change becomes more severe, and the water resources we have are needed to supply a growing population, farmers will need to dramatically reduce water consumption and improve water recycling if dairy farming is to be sustainable.”
Water management presents different challenges in Pakistan, which has the world’s third-largest dairy industry. While water availability may be less restricted than in California, the absence of extraordinary chain infrastructure and quality standards creates inefficiencies throughout the value chain, according to a 2019 study published in the Journal of Agriculture and Rural Development in the Tropics and Subtropics.
Labor Laws: The Overtime Squeeze
While water dominates headlines, California’s labor regulations quietly reshape dairy economics. Beginning January 1, 2025, all agricultural workers at small employers (25 or fewer employees) will receive overtime pay at the employee’s regular rate after 8 hours in a workday or 40 hours in a workweek.
This completes the state’s phase-in of agricultural overtime requirements, which began in 2019. This puts dairy producers—who require round-the-clock staffing—in a challenging position.
Melvin Medeiros, a dairy producer from Layton, California, captures the frustration felt throughout the industry: “I do know when legislation gets involved, it turns into a mess. We’re in that mess now and trying to figure out how to invest in this farm to make it more efficient and cut back on labor.”
The impact of these regulations is already evident in employment patterns. USDA Farm Labor Survey data shows that average weekly hours for California farm workers have steadily decreased compared to the national average—from 2.7 hours more than the national average in 2016 to one hour less than the national average in 2023.
For dairy operations, which can’t simply shut down milking parlors on weekends or holidays, these regulations create a stark choice:
- Pay significantly higher labor costs for necessary overtime
- Hire additional workers to avoid overtime (increasing management complexity)
- Invest heavily in automation to reduce labor needs
- Relocate to states with more favorable labor laws
International Labor Perspectives
Labor challenges vary significantly across global dairy regions. In the European Union, dairy farms face similar regulatory pressures but often operate at more minor scales with more family labor. According to OECD research on global dairy trends, labor regulations in countries like Germany and the Netherlands have contributed to industry consolidation through mechanisms different from those in California.
In developing dairy markets like the Baltic states, labor structures are quite different. The OECD describes a “bipolar” production system—” with a strong competitive sector and part social sector.” These regions face different labor challenges, focusing more on productivity improvements and quality standards than overtime regulations.
Environmental Regulations: Balancing Sustainability and Viability
California’s environmental regulations, particularly those targeting greenhouse gas emissions, create challenges and opportunities for dairy producers. According to a 2024 economic analysis by ERA Economics for the California Cattle Council, these regulations inevitably increase operational costs, creating “a tradeoff between stricter regulations for environmental objectives and increasing costs at the farm.”
The report notes that “the increase in production costs due to regulation decreases the competitiveness of California producers. This results in higher food costs and economic losses, with jobs, income, and farms leaving California for other states with more favorable business conditions.”
However, California’s dairy industry has responded with remarkable innovation. The state now boasts 238 dairy digester projects capturing methane to create renewable energy sources, with 129 currently operational and the remainder under development.
These projects have achieved remarkable results, accounting for 20% of greenhouse gas reductions from all state-funded climate programs while receiving just 1.5% of the awarded funds. These efforts have contributed to a decrease of 24.3 million metric tons of CO2 equivalent emissions.
Karen Ross, Secretary of the California Department of Food and Agriculture, recognizes the challenges and the industry’s response: “I’m very proud of the work we’ve been able to do on climate-smart agriculture. I love that 24.3 million metric tons of CO2 equivalent reductions in greenhouse gasses are because of dairy digesters.”
Environmental Partnerships
Environmental NGOs, leading food and beverage companies, and government agencies have worked alongside dairy farmers to bring sustainability solutions to life. As reported by the California Dairy Research Foundation in May 2024, companies like Starbucks have developed partnerships with California’s largest dairy cooperative, California Dairies, Inc., to implement water conservation tools, electric tractors, and improved manure management technologies on farms.
These collaborative approaches represent a promising model for addressing environmental challenges while maintaining economic viability.
Why This Matters to Your Bottom Line
The combined effect of water scarcity, labor regulations, and environmental requirements creates a competitive disadvantage that’s becoming increasingly difficult to overcome. This has accelerated consolidation within the industry.
According to Food & Water Watch, “California reported roughly half as many family-scale dairies in 2022 compared to just 2017.” This consolidation trend “harms rural communities, with the rise in factory farms linked to a host of social and economic declines, from higher poverty rates to out-migration.”
Tony Louters from T&C Louters Dairy in Merced ranks his concerns bluntly: “Water is our biggest concern right now, along with California environmental and business regulations, continued animal activist pressure, and rising labor costs.”
The processing side of the industry faces similar challenges. “California is a difficult place to do business and especially to build capacity,” Louters notes. “Most plants are built in other dairy states, so they do not have to deal with California’s business regulations.”
This processing bottleneck creates additional market pressures for producers, limiting their options for milk marketing and potentially reducing farm-gate prices.
The Exodus: Finding Greener Pastures
For some producers, the accumulation of challenges has prompted difficult decisions about their future in California. David Lemstra’s story illustrates this trend. After searching for a decade, Lemstra and his family relocated to South Dakota from central California, where they had been established for more than 40 years.
Three pivotal factors drove their decision:
- Feed availability
- Easier permitting processes
- Greater processing capacity
Lemstra describes his family’s coordinated departure from the state as “death by 1,000 cuts,” citing the impact of long-standing political and resource management decisions. California’s overtime labor rule is a considerable obstacle, especially compared to South Dakota’s business-friendly environment.
One benefit Lemstra has discovered in South Dakota is a more favorable labor market. “Some locals say labor is backbreaking, but they don’t know how hard it can potentially get,” he says, appreciating the motivated workforce available in his new home.
Global Industry Restructuring
This migration of dairy operations isn’t unique to the United States. According to OECD research, dairy industries worldwide are undergoing significant restructuring in response to economic and regulatory pressures. In export-oriented countries like France, Ireland, and the Netherlands, dairy companies expand through external investments in other countries. In contrast, developments in countries like Canada, Germany, and the US have mainly focused on greater concentration.
The OECD notes, “The creation of strategic alliances to penetrate product or regional markets is a growing phenomenon,” raising essential questions about competition policy and industry structure.
Water-Smart Strategies for Dairy Survival
Water management has become the cornerstone of operational planning for dairy producers committed to California. The good news is that significant progress has already been made. According to the Dairy Cares initiative, the amount of water used to produce each gallon of California milk has decreased more than 88% over the past 50-plus years, primarily due to:
- Improved feed crop production
- Use of byproducts as feed
- Water use efficiency
Water reuse is now standard practice on California dairy farms, where the same water is used an average of four times:
- Clean water is used in the refrigeration process to cool milk
- Water recycled from refrigeration is then used to wash and cool cows
- After water is used to wash cows, it is captured, stored, and used multiple times to clean barn floors
Additionally, up to 40% of feed ingredients used in California dairies are agricultural byproducts, such as almond hulls, cottonseed, and citrus pulp, which could otherwise be wasted. By upcycling byproducts, dairy farms are reducing the use of water, energy, and fossil fuels needed to grow feed crops.
In 2020, researchers at UC Davis analyzed the economic and environmental sustainability implications of feeding byproducts to California dairy cows. They determined that this practice reduces the water needed to grow feed by as much as 1.3 trillion gallons.
Labor Optimization Approaches
To address labor challenges, successful California dairy operations are implementing several strategies:
- Strategic Automation: Investing in robotic milking systems, automated feeding technology, and other labor-saving equipment to reduce dependence on manual labor
- Schedule Optimization: Restructuring work schedules to minimize overtime while maintaining animal care standards
- Employee Development: Creating clear career paths and training programs to improve retention and productivity
- Housing Solutions: Some more extensive operations are developing employee housing to address California’s high cost of living and reduce commuting time
Environmental Innovation
California’s dairy industry has become a leader in environmental innovation, particularly in addressing methane emissions. The California Dairy Research Foundation reports, “Over the past few years, California’s dairy methane reduction programs have been among the state’s most cost-effective efforts in reducing climate emissions.”
Key initiatives include:
- Dairy Digesters: Capturing methane from manure and converting it to renewable natural gas
- Dairy PLUS Program: Supporting advanced manure management projects that better protect groundwater while also reducing methane emissions
- Feed Additives: Developing new programs to support the adoption of feed additives and other strategies to reduce enteric methane emissions from cows
- Electric Equipment: Transitioning to electric tractors and other equipment to reduce fossil fuel use
| Challenge | Impact on Operations | Adaptation Strategies | Success Indicators |
| Water Scarcity | Reduced feed production, higher input costs | Water recycling, byproduct feeds, irrigation efficiency | Reduced water usage per cwt milk, stable feed costs |
| Labor Regulations | Higher labor costs, scheduling complexity | Strategic automation, optimized scheduling, employee development | Reduced labor hours per cwt milk, improved retention |
| Environmental Regulations | Compliance costs, operational constraints | Methane digesters, feed additives, electric equipment | New revenue streams, reduced emissions per cwt milk |
The Bottom Line
California’s dairy industry isn’t just facing challenges—it’s experiencing a fundamental transformation that will determine which operations survive and thrive in the coming decade. The combined pressures of water scarcity, labor regulations, and environmental restrictions are forcing a level of adaptation and innovation unprecedented in the industry’s history.
For producers committed to staying in California, success will require:
- Strategic water management that anticipates continued scarcity
- Labor efficiency improvements through targeted automation
- Environmental innovations that turn compliance costs into revenue opportunities
- Market diversification to capture premium prices where possible
As Ribeiro puts it: “Dairy producers are fighters. It’s in our blood. It’s how we were raised and woven into the fabric of who we are. If there is a conceivable way to stay in business doing what we love, we will find a way.”
That fighting spirit will be essential as California’s dairy industry navigates this perfect storm of challenges. The producers who emerge on the other side will likely be more efficient, innovative, and resilient—having transformed their operations to succeed despite the state’s challenging business climate.
The question isn’t whether California’s dairy industry will survive—it’s how it will be transformed in the process. For forward-thinking producers, these challenges represent threats and opportunities to build operations that can thrive in the resource-constrained, highly regulated future that awaits all of agriculture.
Read more:
- Dairy’s Rollercoaster: Navigating 2025’s Peaks and Valleys
Explores 2025’s volatile market dynamics, H5N1 disruptions in California, and strategies for surviving price swings and supply shortages. - Dairy Farmers: New Labor Law Changes Could Cost You Big
Breaks down FLSA updates doubling exempt employee salary thresholds (to $58,560/year by 2025) and their financial implications for dairy operations. - Sustainable Dairy Farming: Revolutionizing Practices for a Greener…
Highlights innovations like robotic milking, anaerobic digestion, and water recycling to balance environmental goals with profitability.
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