California’s shift to the federal milk marketing order and volatile economic challenges within the dairy industry have created a landscape in which some producers are thriving while others fight for survival.
For producers on the front lines of the dairy industry, those whose milk flows from the farm into the production lines for cheese, fluid milk, butter and other products, the financial outlook hinges largely on the end product.
Under a system which now ties prices largely to end product pricing rather than pool pricing all milk, producers who ship their milk to plants which produce cheese are receiving significantly higher prices than those whose milk goes to butter and powder production.
The difference, Western United Dairies CEO Anja Raudabaugh recently told Mattos Newspapers, is stark.
“I have some dairy producers who year over year have been having the best year of their entire career,” Raudabaugh explained. “Half of my members are absolutely having the best year they have ever seen.”
But others, she said, are facing existential challenges.
“It has not been unusual for (a producer) to be making 50 percent less than their neighbor right now,” said Raudabaugh.
She estimated that the average pay to a dairy producer shipping to a cheese plant is more than $20 per 100 pounds of milk, while the average for a producer shipping to a butter/powder plant is in the range of $11 to $12.
The average break-even cost for a California dairy producer, Raudabaugh said, falls in the $16 to $17 range.
The state’s dairy producers entered into the federal milk marketing order in 2018, she said, drastically changing the pricing structure.
Without diving too deeply into the complexities of the milk pricing system, Raudabaugh explained that “broadly speaking, all milk was pooled and the average price was paid out to producers. Everybody basically got paid the same” under the previous structure.
Under the federal order, processors have more flexibility in how they pay their producers, and the format has largely shifted to an end product pricing system.
“Cheese plants have paid their producers what they have reaped off the market. The market for cheese has been good,” Raudabaugh explained.
At the other end of the spectrum, though, are the butter/powder processors. While butter has long been a “golden” dairy commodity, she said, its dry milk powder by-product is at the lowest rung on the pricing scale of dairy products.
“The producer who is making milk for a butter/powder plant gets the average of those two products,” Raudabaugh stated.
Cooperatives which have processing capability for both Class III (cheese) and Class IV (butter/powder) plants have the flexibility to pool or de-pool all or part of their milk, she noted, which maximizes the plant’s ability to make a profitable product for its farmers.
“The synopsis is that in California our producers’ ability to survive in the future depends on how well their processor plays the pool game. If they are really adept at it, they will have a competitive edge.”
Other financial challenges have also come into play.
The cost of feed has skyrocketed in the past year, she noted, and has been exacerbated by dry conditions in California which have limited the ability of Golden State producers to grow their own commodities.
“Feed prices have been terrible,” Raudabaugh remarked. “If you didn’t have your feed hedged and were trying to buy rolled corn on the market you paid mightily for that.”
Labor costs are also a concern, particularly in the local market where dairy producers are competing with other employers for workers.
Dairy producers in some areas, she said, are paying $18 to $20 an hour to hire employees “because they are right next door to urban construction projects” competing for labor.
Some processors have reportedly taken measures to enforce limits or asking producers to cut back the amount of milk they are shipping.
“Mostly what I hear is that cooperatives are simply trying to enforce their base with members,” she explained. But, Raudabaugh noted, she has also heard reports that two private processors have asked for milk cutbacks from their shippers, one last April and another recently.
While demand for dairy products remains strong, she said, “right now across the United States there is a massive over-supply of milk being produced. In California the numbers are not quite as stark, but we are probably producing 2-3 percent more year over year.”
While California is fortunate to have a very high manufacturing capacity, Raudabaugh said, if the rest of the nation is overflowing with milk it is only a matter of time before California is impacted.
Creameries, she explained, must strike a balance to avoid creating a surplus of high-value commodities such as cheese and butter, which would ultimately diminish returns to producers. “Processing milk for higher value products is one pressure point – (which) combined with contracting the supply of that higher value product creates a better balance for farmers,” Raudabaugh explained.
Pandemic relief funds were crucial in helping struggling dairy producers survive the past year, Raudabaugh said. She encouraged those who could to invest those funds into strengthening their operations through measures such as hedging feed costs and base milk prices. For others, the payments went directly to staying afloat.
“The payments have been put to good use. People who didn’t really need the money, I’ve seen reinvest to prevent disaster later. It wasn’t necessarily needed in half the cases, but the other half used it to buy feed,” Raudabaugh commented. “It has been the only thing preventing bankruptcy in a lot of cases.”
Increasingly, Raudabaugh added, she is encouraging producers to lock in as many of their costs as possible through hedging.
The current situation, she told Mattos Newspapers, is not sustainable for producers who are shipping to butter/powder plants.
“Dairymen in California are used to having a good year, a bad year, a good year a bad year. They went to the federal order because they wanted to see stability. That is not going to happen,” Raudabaugh said. “In the past, everybody was on the same playing field. If you were a producer you knew what you were going to make your neighbor was going to make the same. Now there are winners and losers.”
Source: westsideconnect.com
