Dairy Situation and OutlookDairy Situation and Outlook

Eric ErbaCalifornia Dairies, Inc.,

Dairy Situation and Outlooky

Thoughts from 2008 – “Dairy industry at a crossroads”g y y Level of government involvement Modifications of decades-old national policiesp Dominance of domestic marketCalifornia’s Golden Age of Dairying 1970 – 2008g y g Growth rates averaged 3 to 4% annually (US averaged 1.2%) 1993 – Took top-ranking dairy state title from Wisconsin Era Mega-Dairies – lowest cost per cwt in the U.S.

So what happened after 2008???

O/B Price, July 2008 to March 2011 (projected)

$17.00

$18.00

$14 00

$15.00

$16.00

$12.00

$13.00

$14.00

$ p

er c

wt.

$10.00

$11.00

$8.00

$9.00

l-0

8g-

08

p-0

8t-

08

v-0

8c-

08

n-0

9b-

09

r-0

9r-

09

y-0

9n

-09

ul-0

9g-

09

p-0

9t-

09

v-0

9c-

09

n-1

0b-

10ar

-10

pr-1

0y-

10n

-10

ul-1

0g-

10p-

10ct

-10

v-10

c-10

an-1

1eb

-11

ar-1

1

Jul

Aug Se

pO

ctN

ovD

ecJa

nF

ebM

arA

prM

ayJu

nJu Aug Se

pO

ctN

ovD

ec Jan

Feb

Ma

Ap

May

Jun

Ju Aug Se

pO

cN

ovD

e J a Fe

Ma

$350

Corn and Alfalfa Hay Prices Paid by California Dairy Producers.

$300

$350

$200

$250

n

$150

$200

$ pe

r ton

$50

$100

Spot Price for Corn Alfalfa Hay Price

$-

2006 2007 2008 2009 2010

California Milk Production, 1973 to 2010

40,000

45,000

30,000

35,000

s.

Trendline @+4.0%

per year

20,000

25,000

Mill

ion

lbs

10 000

15,000 Annual Average:+3.7%

5,000

10,000

-1973 1978 1983 1988 1993 1998 2003 2008

2008 - 2009 Dairy Financial Crisis

S t i d ti d i d t l ilkSustained negative producer margins due to low milk prices and high feed costsUnprecedented loss of producer equityUnprecedented loss of producer equityNumber of dairies declined from >2,000 in 2004 to ~1 600 in 2010~1,600 in 2010 Almost 100 California dairy farms exited in 2009 through

the CWT (herd retirement program)( p g )

Major disruption in dairy families and dairies that had existed for generations

Issues “in the Shadows”Issues in the ShadowsProcessing Plant Capacity

V li l h i 2008 Very little change since 2008 Not enough capacity to have CA continue at 4% milk

production growth per yearproduction growth per year National Supply Management Proliferation of ideas in 2010 Only one has been introduced into Congress Not widespread support for government-run supply

management California cooperatives and large proprietary plants have

maintained their own individual supply managementmaintained their own individual supply management programs

Issues “in the Shadows”Issues in the ShadowsExporting Dairy Products

If h i d i l id If the industry can commit long-term, great upside potential in international markets in the long run

What does it take to be a better supplier for international What does it take to be a better supplier for international customers? Capability to supply consistent, high quality, spec-

d d i l i hready product in correct volumes with correct documentation

Competitive pricing relative to world (not the lowest) Competitive pricing relative to world (not the lowest) Innovation – what can be provided to assist in

applications of product

S tli ht D i F P fit bilitSpotlight: Dairy Farm Profitability

H ill d i d i ft 2009?How will dairy producers survive after 2009? Will take years of good returns to earn back the equity lost

Growth by dairy producers has been an essentialGrowth by dairy producers has been an essential ingredient to profitability Projected annual growth rates of 1% to 2% not the Projected annual growth rates of 1% to 2%, not the

extraordinary growth rates of the past (3% to 4%)

If continued growth is not the answer, what will be g ,the key to “survivability”?

S tli ht D i F P fit bilitSpotlight: Dairy Farm Profitability

C i l b k d f dit th jCommercial banks and farm credit are the major source of operating capitalThe game has changed banks are demanding the reThe game has changed – banks are demanding the re-establishment of farm equitySome banks have announced scaling back or exitingSome banks have announced scaling back or exiting from dairy lending Portfolios were too heavily invested in dairies when thePortfolios were too heavily invested in dairies when the

economy collapsed

Interest expense is a larger line item on financials

S tli ht D i F P fit bilitSpotlight: Dairy Farm Profitability

M t d t t f d i b iMust adapt to a new way of doing business – no room for mistakesMust seek refinancing on different terms than in theMust seek refinancing on different terms than in the pastMust protect against falling milk prices and risingMust protect against falling milk prices and rising feed prices with hedging tools Milk futures, options, and swapsMilk futures, options, and swaps

Must involve lender by education, communication, more frequent contact regarding long termq g g g

Cost of Production Relative to Milk Income for California Dairy Farms

$25.00

Cost of Production Milk Income

$20.00

Cost of Production Milk Income

$10.00

$15.00

$ pe

r cw

t.

$5.00

$-Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010

What is the Future of Dairying in California?

Fewer facilities being operated, more cows and more g p ,production per cow (i.e., increased efficiencies)New larger dairies will be built at a much slower rate Look for increased number of remodels to existing facilities

Dairy producers must seek out more education on financing practices and commodity trading Milk price and feed price volatility are not going away

Dairymen will spend less time with cows and more in the office where critical business decisions must be mademade

What is the Future of DairyingWhat is the Future of Dairying in California?

New/expanded plants will be built primarily by cooperatives with emphasis on specialty productsPlants producing commodity products (butter, powder and cheddar cheese) must develop an operating plan i th b f l t i tin the absence of a relevant price support programIndustry must decide whether or not to support National Supply ManagementNational Supply Management

Concluding RemarksConcluding RemarksThe California dairy industry has matured, but it is

d i ffnot dying off“Dairy industry at a crossroads” has morphed into a question of dairy farm survivabilityquestion of dairy farm survivability Long-term factors that will shape the dairy industry continue to persistp Limitations on milk processing capacity National milk supply management

ff f f d l li i f d Effect of federal policies on feed costs Commitment to dairy product exports

The “new dairy world” continues to evolveThe new dairy world continues to evolve…