Kings County’s $773 million dairy industry -- along with the rest of the state’s powerhouse milk machine — is going into a downturn that could last for most of 2015, forecasters say.
“I’m not sure how long it’s going to be, but based on our own estimates, we’re going to see the price coming down,” said Mike Marsh, CEO of Western United Dairymen.
Wholesale milk prices -- the price farmers get paid when the tanker-truck empties at the processing plant -- have soared to extraordinary heights lately. They reached an all-time high in October, then began to slip in November.
In Kings, the wholesale milk price is a more important factor in the county's farm-based economy than the price consumers pay at the grocery store. The ripple effect of local dairies spreads far and wide into other industries that directly or indirectly benefit.
The downhill price slope is expected to steepen as December progresses. Looking ahead, Rabobank is forecasting low milk prices through September 2015.
To understand why, you have to understand that dairy is a global commodity with a worldwide market, mainly due to cheese, powdered milk and other dairy products that can be easily shipped overseas.
Basic economics dictates that when supply exceeds demand, the price will drop, supply will shrink and the market will seek to achieve a new balance.
The explanation for why milk demand is lagging behind milk supply requires an understanding of geopolitics, recent political crises and the health of the global economy.
The high prices U.S. dairy producers have enjoyed in 2014 have largely been the product of demand overseas. China’s massive growing economy – growing at a rate faster than the U.S. – has produced a rising standard of living and a demand for products such as cheese, powdered milk and infant formula containing dairy.
Chinese consumers perceive food products from the U.S., Europe and other English-speaking countries to be safer, so they want to buy them.
A recent banking scandal and other factors, however, have slowed China's economy. As a result, Chinese shoppers are backing off their purchases of expensive U.S. dairy imports, which had been selling well despite Chinese tariffs designed to make them less attractive.
Russia also comes into the mix. After western countries imposed sanctions earlier this year to punish Russia for its intervention in Ukraine, Russian President Vladimir Putin retaliated in August by imposing a one-year ban on most dairy imports from the U.S. and the European Union.
Combined with China’s slowdown, Russia’s ban helped create a worldwide milk glut. U.S. prices are dropping to reflect that.
“Having the Chinese come out of the market is a problem,” Marsh said. “I would describe it as a convergence of prices in the U.S. with [lower] world prices.”
The forecast raises the specter of a repeat of harsh downturns in 2009 and 2011 that drove many Kings County dairy operators out of business.
According to Carol Collar, a farm adviser with the University of California Extension, Kings County had 115 dairies in 2013, with 179,000 milk cows. That’s 35 fewer dairies and 2,243 fewer milk cows than in 2009.
Data for 2014 isn’t available yet.
For those who fear a repeat of the bloodletting, Riverdale dairyman Steve Maddox offered assurances that 2015 won’t be a meltdown.
“Our feed costs are less, because of the big grain crop [in the Midwest],” Maddox said. “That was the double whammy in 2009.”
“It will be tight, but most of the people should be able to weather this [next] year,” he said.
Dairy isn’t as quick to respond to price changes as some other production industries. Once cows are pregnant, they have to be milked or they will get an infection. Conversely, once a herd is cut and milk output is reduced, it takes a while to crank up the milk volume back to where it was.
As a result, the price situation is likely to overcorrect before the market reaches a new supply-demand equilibrium.
Marsh thinks stability will return sometime in late 2015.
“As long as the farmer can buy the corn, buy the alfalfa at a reasonable price, I’m hopeful we’re going to be able to maintain a relatively favorable market for the dairy farmer,” Marsh said.