'Things are different this time,' economist says of downturn

By CECILIA PARSONS
Capital Press

The shellacking the dairy industry has taken in 2009 is leading to speculation that when demand increases, a rebound of cows and production won't come quickly -- if it comes at all.

"Things are different this time," said Bill Schiek, an economist with the Dairy Institute of California in Sacramento. "Strong dairymen are in a declining equity position and if they survive that will limit their ability to crank up milk production."

Rebuilding a capital base could take a long time, Schiek added, and that flies in the face of past experiences with healthy expansions following low milk price cycles.

Schiek said there is speculation that production won't ramp up to fill expected increased demand at processing plants.

California milk processing plants were running at capacity in 2007 and early 2008 as producers expanded herds. At that time, Schiek said, the state could have lost production and there would not have been shortages of dairy products. He said it was estimated that capacity was short five million pounds per day. California needed to cut production or build more plants and both those things are happening now.

California Dairies Inc. recently opened a new powder plant in Visalia and another is scheduled to open later this year.

"Will there be enough milk to satisfy every California plant in the future?" Schiek asked. That will depend on returns for each product and how long the low milk prices last. There could be a shortage in total processing, he said.

California's dairy industry is shrinking, confirmed CPA Paul Anema, who is with Genske Mulder, an accounting firm with a long history of working in the dairy industry.

Banks have tightened credit lines as they see operators struggle with low prices and high feed costs. Those who can get credit can borrow less because the assets they use as collateral -- cows and land -- are worth less now than in previous years.

Dairy operators who are managing to stay afloat have some common denominators, Anema said. One is that they have lenders who understand the dairy business and two; they have structured their long-term debt properly.

Others are dying a slow death, bleeding equity as they sell off cows and other assets.

"The fear is that if milk prices remain low, more milk will be taken off the market than necessary and there could be shortages of products like butter and cheese," he said.

Dairies that are able to hang on until prices rebound won't be able to meet demand, Anema added.

A USDA forecast in July showed significant downsizing of dairy herds nationwide.

By the fourth quarter of 2009, cow numbers are down 295,000 from the same time last year. By the first quarter of 2010, they are forecast to be down an additional 65,000 head.

There is a chance milk supply would not turn around as fast as milk prices could, said Mike Marsh, president of Western United Dairymen.

Foreign demand could drive the turn around, he pointed out, with China anticipating eight percent growth next year.

As dairy producers continue to sell heifers to generate some cash flow, there isn't the potential for a quick turn around. Rebound from low milk prices in 2006 and 2002 were quicker, Marsh said, because dairies didn't lose nearly the equity in their operations as they did in 2009.

Cecilia Parsons is a staff writer based in Ducor, Calif. E-mail: cparsons@capitalpress.com.