CaliforniaDairyIndustrySituationandOutlook

Dr.EricErbaCaliforniaDairies,Inc.

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CaliforniaMonthlyMilkProduction

2

2 2,500

2,750

3,000

3,250

3,500

3,750

4,000

CaliforniaMilkPrice

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3 $10.00

$12.00

$14.00

$16.00

$18.00

$20.00

$22.00

$24.00

NumberofCaliforniaDairyFarms

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1,752 1,715 1,6681,563

1,496 1,470 1,438 1,385

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2009 2010 2011 2012 2013 2014 2015 2016

LocationofMilkSupply

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•  GeographicfootprintofmilkisgettingsmallerandmoreconcentratedintheCentralValley•  Topeightcountiesareallinthemiddleone-thirdofthestate•  Eightcountiesproduce90%ofCalifornia’smilk

WherethedairyindustryishotandnotYTD2016MilkProduction

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OutlookforDairy•  Intwoshortyears,theCaliforniadairyindustryhascompletelychanged•  Fordecades,theindustrystruggledwithbalancingabundantmilksupplieswithprocessingcapacity•  Criticaltimesforbalancingmilksupplies:•  FebruarythroughMay•  ThanksgivingtoNewYear’s

•  Startinginlate2015,theoppositeproblememerged,i.e.,Rindingenoughmilktokeepassetsrunning 7

OutlookforDairy• Thefoundationofthedairyindustryisbuiltondairyfarmsandmilk• Threerelatedanddependentsectors:•  Farmstoproducefeed(manylocatedoutofstate)•  Milkprocessingplantstoproduce(andsell)dairyproducts•  AfRiliatedbusinessesthatareeconomicallyviable

• Widespreadandgrowingconcernaboutthealarmingtrendsseenonthedairyfarmside•  Dairyfarmsarejustrespondingtoeconomicsignalsandpressures 8

OutlookforDairy• WhathaschangedinthelastRivetotenyears?•  Milkpricestabilityhasbeenalteredasgovernmentinvolvementhasdecreased•  EmergenceofdiversiRiedoperations–operatedairyfarmbutwithsomeadditionalfarming–reducesrisk•  Permanentcropswereproventobeeffectiveagainstdownyearsforthedairyfarm

• Environmentalrestrictionshavebeenbuildingoveraperiodofyears•  Dairyfarmsandmilkprocessingplantsdonothavetheexemptionsthattheyusedtohave 9

OutlookforDairy• Whatdotheindicatorssuggestnow?• MilksupplieswillbecomelessavailableinCA• WillhaveastableandRixedassetbaseformilkprocessing•  Increasedcompetition–processingplantswillbeforcedtobelockinmilksupplies•  Greaterinterestinhavingdirectshippersinsteadofbuyingmilkfromacooperative•  Dairycooperativesareexpectedtobecompetitivewithothermilkbuyers

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OutlookforDairy• WhyaredairycoopsimportantinCA?• Historically,about80%ofCAmilkhasbeenmarketedbydairycooperatives• Relevancyofmilkmarketingcooperatives?• Keystoremainingrelevant:•  Continuetoperformwithgoodreturnsoncapitalinvestments•  Offerservicesthatcannotbefoundelsewhere•  ConsolidatetostrengthencooperativeinRluence

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OutlookforDairy•  SurvivabilityofdairyfarminginCA• Mustadapttoadifferentmodelthanwhatgrewtheindustryfordecades•  ThenextRiveyearswillnotresemblethelastRiveyears

•  Internationalmarketshavenotproventobepredictably“good”formilkprocessors

•  Increasedregulationsforagingeneral•  Dairyindustrywillhaveadditionalregulatoryproblemstosolve

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OutlookforDairy•  SurvivabilityofdairyfarminginCA(con’d.)• Morecompetitionforland,waterandlaborfromotherindustries• Workswellfordairiesseekingoptions•  Doesnotbodewellfornewdairyconstruction

•  On-farmmarginswillimproveascompetitionformilksuppliesheatup• Mustbereceptivetoanincreasinglyinquisitiveconsumerbase–“Howismyfoodproduced?”•  Fordairyfarmsthatadapt,thefutureisbright

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