Samenvatting

This research is conducted for the Food and Agriculture Research and Advisory department at Rabobank North and is designated for internal use only. The research is constructed from desk research and field research by means of interview responses from participants active in various parts of the California dairy sector. These participants were selected based on their corporate function, authority and experience in the California dairy sector.

A vast proportion of the clients in the California client portfolio of Rabobank North America are active in the dairy sector. Volatile milk prices and rapidly changing feed prices have, and are expected to, affect the profitability of dairy operations in California. This research is intended for Rabobank North America to manage the exposure of its clients to the uncertain dairy sector.

The two integral elements in the research are the volatility of the California milk price and the instability in feed costs. The volatility of the milk price causes uncertainty in the dairy sector in terms of revenue to dairy operations. The combination of this volatile revenue stream and rapidly moving feed costs creates uncertainty in profitability to California dairy operations. Such uncertain profitability will eventually impose a credit risk to financial service providers active in the California dairy sector, like Rabobank North America.

To ensure profitability of their business, dairy operations in California should consider a diversification strategy. Although different forms of diversification are feasible for dairy operations in California, it is important that the management does not lose focus of the core business, i.e. milk production. The most effective diversification strategy is growing own feed on continuous bases on excess, or newly purchased land; this will decrease the exposure of the dairy operation to volatile feed costs. Diversification in other crops is also possible; this could potentially create another revenue stream to the dairy operation which could compensate for less profitable years in the dairy sector.

It is recommended that dairy operations in California diversify by growing their own feed. This will mitigate the risk of increasing and volatile feed costs, and in the long-term stabilize profitability to dairy operations. Excess feed can be sold on the market with a profit. Furthermore, it is recommended that dairy operations stay with their core-business as the dairy sector is becoming increasingly complex. In this respect the use of features to lock in crop prices is not recommended because it is a potentially costly strategy, and not easily applicable to a volatile market. Factors such as management and team effort will become increasingly important. Furthermore, dairy operations should milk their dairy cows three times a day to achieve to achieve the lowest average costs of production per hundredweight of milk. The surviving dairy operations in the California dairy sector will eventually benefit from emerging stable export markets, which are expected to substitute for the reduced demand resulting from the outflow of milk processors in California.