The Gulf Today - Business - - SPECIAL REPORT -

TURLOCK: “The over­all feel­ing is that we hit ‘peak cow’ five or six years ago.”

Devin Gi­o­letti, a fourth-gen­er­a­tion dairy farmer in this Cen­tral Val­ley com­mu­nity, was out­lin­ing for me the tra­jec­tory of the dairy in­dus­try in Cal­i­for­nia, the na­tion’s largest. He was al­lud­ing back to when the in­dus­try was still grow­ing and milk prices were ris­ing, and his fam­ily farm was ex­pand­ing the herd and in­vest­ing in ad­vanced equip­ment to raise the pro­duc­tiv­ity of its thou­sands of cows.

Things look dif­fer­ent now. The in­dus­try, in­clud­ing his farm, has been un­prof­itable since 2014, when prices peaked. Since then, the av­er­age pro­ducer price for raw milk has fallen by al­most one-third, to less than the cost of pro­duc­tion.

For a few months this spring, it looked as if milk prices were fi­nally turn­ing around. Then came the tariffs.

Start­ing at the be­gin­ning of July, Mex­ico and China im­posed tariffs on U.S. dairy prod­ucts in re­tal­i­a­tion for Trump ad­min­is­tra­tion trade bel­liger­ence. China, which had been de­vel­op­ing as a promis­ing new mar­ket for U.S. dairies, im­posed new tariffs on dairy prod­ucts al­most across the board as Trump moved to place 25 per­cent tariffs on up to $50 bil­lion in im­ported goods; com­bined with ex­ist­ing tariffs, the levies now reach as high as 45 per­cent on some prod­ucts. Trump added 10 per­cent tariffs on an ad­di­tional $200 bil­lion in Chi­nese im­ports in Au­gust, with a threat to raise them to 25 per­cent on Jan. 1.

Mean­while, Mex­ico, re­tal­i­at­ing for Trump tariffs aimed at forc­ing a rene­go­ti­a­tion of the North Amer­i­can Free Trade Agree­ment, im­posed 25 per­cent tariffs on U.S. cheese. Although the agree­ment has been mod­estly renegotiated, the tariffs are still in place.

Those moves have left dairy pro­duc­ers feel­ing like col­lat­eral dam­age in a war they had noth­ing to do with. Wis­con­sin may bill it­self as “Amer­ica’s Dairy­land,” but Cal­i­for­nia is the lead­ing dairy state in the union, with the most cows and high­est pro­duc­tion. Cal­i­for­nia dairies had made great strides in open­ing new for­eign mar­kets, in part by ex­ploit­ing the ben­e­fits of NAFTA and by fo­cused ap­proaches to China and other Asian mar­kets.

“Two decades ago, this in­dus­try was largely do­mes­tic,” says Rachel Kal­dor, ex­ec­u­tive di­rec­tor of the Dairy In­sti­tute of Cal­i­for­nia, a statewide trade as­so­ci­a­tion. Now, with a third of its pro­duc­tion ex­ported to trad­ing part­ners that are “ex­er­cised about tariffs be­ing thrown on their prod­ucts and want to re­tal­i­ate, we look like we’re go­ing to be vul­ner­a­ble,” she says.

“These are mar­kets we’ve been work­ing on for years,” says An­nie Ac­moody, chief econ­o­mist for the trade group Western United Dairy­men. Dairy pro­duc­ers fear that while they’re shut out of the mar­kets, com­peti­tors from Europe, Aus­tralia and New Zealand will take the op­por­tu­nity to strengthen their foothold. “Once you lose a mar­ket, it takes time to get it back,” she says.

For Gi­o­letti and other mem­bers of Cal­i­for­nia Dairies Inc., the state’s largest dairy co­op­er­a­tive and the sec­ond-largest in the U.S., the trade war with China has had a di­rect ef­fect: “We no longer sell any prod­ucts into China since the mid­dle of this year,” says Rob Van­den­heuvel, the co-op’s vice pres­i­dent of in­dus­try and mem­ber re­la­tions. That means the loss of 6 per­cent to 9 per­cent of its sales of milk pow­der. “We’re down to zero there.”

The Trump ad­min­is­tra­tion hasn’t paid much at­ten­tion. The White House an­nounced a plan this sum­mer to pro­vide up to $12 bil­lion in re­lief for all farm­ers af­fected by the tariffs, but only $4.7 bil­lion has been set for pay­ments thus far, in­clud­ing a mere $127 mil­lion for dairy farm­ers na­tion­wide. “That’s a nice sym­bolic sym­pa­thy payment,” Kal­dor said, “but it won’t do much to re­store mar­kets that have been lost.” Nor will it do much to cover the es­ti­mated $1.5 bil­lion in losses the na­tion­wide dairy in­dus­try ex­pects to in­cur this year be­cause the tariffs have pushed dairy prices down.

Agri­cul­ture faces un­told chal­lenges all over the state, but dairy farm­ers ar­guably have a tougher time of it. Live­stock has to be cared for more in­ten­sively than field crops. On top of the en­vi­ron­men­tal re­stric­tions con­fronting all farm­ers, dairies must deal with reg­u­la­tions gov­ern­ing meth­ane, a green­house gas pro­duced by cow di­ges­tion and bub­bling up from the ma­nure spread into pits to be dried for fer­til­izer. New state rules will reg­u­late how much ground­wa­ter farm­ers can ex­tract, pos­ing an­other po­ten­tial lim­i­ta­tion on their busi­ness.

La­bor has got­ten scarce. Even though Gi­o­letti’s work­force is mostly for­eign-born, it’s not im­mi­gra­tion en­force­ment that’s caus­ing the scarcity, he says, but de­mand from a surg­ing con­struc­tion sec­tor that’s out­bid­ding him. (He says he pays an av­er­age of $12 an hour, which doesn’t in­clude ben­e­fits such as health cov­er­age but does in­clude free hous­ing.)

Then there’s the price of farm­land, which has been driven higher by en­croach­ing res­i­den­tial de­vel­op­ment in South­ern Cal­i­for­nia and the suit­abil­ity of land now de­voted to dairies in the Cen­tral Val­ley and North­ern Cal­i­for­nia for high-value crops such as al­monds. That’s prompted scores of dairies to con­vert to tree crops in re­cent years. The num­ber of Cal­i­for­nia dairies has shrunk to 1,331 at the end of 2017 from nearly 1,600 as re­cently as 2012. Ex­pec­ta­tions are that by the end of this year the num­ber will fall be­low 1,300.

But when Cal­i­for­nia dairy own­ers get to­gether, prices are the No. 1 topic of dis­cus­sion, Gi­o­letti told me from be­hind the wheel of his black truck as we tooled around his 800-acre spread (an ad­di­tional 1,200 acres nearby are farmed for feed). We passed tin-roofed en­clo­sures for his 2,300 Hol­stein milk cows and for 3,000 heifers (young cows that have not yet calved and thus aren’t yet pro­duc­ing milk), and rows of stalls for calves. At one end of the farm sup­plies of silage were stored in rows of white plas­tic sleeves re­sem­bling im­mense, fat cater­pil­lars.

The math of milk prices tells the story of dairy profit and loss in grisly de­tail. Pro­ducer prices are ba­si­cally de­rived from a blend of com­mod­ity prices on the Chicago ex­change for but­ter, milk pow­der, cheese and whey. That makes all pro­duc­ers sub­ject to price changes in any of the com­po­nents.

That’s been a prob­lem for Gi­o­letti and other mem­bers of Cal­i­for­nia Dairies Inc. Mex­ico’s re­tal­ia­tory tariffs are im­posed chiefly on cheese, which the co-op doesn’t pro­duce. But with the value of the cheese com­po­nent of the over­all com­mod­ity price be­ing driven down, even non-cheese pro­duc­ers have been feel­ing the pain.

About 60 per­cent of the co-op’s main prod­uct, milk pow­der, is ex­ported, chiefly to Mex­ico, Van­den­heuvel says. Even though the vol­ume of co-op ship­ments into Mex­ico hasn’t been af­fected by the tariffs, he says, “be­cause cheese has been heav­ily im­pacted by the tariffs, that’s de­pressed the farmer’s over­all price.”

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