by Chas Bonner
If anyone tells you with certainty about the dairy industry future, listen, learn, and then toss. There are as many theories as there are dairymen. The one thing we do know is that the business went through very trying times recently, roughly 1/3 of dairies are in “special assets” divisions of banks, and although economics are improving, the business is still questionable.
Because we had major interest from a Chinese company, we spent quite some time in southern Idaho and California researching the industry. The result of that research is we are more positive about the long-range future of the business than the past, but cost of inputs is a real negative for the business. Reasons for the relatively “positive” opinion (emphasis on opinion):
- Although fluid milk sales are down over the past 20 years, milk derivatives are strong. For instance, specialty cheeses increased as a category by 35% three years ago (granted, a small category), and all cheese is still increasing; powdered milk products are growing, with much of that going to developing countries; food scares have caused “Made in America” to be a strong marketing tool; milk derivatives are growing as a food additive; the U.S. government continues to push agriculture exports because that is the most positive contributor to our balance of payments.
- By 2050 China is predicted to have a GDP of $71 Trillion, double the U.S., and India will be right behind us at $35 Trillion. We are currently $14+ Trillion. Many dairy operators told us that an average 10% return annually was not unrealistic, but recognize years like 2007/08/09 can
take you out of business. However, even if 10% cash return, one cannot expect the same value appreciation on a dairy as he can on farmland unless the industry booms. - Several banks have stated that to remain competitive in the dairy industry, one must have size and financial strength because of the multitude of requirements for success.
- We often heard there are “Four immutable laws of the dairy industry:” 1. Must have owner or first rate dairyman on premise 24/7; 2. Veterinarian on staff or very close by; 3. Nutritionist at the dairy every day; 4. CPA do bookkeeping including Balance Sheets and Cash Flow statements, and close on a monthly basis.
Nationally, there appear to be fewer investment groups interested in dairy than in traditional farmland, and we believe the reason is the complexity of the business. That is a benefit to true dairymen as no one needs a big increase in supply.
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