Sunday, December 5, 2010
(click on image to enlarge)
Conventional thinking, like the carnival worker, wants attention focused on supply/demand as the sole driver of production - simple answers are always favored.
We will soon hear some reports from the Dairy Industry Advisory Committee (DIAC) and the combined DOJ/USDA hearing. One could almost guarantee, there will be no mention of external capital driving production. That is capital not derived from the business of dairy farming.
In 2003 Rural Sociology magazine published a paper "Dairy Industrialization in the First Place" The article was all about the importance of L.A. real estate values driving dairy production.
Then in 2006 McKinsey & Company published a report ($2.3 million price tag) for the California Milk Advisory Board titled, "Foundations for a Consumer-Driven Dairy Growth Strategy" which stated, "The industry also benefited from a vitalizing cycle of reinvestments, spurred by steadily appreciating land values, useful capital gains tax treatment, and cash accounting."
So, even though there are dairies all over the country, growth has been driven primarily in the West funded with "appreciating land values" mostly from L.A. There is a .61 (positive) correlation between L.A. real estate values and the number of cows on farms in the U.S. As can be seen in the above graph, there is a lag factor.
The likelihood of real estate gaining legs and walking again is pretty remote. Unemployment is serious. Beneath the normally reported unemployment data are some very gruesome details. The employment participation rate for men age 25 to 54 (prime working years)fell in November to a record 88.8%. Without jobs there can be no buying of homes.
Capitalism holds that the selling price of anything is costs plus profit. The "real" profit generates capital. How long has it been since dairy has generated capital? How long has it been that policy makers have attributed growth in milk production to the wrong factor?