California is the leading dairy producing state with nearly 1.69 million cows producing almost 42 billion pounds of raw milk, accounting for nearly one-fifth of total U.S. supply. Operating in one of the most environmentally progressive states, California dairies are constantly innovating and improving management practices for environmental stewardship. Innovation increases costs for California dairies. This and other economic pressures are causing consolidation and attrition in the dairy sector.
California is developing policies and regulations targeting greenhouse gas (GHG) emissions. This includes regulations for methane emissions from dairies. Senate Bill 1383 sets a target to reduce methane emissions by 2030. In response, the dairy industry has partnered with private investment to develop alternative revenue streams that help offset compliance costs. Anaerobic digesters generate Low Carbon Fuel Standards (LCFS) credits and reduce GHG emissions. Recent policy proposals consider changing LCFS and/or moving toward direct regulation of dairy emissions. This has important economic implications.
The California Cattle Council engaged ERA Economics (ERA) to complete the following data-driven assessments:
- Analyzing California dairy industry trends to illustrate how the industry has changed in response to market conditions, regulations, and other pressures.
- Evaluating whether anaerobic digesters are causing industry consolidation in California.
- Estimating the economic leakage of dairy to other states/countries in response to potential direct GHG regulation of dairies in California.
“Economic Analysis of California Dairy Consolidation, Attrition, and Policy Leakage” was commissioned by the California Cattle Council.
Click here to download the Executive Summary.
ERA prepared a data-driven economic analysis of California’s dairy industry. This was grounded in extensive outreach across the industry. An economic framework of California, U.S., and export milk production and demand was developed, including an explicit representation of small and large dairy operations. Key findings included:
- Digesters are not causing industry consolidation. Multiple factors have contributed to dairy industry consolidation, including production costs, economies of scale, age of farms, dairy policy, and other economic pressures.
- It is more expensive to operate a dairy in California. For example, most U.S. dairies must develop a nutrient management plan. California dairies face additional waste and groundwater regulation as well as air quality and dust control measures. Despite these cost disadvantages, California has maintained a leading dairy industry and has committed to substantial GHG reductions.
- LCFS credits incentivize investors to partner with dairies to invest in anaerobic digesters to reduce methane emissions. Average construction costs are more than $6 million. The dairy only receives a fraction of LCFS credits generated by a digester.
- For new digester construction to be economically viable, average LCFS prices need to be around $120 per credit for a 10-year project payback period; average prices in 2023 were $75 per credit.
An economic analysis of different scenarios illustrating direct regulation of dairy emissions, and phase-out of LCFS credits was developed. Three scenarios were developed to illustrate economic impacts and leakage (dairies and GHG emissions shifting out of state). Key results include:
- Annual direct economic losses are $300 to $675 million per year. A sensitivity analysis shows impacts up to $400 to $955 million per year.
- Phasing out LCFS credits to California dairies causes production to shift to dairies with lower emissions reductions in the state, and some production to shift other regions, effectively exporting environmental externalities. This is known as policy leakage, and the extent of the environmental consequences depends on production and manure management practices of these other dairies.
- Direct regulation of methane emissions puts disproportionately high-cost pressure on small dairy farms because the cost per cow of capital investment in methane-reducing technologies is substantially greater. Therefore, direct regulation leads to increased dairy sector consolidation in California. An estimated 20 – 25% of small dairies would exit California.
- Regulatory leakage occurs as production moves from California to out-of-state dairies with inferior methane management. Up to 1.43 million MTCO2e in emissions leakage was estimated.
- Economic impacts show direct economic losses only. There would be indirect impacts to businesses and employees. These impacts are likely to be concentrated in rural communities. These “multiplier effects” were not considered for this analysis.
The table below summarizes the results of this analysis.
The study provides a data-driven assessment of dairy industry trends, consolidation, digesters, and direct methane regulation. As state and local agencies begin implementing programs it is important to also evaluate the cumulative impact of these programs on the California dairy industry and the local communities that it supports. Future studies should illustrate the overlap in regulatory programs (such as requirements regarding water quality), individual and joint costs of meeting program requirements, and the impacts on local communities across the state.
If you’re interested to talk more about regulatory impacts to your industry or community, please contact us.
