An Analysis of the Inland Empire Dairy Industry

An Analysis of the Inland
Empire Dairy Industry
November 2013
Andrew Chang & Company, LLC
1301 H Street Sacramento  CA 95814  916-538-6091
0
About Andrew Chang & Company, LLC:
The professionals at Andrew Chang & Company work with our clients to achieve tangible results
by combining best-in-class research and analyses with unique insights into public policy and
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recognized experts in State and local government revenue projection modeling and have
performed revenue projection modeling for cities and State government agencies throughout
California The professional qualifications of the staff who worked on this report are set forth as
Exhibit A.
1
An Analysis of the Inland Empire Dairy Industry
(Table of Contents)
Section
Page
Key Findings
3
1. Background
4
2. Inland Empire Dairy Industry Overview
6
3. Literature Review
10
4. Decline of Inland Empire Dairy
12
Conclusion
19
Exhibit A – Professional Qualifications
20
2
An Analysis of the Inland Empire Dairy Industry
(Key Findings)

The dairy industry in the Inland Empire is small: In 2010, dairy in the Inland Empire
made up only 0.9% of the regional economy and only 3.1% of California’s total
agriculture industry. In 2010, there were approximately 5,000 workers employed in the
agriculture industry in the Inland Empire. This equals less than 0.3% of all employed
persons in the region.

The dairy industry in the Inland Empire is shrinking despite significant growth
statewide: In 1995, there were 329 operating dairies in the Inland Empire, with over
310,000 dairy cows. As of 2012, the number of operating dairies dropped to 111 with
only 115,000 dairy cows, amounting to a decline of over 60%. In the rest of the state, the
number of dairies also declined, but the number of dairy cows increased by 76%,
reflecting an overall consolidation trend in the industry.

The dairy industry in Southern California has been consolidating and shrinking:
Los Angeles County between 1920 and 1970 was a major dairy producing area, with
three major regions located in the San Fernando, San Gabriel and Dairy Valleys.
Beginning in the 1950s, production began to shift to the Chino Valley, the Mojave Basin
and San Jacinto as urbanization spread across Los Angeles. Over the last 20 years,
dairy has been shifting out of the Chino Valley and into the Central Valley and the
Imperial Valley. Similarly, the Chino-area economy has evolved, shifting to more modern
industries and residential housing.

There is consensus in recent studies that dairy is in decline in the Inland Empire

There are 3 key structural issues that are driving the decline of dairy in the Inland
Empire:
‒
‒
‒
Housing affordability and demand in the region;
Competition from other regions; and
Environmental regulations
The dairy industry will likely continue to decline in the Inland Empire, regardless of
whether Falloncrest Farms Residential is developed or not
3
An Analysis of the Inland Empire Dairy Industry
1. Background
The City of Chino is located in the western part of San Bernardino County, near the borders of
Riverside and Los Angeles Counties and encompasses 29.64 sq. miles. Chino’s population has
grown to 80,164, the 8th most populated city in San Bernardino County. Figure 2.1 shows
Chino’s location in the region.
Figure 1.1
City of Chino
Source: GoogleMaps
Chino has historically been a major center of dairy production in California, providing milk and
other dairy products to the sprawling Southern California urban areas. As recently as the late
1980s, San Bernardino County, with production centered in Chino, was the largest milk
producing region in the country. 1
Project sponsors are proposing to develop Fallon Farms, a dairy in current operation with 9,600
head of cattle, into a residential development, similar to those in the surrounding area. Figure
1.2 provides a map of the site.
1
Hirsch, J. (2006) Dairies Moving out of Inland Empire. Los Angeles Times. Retrieved from:
http://articles.latimes.com/2006/jan/09/business/fi-dairy9
4
Figure 1.2
Map of Proposed Site
Source: GoogleMaps
5
2. Inland Empire Agriculture and Dairy Industries
The Inland Empire has historically been a large agriculture and dairy producing region. In the
mid-1980s, the region was the largest dairy producing region in the nation. 2 However, since
then, the industry has declined significantly. Today, the Inland Empire is only a small portion of
the overall state agricultural economy. As of 2012, the Inland Empire’s agriculture industry (of
which dairy is a component) made up less than 1 percent the regional economy and only 3.1%
of California’s overall agriculture industry base.
Figure 2.1
2012 Inland Empire Economy (GSP)
Source: U.S. Bureau of Economic Analysis
3
While the Inland Empire’s overall economy continues to expand as a whole, the agriculture
industry has shrunk in importance to the region. The industries that have seen the most growth
since 2004 are professional and business services, transportation, and education and health
services, while agriculture has shrunk as a portion of the overall economy.
2
Hirsch, J. (2006) Dairies Moving Out of Inland Empire. Los Angeles Times. Retrieved from:
http://articles.latimes.com/2006/jan/09/business/fi-dairy9
3
U.S. Bureau of Economic Analysis, U.S. Department of Commerce, “Gross Domestic Product
by Metropolitan Statistical Area, Riverside-San Bernardino-Ontario 2010,” accessed October
2013 (http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=2)
6
Figure 2.2
2001-20012 Inland Empire Economy (GSP)
Source: U.S. Bureau of Economic Analysis
4
Similarly, agriculture employment in the Inland Empire declined since 2000. In 2000, agriculture
employment accounted for 21,000 jobs; by 2012, agriculture employment diminished by nearly
30 percent to 15,000. As of 2012 it made up 3.7% of total state agriculture employment.
Furthermore, the EDD projects that employment will continue to decline by an additional 6.7%
by 2020.
Figure 2.2
Agriculture Employment In Inland Empire
4
U.S. Bureau of Economic Analysis, U.S. Department of Commerce, “Gross Domestic Product
by Metropolitan Statistical Area, Riverside-San Bernardino-Ontario 2010,” accessed October
2013 (http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=2)
7
Source: Employment Development Department
5
Today, the agriculture industry is a relatively small employer in the region. In 2012, there were
15,100 workers employed in the agriculture industry in the Inland Empire, amounting to less
than 1% of jobs in the region.
Overall, dairy is a growing industry in California. Cow population in California increased
significantly since 1995. Despite shrinking modestly during the recession, cow population has
increased by over 40% since 1995. This rapid growth has been concentrated in the San Joaquin
Valley. The number of cows in the Inland Empire and other regions of the state has shrunk over
this period as shown in Figure 2.3.
Figure 2.3
Number of Cows by Region
Source: California Department of Food and Agriculture
6
The decline in regions other than San Joaquin Valley is largely attributable to the consolidation
of the industry into fewer, larger dairies. The number of dairies has declined statewide and in
every major region, as shown in Figure 2.3. The industry has consolidated into fewer larger
farms. However, the decline has been faster in the Inland Empire than the state as a whole.
5
State of California Employment Development Department, “LMI for Riverside-San BernardinoOntario MSA, California” accessed March 2012
(http://www.calmis.ca.gov/htmlfile/msa/rivsbern.htm)
6
California Department of Food and Agriculture, data provided by staff
8
Figure 2.3
Number of Dairies by Region
Source: California Department of Food and Agriculture
7
7
California Department of Food and Agriculture, data provided by staff
9
3. Literature Review
The academic and industry literature shows a strong consensus that the industry is decline in
Chino and urbanized areas like Chino. It shows that this decline is largely unavoidable due to
market dynamics driven by the pressures of urban expansion.
Dairy companies have always chosen locations based on market and real estate demands.
Given its need for affordable land with close access to urban markets, it has historically moved
just beyond boundaries of large urban areas.. As Van Campen wrote in 1977, “Since the urban
fringe is dynamic, any land-use patterns not compatible with urban expansion are forced farther
from the population center, as evidenced by the southern California dairy industry.” 8 More
recently, Kranz agreed, noting, “Suburban growth has pushed dairy farms out of the Chino
Valley – a push that accelerated through the first years of this decade.” 9
An industry publication, Hoard’s Dairyman recently observed, “What was once wall-to-wall
dairies is now basically a few here and a few there. Those that didn’t become subdivisions
before the housing bubble burst look oddly and eerily out of place.” 10
Dairyman have long foreseen the region’s dairy decline. Van Campen wrote, even in the 1970s
“many dairymen [felt] it [was] only a matter of time before the dairies must again migrate. As
overwhelming 70% of the Chino Valley respondents felt urbanization would eventually force
them out of their area.” 11 Despite their position in the industry, Campbell wrote that, “Old-time
farmers in the area say they aren’t dismayed by the shrinking farmland base.” The area’s shift
away from agriculture has been expected for a long time. They point out that dairies migrated 40
to 50 years ago to the Inland Empire … from burgeoning coastal communities surrounding Los
Angeles and from Orange County.” 12
Butler identifies the internal pressures presenting challenges for dairy production in the Inland
Empire. “Growth and development pressure and environmental regulations are forcing dairy
enterprises in Chino to relocate.” 13 As Campbell notes, real estate demand is driving up the
value of land in the region. “70 percent of the remaining 140 dairies [are] either sold to real
estate developers or in negotiations … Housing developers are paying from $300,000 an acre
to, in one case, $600,000 an acre for dairy land in the Chino Valley.” 14
8
Van Campen, C. (1977) From Dairy Valley to Chino: An Example of Urbanization in Southern
California’s Dairy Land. The California Geographer
9
Kranz, D. (2006) Dairies Flee Chino Valley, California Farm Bureau Federation
10
Hoard’s Dairyman office. (2012) A Recent Visit to the Chino, California Milk Shed was a Sad
Sight
11
Van Campen (1977)
12
Campbell, K. (2013) Chino Dairies are Drying Up as Urban Shift Accelerates. AgAlert
13
Butler, L.J. and Ekboir, J. (1997) Appropriate market is key to success of dairying in Imperial
Valley. California Agriculture
14
Campbell (2013)
10
Because of these pressures, the industry is clearly in long term decline in the region. As Hoard’s
Dairyman recounts, “Cow numbers are [currently] about 25,000 … Cow numbers in the two
counties peaked at 312,000 in 1991 …” 15
The decline is occurring rapidly. “The Artesia-based dairy cooperative California Dairies Inc.
says it has lost 40 percent of its Southern California milk production in the past three years. As
suburban amenities replace dairies in the former Chino Agricultural Preserve, friction increases
between the remaining dairies and their new neighbors. Homes overlook corrals; high school
playing fields adjoin dairy calf operations; minivans and sports cars compete with cattle and
feed trucks on roads that were once country lanes.” 16
15
16
Hoard’s Dairyman (2012)
Kranz (2006)
11
4. Decline of Inland Empire Dairy
"People and cows don't mix."
Bill Van Leeuwn, Owner Midhill Dairy 17
Because of the cost and challenges of bringing dairy products to market, producers have
traditionally set up just beyond major urban boundaries. These areas offered affordable land,
without nearby residents to complain about the stench or health issues, while still offering cost
effective access to urban markets. Early in the 20th century, Southern California Dairies were
concentrated in Los Angeles and northern Orange County -- three areas that are heavily
populated today. As the Los Angeles metropolitan area grew, these dairies closed operation
and the industry moved east, into the Inland Empire, especially Chino. By the 1950s, dairies had
essentially disappeared from most of Los Angeles and Orange Counties.
Beginning in the 1950s, production shifted primarily to the Chino Valley, as well as the Mojave
Basin and San Jacinto as urban areas spread across the region. Over the last 30 years, it has
been shifting out of the Chino Valley, primarily to the Central Valley, with some growing
production in the Imperial Valley. Similarly, the Chino-area economy has evolved, shifting from
orchards to dairy and, now, to more modern industries and residential.
Three key factors have driven the recent decline of the dairy industry in the Inland Empire. The
largest factor is population demands for affordable housing in the region. As Los Angeles
Metropolitan Area has grown rapidly, it has constantly taxed the stock of available housing,
driving up costs and making housing increasingly unaffordable for residents. Because of this
demand, land in nearby, undeveloped areas, such as Chino, has increased in value, offering
incentive for dairy producers to sell their land and move production or leave the industry.
Figure 4.1
Key Factors in Regional Decline of Dairy Industry
17
Hirsch (2006)
12
4.1 Housing Affordability and Demand
Southern California was a sparsely populated region at the turn of the 20th century. Los Angeles
County began growing rapidly thereafter. The county experienced its first major population
boom in the late 1920s and early 1930s due to the Great Depression, as displaced workers
sought new opportunity in the west. It experienced its second great boom during and after World
War II as workers sought employment in the burgeoning naval and aeronautic manufacturing
industries. Both Los Angeles and the Inland Empire were sparsely populated at the turn of the
century. While the population continues to grow, it has slowed since 1990.
Figure 4.2
Population Growth Since 1900
Source: U.S. Bureau of the Census
The Inland Empire grew slowly for most of the 20th century. The region’s population did not
reach one million until the 1960s, when Los Angeles County had already topped six million. Los
Angeles’ population was originally concentrated near the coast, but as it grew, the population
shifted east due to Los Angele’s crowding. Eventually this eastward population drive reached
Chino and the Inland Empire. Once it did, the Inland Empire started growing quickly in 1970 and
has more than tripled in the ensuing decades.
As the density map in Figure 4.3 shows, as recently as 1970, Chino was a small city, removed
from the urban area, with a population of just 20,000. This was after relatively rapid growth since
World War II, increasing from just 4,000 in 1940. It was during this earlier era that the dairy
industry moved east into what was then a small town, exurban town. As the density map in
Figure 4.4 shows, the densely populated urban area has stretched thirty miles west of Chino, as
far east as San Bernardino.
13
Figure 4.3
Los Angeles Area Density 1970
Source: U.S. Bureau of the Census
14
Figure 4.4
Los Angeles Area Density 2010
Source: Bureau of the Census
15
Today, Chino provides affordable housing to a majority minority population. Over 70% its
population belongs to minority groups, including 54% Hispanic. 18
4.2 External Competition
There is significant demand for and production of milk in California. Milk production has
increased dramatically in California since 1995, a 67% increase from 25 billion gallons to 42
billion gallons in 2012. Despite this impressive growth, the Inland Empire has declined steeply,
losing over 50% of its production since 1995. It has lost significant market share to its chief
competitor, the San Joaquin Valley, which accounts for nearly 90% of the state’s production, up
from 70% in 1995. The Inland Empire continues to be the second largest region, despite
shrinking by over 50% since 1995 and now accounts for just 6% of the milk production, down
from 23%.
Furthermore, the Inland Empire is beginning to face additional competition from the south. The
fastest growing region is the Imperial Valley. The area’s total production is still quite small,
accounting for just .3% of the state’s milk production, but if these trends continue it could quickly
become a major destination for dairies relocating from the Inland Empire.
Figure 4.5
Regional Milk Production Growth from 1995-2012
Source: Bureau of the Census
4.3 Environmental Regulation
Dairy producers in Chino face more significant environmental regulations than their competitors
in the San Joaquin Valley. Region 8, which includes Chino, imposed strict run-off regulations in
18
2010 United States Census
16
1995, while region 5, which includes the San Joaquin Valley did not begin enforcing similar
regulations until 2011. 19
This has a direct impact on the industry. As Brad Scott, a San Jaicnto dairyman that moved
from Chino in 1979 said, “Regulations put in place to address environmental and urban
concerns are usually applied across the board and that means they affect me.”
Moreover, the dairies are failing to meet the regulations. In 2011 13 Chino dairies were cited by
the EPA for failing to control manure run-off into local water supplies.
Figure 4.6
California Water Quality Control Boards
Source: United States Census
The literature shows a clear consensus that environmental regulations are a key decision driver
for dairy location.
Sneeringer found that the Inland Empire faces significantly more environmental regulations than
competitors in the San Joaquin Valley, “this article has documented the significant variation in
California’s environmental regulation of dairy production over time and location.” She also cites
Art Marquez, 3rd generation dairy farmer: “With the way that the industry is moving through the
more stringent regulations and rules, it doesn’t make economic sense to continue in Southern
California. You can sell your piece of property and move somewhere else that’s more
agriculture-friendly.” 20
19
20
Sneeringer, S. and Hogle, R. (2008) Variation in Environmental Regulations
Sneeringer (2008)
17
In a subsequent analysis, Sneeringer’s differences-in-differences model’s “results show that
regulation had significant negative impacts on dairy production.” It found that “more stringent
regulations in Southern California appear to have induced additional growth in the Central
Valley beyond what was taking place independents. However, the loss in mil cows from Region
8 was not equaled by growth in the Central Valley, suggesting that regulation encouraged some
production to move out of state.” 21
Pfost’s guide clearly states, “the first factor to consider in selecting a site for an animal feeding
operation is state and local permitting requirements.” He also notes a complaint that is common
in the Chino area. “Likelihood of odor complaints by neighbors may be a major deterrent to
siting large livestock operations in many locations.” 22
in California and Effects on Dairy Location
21
Sneeringer, S.E. (2011) Effects of Environmental Regulation and Urban Encroachment on
California’s Dairy Structure. Journal of Agricultural and Resource Economics
22
Pfost, D. and Fulhage, C. (2000) Selecting a Site for Livestock and Poultry Operations. MU
Guide
18
Conclusion
The dairy industry in the Inland Empire is in long term decline. The declines will likely continue,
regardless of whether Falloncrest Farms Residential is developed or not. Local pressures from
demand for residential development and environmental regulations, combined with external
competition from the San Joaquin Valley have created a situation where the industry is no
longer locally viable.
While it was once significant, today the dairy industry in the Inland Empire is small and
continuing to shrink, despite statewide growth. In 1995, there were 329 operating dairies in the
Inland Empire, with over 310,000 cows. As of 2012, the number of operating dairies dropped to
111 with only 115,000 cows, each over a 60% decline. This is consistent with the historical
trend, as the dairy industry consistently locates and then relocates beyond the boundaries of
major urban areas.
19
EXHIBIT A
ANDREW J. CHANG
Managing Director
PROFILE:
Seventeen years of experience working with both high-level executives and operations staff on sensitive
issues under tight deadlines in both the private and public sectors. Eight years strategy and operations
consulting experience with emphasis on customer analysis and market entry strategies. Twelve years
public policy development and implementation experience in California State government. Extensive
experience working with a broad array of stakeholders to design, implement and monitor organizational
initiatives.
PROFESSIONAL EXPERIENCE:
10/11 – present Andrew Chang & Co, LLC
Sacramento, CA
Managing Director
 Provide market entry and strategy consulting to Fortune 1000 companies with an emphasis on private
sector interaction with government. Private sector specialization in assessing and identifying new
market opportunities and developing strategies to enter new markets. Public sector emphasis on
public policy, economic and public finance analysis and operations management consulting.
07/09 – 10/11
Chang & Adams Consulting
Sacramento, CA
Managing Director
 Provide market entry and strategy consulting to Fortune 1000 companies with an emphasis on private
sector interaction with government. Private sector specialization in assessing and identifying new
market opportunities and developing strategies to enter new markets. Public sector emphasis on
public policy, economic and public finance analysis and operations management consulting.
04/07 – 07/09
Forward Observer, Inc.
Sacramento, CA
Vice President
 Provide business intelligence and strategy consulting to Fortune 1000 companies to support market
entry initiatives. Provide business-political risk and due diligence assessment for investment
companies. Conduct fiscal, economic and public policy assessments.
08/04 – 04/07
California Department of General Services
Sacramento, CA
Chief Deputy Director
 Chief Financial and Operations Officer of a state department with $1 billion annual operating budget,
thirteen business units and 4,000 employees. Oversaw the state’s procurement and real estate
operations. Also responsible for the state’s telecommunications, automobile fleet, printing,
warehousing, insurance and school construction operations.
 Special assignment to the Governor’s Office to serve as chief staff economist for the Governor’s
Council of Economic Advisors. Facilitated Council meetings, prepared written briefings for the
Governor on policy issues for consideration and assisted Council members with original research to
present at the Council meetings.
 Special assignment to the California Department of Corrections and Rehabilitation to assess the
agencies procurement operations and develop recommendations to improve procedures and
operations.
06/00 – 08/04
A.T. Kearney, Inc.
San Francisco, CA
Senior/Engagement Manager (06/02 – 08/04)
 Lead teams to develop strategies for new lines of business for a Fortune 1000 technology company, a
national consumer products consortium and an international consumer products retail company.
 Lead teams to develop strategies to both acquire and sell technology services, R&D and
manufacturing business units.
 Analytic and modeling methods subject matter expert. Finance and Accounting business processes
subject matter expert.
Associate Management Consultant (06/00 – 06/02)
 Conduct research and develop recommendations for various clients in the high technology and
consumer products industries.
20
08/03 – 10/03
Californians for Schwarzenegger (Temporary leave from A.T. Kearney, Inc.)
Santa Monica, CA
Chief Economist/Deputy Policy Director
 Principal economic, tax, energy and budget staff advisor for Arnold Schwarzenegger’s gubernatorial
campaign.
12/98 – 02/00
MGT of America, Inc.
Sacramento, CA
Senior Management Consultant
 Implemented studies to improve finances and operations for Cleveland Unified School District, Florida
State University and the California Resources Agency.
10/95 – 12/98
California State and Consumer Services Agency
Sacramento, CA
Assistant Secretary for Policy and Operations
 Executive of a government agency with an annual operating budget of $1.3 billion, twelve departments
and over 14,000 employees.
 Under supervision of the Secretary, guided agency and department policies, budgets and strategic
plans.
05/95 – 10/95
Personal Staff of Governor Pete Wilson
Sacramento, CA
Chief Economist/Deputy Issues Director
 Managed the development of national tax, trade, environment, agriculture and crime policies for
Governor Pete Wilson’s presidential campaign.
09/93 – 05/95
California Office of the Governor
Sacramento, CA
Deputy Chief Economist
 Lead research teams to assess the economic and fiscal impact of tax, economic development, health
care and immigration policies.
EDUCATION:
University of Michigan
Ann Arbor, MI
Master of Business Administration Essentials (1 of 30 A.T. Kearney consultants selected globally to
participate in a tailored executive MBA program.)
Georgetown University
Master of Public Policy
University of California
Bachelor of Arts
Washington, DC
Berkeley, CA
21