The souring of California’s milk price relative to the rest of the country will finally be addressed as the U.S. Department of Agriculture begins what could be several months’ worth of hearings into establishing a new Federal Milk Marketing Order (FMMO) for California.
For dairy producers attending the opening day of hearings in Clovis, Calif. on Sept. 22 the attitude was generally positive as the state’s dairy industry prepares its case for a federal order.
“I’m just glad we’re finally going to do this,” said Frank Mendonsa, board president of Western United Dairymen (WUD), one of two key dairy trade association groups seeking a divorce from the state order, which is regulated by the California Department of Food and Agriculture (CDFA).
California dairy producers have complained loudly for several years that the California milk order pays them significantly less for milk used to make cheese than dairy producers receive for the same milk under the federal orders.
In 2014, California dairymen were paid an average of $19.93 per hundredweight (cwt) for their Class 4b (cheese) milk. Dairymen on federal orders averaged $22.34 for Class III (cheese) milk, a difference of $2.41 in favor of the federal order price.
Hearings at the CDFA earlier this summer convinced CDFA Secretary Karen Ross to close that gap to 33 cents in August, a significant change from the $1.35 chasm reported in July.
According to Rob Vandenheuval, general manager of the Milk Producers Council, a dairy trade association based in southern California, the cumulative effect of this price difference since 2010 exceeds $1.8 billion dollars in lost revenue to California dairy producers.
This is a significant reason cited for the decline in dairy numbers in California over the past several years as milk prices, outside of 2014, have largely remained unprofitable in California.
The price difference mainly has to do with how whey is factored into state pricing formulas versus how the FMMO assesses the cheese-making component.
Under the proposal submitted to the USDA by three major cooperatives that process milk in California – Land O’Lakes, Dairy Farmers of America and California Dairies, Inc. – the all-milk price in California could increase by about $1 per cwt. if the cooperatives get everything they want.
More than 75 percent of the milk produced in California comes from members of the three cooperatives, according to the petition filed with the USDA. Collectively the cooperatives operate 12 plants and market milk to a significant majority of the state’s milk buyers.
Petitions seeking a federal order hearing were also filed by the Dairy Institute of California, the California Producer Handlers Association and Ponderosa Dairy.
The Dairy Institute of California is a non-profit trade association and voluntary membership organization founded in 1939 to represent milk processors on regulatory and legislative matters, according to their website.
The California Producer Handlers Association (CPHA) represents four vertically-integrated dairy farms, including: Foster Dairy Farms, Inc., Hollandia Dairy, Inc., Producers Dairy Foods, Inc., and Rockview Dairies, Inc.
Ponderosa Dairy is a dairy farm located in Nevada, in the Amargosa Valley just north of Death Valley National Park. As an out-of-state shipper that transports milk into California, Ponderosa Dairy claims the switch to a federal order would negatively impact the company.
A letter supporting the change to the FMMO was written by Mark McAfee, chief executive officer of Organic Pastures Dairy Company. McAfee, whose company represents small, vertically-integrated dairy producers in California, called California’s milk pooling system “highly unjust at many levels.”
One of his concerns deals with the requirement these vertically-integrated producers have of paying into the California milk pool to utilize their own milk, a move he calls a “subsidy” to California’s cheese producers.
A lengthy economic analysis completed by the USDA Agricultural Marketing Service (AMS) suggests that under the cooperative’s proposal, the all milk price to California dairy producers could increase an average of $1.03 per cwt. This compares to an increase of about $1.02 under the CPHA and Ponderosa Dairy proposals and 10 cents under the Dairy Institute of California plan.
California has operated a milk marketing order unique from the federal order system since the passage of the Young Act in 1935.
According to the AMS analysis the move could sour milk prices for much of the rest of the country as predictions indicate a slight reduction in milk prices under some federal orders. The Arizona all-milk price declines an average of 6 cents per cwt. under the cooperatives’ proposal, the government analysis suggests.
The AMS analysis suggests the Dairy Institute plan would generally keep the average price on other orders relatively flat or down a few cents per cwt. The other proposals hit some of the federal orders a little harder on the all-milk price category.
As the hearings opened in Clovis, Calif. much of the first day was spent taking testimony from and questioning AMS Economist Amanda Steeneck about the government’s economic analysis.
According to Steeneck’s report, the cooperative proposal would, in part:
- Provide similar treatment of out-of-state milk as under other FMMOs
- Allow transportation credits to incentivize movement of farm milk from supply areas to demand areas
- Adopt definitions and pooling regulations for producer-handlers similar to those in other FMMOs
- Continue California’s fluid milk fortification standard; and,
- Continue California’s milk quota program, leaving it to be administered by the CDFA
According to Mendonsa, the quota provision could become a deal-breaker if the USDA, when it issues its final ruling, decides not to include quota in the final FMMO. Dairy producers will not support the FMMO if it does not include quota.
California quota, which is part of the state’s milk marketing order system established in 1969, is an asset estimated to be worth about $1 billion to California dairymen and accounts for the first $12 million paid from the California pool each month. It effectively provides California dairy producers with about $1.70 per cwt. in extra income on their milk checks each month.
Virginia is the only other state that operates a quota, according to the USDA.
According to Vandenheuvel, language written into the 2014 Farm Bill recognizes California’s quota system and allows the state to join the FMMO and keep its quota.
Because California has five classes of milk and the federal order system has only four, two of California’s milk classes – 2 (cultured products) and 3 (frozen products) – will need to be folded into the federal Class II category. California’s Class 4a (butter/powder) will then be placed in the federal Class IV category with its 4b (cheese) class incorporated in the federal Class III structure.
The FMMO hearings are open to the public and are located in Clovis, Calif. They are presided over by Administrative Law Judge Jill Clifton.
The hearings themselves could take several months to complete and will include testimony by a host of parties. Each person testifying can be questioned by anyone in the room. Because of the length of the hearings, Judge Clifton repeated on the opening day of the hearing that she will work to accommodate those who cannot attend the entire hearings and allow them to testify on days convenient for them to attend.
Vandenheuvel says this all-inclusive process should bode well for the dairy industry.
A decision to form a California FMMO will be made based on the entire hearing record. This includes testimony, evidence presented at the hearing, post-hearing briefs, public comments in response to a recommended decision, and documents that the government takes official notice of, such as previous formal rulemaking proceedings.
The process to establish a California FMMO could take years. A potential timeline published by WUD sets the process as follows:
- Hearings begin – Sept. 2015
- Recommended decision – Aug. 2016
- Briefs due – Oct. 2016
- Final decision – Jan. 2017
- Producer vote – May 2017
- Implementation – Aug. 2017
For California dairy producers to establish a new Federal milk order a referendum vote must take place.
For those in a cooperative, that vote will either be by bloc – the cooperative voting for its membership – or by individual ballot. The cooperatives can choose which voting method they prefer, but must choose one method only.
If individual voting is requested, each dairy farmer in the cooperative gets only one vote, regardless of how many dairies they have or if they belong to more than one cooperative.
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Of those participating in a referendum, either two-thirds of the dairy farmers voting, or producers representing two-thirds of the milk that would have been pooled during a designated month, must approve the new federal order in order to join the FMMO. Refer to 7 CFR §§ 900.300-311 for more information.
Information on the hearings and the process can be found online at http://www.ams.usda.gov/rules-regulations/moa/dairy/ca.
The hearings can also be listened to online at www.tinyurl.com/CAMilkHearing.