WASHINGTON, Sept. 17, 2014 – An effort by the California Department of Food and Agriculture (CDFA) and members of the California Legislature to change the way milk is priced in the state failed last month because it did not have the support of large national and state dairy cooperatives that handle milk in California. The legislation (AB 2730) was dead before it ever reached the floor, but the ongoing effort to bring California into the Federal Milk Marketing Orders likely will intensify as a result.
The Federal Milk Marketing Orders establish rules under which dairy processors purchase raw milk from dairy producers supplying a specified marketing area. Currently there are 10 such marketing areas, but California, which is not included in any of the federal orders, has its own separate pricing system.
California milk used in manufacturing has long been priced at a discount to federal order milk, putting California processors at an advantage to those operating elsewhere in the federal order system. At the same time, though, California producers are paid far less than their counterparts in the established marketing areas governed by the orders.
For many years, the spread between the California 4b milk price and the federal order Class III milk price (both used to make cheese) averaged between 45 and 55 cents per hundredweight, says Rob Vandenheuvel, general manager of the Milk Producers Council, in Turlock, California.
In 2007, however, CDFA changed how whey was valued in the state’s 4b pricing formula, effectively widening the gap between the 4b and Class III prices. The spread so far in 2014 has averaged $2.14 per hundredweight, according to Vandenheuvel.
“All told, since 2010, the discount has equated to a real-dollar impact of more than $1.4 billion, or more than $830,000 for an average 1,000-cow dairy,” he says in a recent issue of the group’s newsletter.
With federal order processors and dairy cooperatives as well as California producer groups and the state’s cooperatives generally in favor of seeing the spread between the two pricing systems narrowed, why then did the recent California legislation fail?
The three major co-ops operating in the state opposed the plan, saying it was lacking in details. Two of the three co-ops—Dairy Farmers of America (DFA) and Land O’Lakes—have significant milk shares outside of the state. The other co-op, California Dairies Inc. (CDI), operates in state.
“This is a sweeping deregulation program—the first in 70-plus years in a $7-billion agricultural marketing sector—with many critical issues unresolved, crucial details undecided and manifest unintended consequences,” wrote DFA about the California bill in an Aug. 22 letter to CDFA Secretary Karen Ross.
The 2014 U.S. Farm Bill allows for the creation of a California federal order that lets the state retain some form of its unique quota system, which has always been a sticking point of bringing the state into the federal system. Now that quota can be retained, the three co-ops have been working on a regulatory proposal for a California federal order, and AB 2730 would have increased the disparities between the two systems.
In a fact sheet about the failed legislation, DFA said USDA hearings in the past have moved toward placing restrictions on producers who pull their milk out of the pool, called depooling, when it benefits them financially. The failed California legislation would have moved in the opposite direction of that, DFA notes.
AB 2730 would have created a deregulated class of milk overseen by a new regulatory entity, the Alternative Milk Marketing Agreement (AMMA), yet the bill would have allowed AMMA to enter the traditional regulatory pool.
“There are no protections from, or penalties for, those who would game the system by repeatedly jumping in and out of the pool,” wrote DFA in yet another letter to Susan Eggman, AB 2730’s sponsor and chair of the California Assembly Committee on Agriculture.
So what’s next?
“DFA, Land O’Lakes, and CDI have committed to pursue a federal order for California, and we continue to work on writing the proposal,” says Elvin Hollon, DFA’s director of fluid milk marketing and economic analysis. “In June 2013, each of the three co-op boards directed their staffs to work on a proposal.”
Now that CDFA and California legislators have gotten involved, there could be increased pressure on the co-ops to get a proposal ready to submit to USDA before another bill can be submitted to the California legislature.
Once the co-ops file a petition with USDA, the process could stretch on for a year or longer, says Randy Russell, a principal with the Russell Group in Arlington, Va. “Ultimately, the proof will be in the pudding,” says Russell. “Whether a proposal can get all the way through the system is going to be the challenge.”
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