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Federal milk marketing order for California raises questions

Carol Ryan Dumas
California's dairy farmers are voicing their support of abandoning the state milk marketing order and joining the federal milk marketing order system. Three university ag economist have analyzed some of the possible effects of making the switch.

Suffering from high feed costs and insufficient milk prices since 2009, California’s dairy farmers have given up on milk pricing relief from the state Ag Department and are setting their sights on joining the federal milk marketing order system.

The 2014 Farm Bill provides the authority for California to abandon its existing state system and for dairymen to petition USDA to join the federal system.

Three major dairy co-ops — California Dairies Inc, Dairy Farmers of America and Land O’Lakes — have been working on language to submit to USDA for establishing a federal order for the state.

Questions abound in making such a switch, and three university economist analyzed some of the many complex issues in a paper released late last month. That analysis was done by John Newton of University of Illinois, Cameron Thraen of Ohio State University, and Andrew Novakovic of Cornell University.

They looked at the effects on farm milk prices and the state’s quota system, utilization and de-pooling, and processors’ competitive position in the national cheese market.

The majority of discontent in California’s system stems from the gap between prices in California and federal marketing orders for milk used for cheese. Historically, California’s 4b price correlated well with the FMMO price, lagging the Class III price by an average of 42 cents per hundredweight prior to 2009.

But the gap has grown with the state’s 4b price lagging the Class III price by as much as $3 per hundredweight since 2009 and an average of $1.43 per hundredweight from 2010 through 2013.

The large differences in price are driven almost exclusively by the value of whey in the 4b formula, which is capped at 75 cents per hundredweight — making it much less responsive to market prices for whey, the economists reported.

Because 44 percent of the milk produced in California goes into cheese and dry whey production, the lower 4b price has resulted in significantly lower average farm prices than those in FMMOs. Combined with dramatically increased feed prices, those lower prices have contributed to the closure of more than 400 dairies in the last five years, the economists stated.


Higher milk prices


“What’s commonly overlooked in the debate over the milk price divergence are the implications of imposing higher FMMO classified milk prices on California’s position in the dairy processing sector,” they stated.

The built-in price advantage of 4b milk combined with plant efficiency has allowed California cheese to compete by partially offsetting transportation and marketing costs needed to serve a national market.

Higher marketing order prices could make the state’s cheese processor less competitive, and that could modify investment decisions and adjust processing capacity away from cheese, they stated.

And while higher FMMO prices might lift regulated farm-level prices, it could adversely impact the value or frequency of premium payments to dairy farmers over and above the regulated prices, the economists said.


Quota


Among the most important issues of a California FMMO is the ability to accommodate a quota system. The new farm bill allows the state dairy farmers to keep some form of their system, but it isn’t clear how it would work.

The state’s quota system provides additional payments above the blended pool price to producers holding quota certificates. It came about in the late 1960s to gain support for forming a state milk marketing order. It was developed to pay Grade A shippers selling into Class I fluid markets an amount over the blended pool price.

California’s quota represents more than $1 billion and entitles those producers to as much as $1.70 per hundredweight in additional milk revenue, the economists stated.


De-pooling


Another question in the FMMO issue is de-pooling rules. California’s current order does not permit de-pooling of milk used for manufacturing on a monthly basis. It is permitted on an annual basis prior to classified price announcements. FMMOs allow de-pooling on a monthly basis after price announcements.

“If monthly de-pooling is permitted, the amount of milk pooled and total value of the milk in the pool would be conditional on the price relationships and the amount of milk de-pooled,” the economists stated.

Funding quota from a smaller pool of money could diminish the market value of the pool and reduce the post-quota uniform milk price. Any gains in farm milk due to the adoption of FMMO class prices would be dependent on market utilization and would be offset if high-value milk is consistently de-pooled, they said.


Other considerations


Consideration should also be given to the effect of increasing milk prices on milk production, the value of fluid milk re-fortification, who is eligible to purchase quota, who is eligible to participate in the pool, dairy farmer ability to opt out of the pool through Grade B election, and the process for quota retirement or buyout, the economists stated.

In addition, dairymen currently operating under FMMOs are raising questions about the regulatory burden and market structure efficiency of FMMO provisions and are looking to simplify the pricing structure. Draft proposals of the farm bill and USDA’s Dairy Industry Advisory Committee recommended a review and potential overhaul of FMMO pooling and pricing provisions.

If USDA, through a formal hearing process, alters the pricing and pooling provisions post California joining the program then the benefits from adopting a FMMO may not be as anticipated. On the other hand, one benefit of joining the FMMO program before price and pooling reform is that’s California dairy producers would have a voice through the hearing and referendum process, the economists stated..

The report: www.farmdocdaily.illinois.edu



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